QuickLinks -- Click here to rapidly navigate through this document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.           )

Filed by the Registrant ý

Filed by a Party other than the Registrant o

Check the appropriate box:

ý

 

Preliminary Proxy Statement

o

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o

 

Definitive Proxy Statement

o

 

Definitive Additional Materials

o

 

Soliciting Material Pursuant to §240.14a-12

Vertex Pharmaceuticals Incorporated

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
         
Payment of Filing Fee (Check the appropriate box):

ý

 

No fee required.

o

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

 

(1)

 

Title of each class of securities to which transaction applies:
        

    (2)   Aggregate number of securities to which transaction applies:
        

    (3)   Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
        

    (4)   Proposed maximum aggregate value of transaction:
        

    (5)   Total fee paid:
        


o

 

Fee paid previously with preliminary materials.

o

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

 

(1)

 

Amount Previously Paid:
        

    (2)   Form, Schedule or Registration Statement No.:
        

    (3)   Filing Party:
        

    (4)   Date Filed:
        


GRAPHIC

April     , 2008

Dear Fellow Stockholder:

        You are cordially invited to attend the 2008 annual meeting of stockholders of Vertex Pharmaceuticals Incorporated to be held on Thursday, May 15, 2008, at 9:30 a.m. at our headquarters at 130 Waverly Street, Cambridge, Massachusetts.

        As described in the accompanying notice of annual meeting of stockholders and proxy statement, this year we will ask you and our other stockholders to:

        Regardless of the number of shares of common stock you may own, your vote is important. YOU ARE URGED TO VOTE, SIGN, DATE AND MAIL THE ENCLOSED PROXY CARD PROMPTLY, whether or not you plan to attend the annual meeting in person. This will ensure your proper representation at the annual meeting.

        Thank you for giving these materials your careful consideration.

    Sincerely,

 

 

 

 

 

JOSHUA BOGER
President and Chief Executive Officer

VERTEX PHARMACEUTICALS INCORPORATED
130 Waverly Street
Cambridge, Massachusetts 02139-4242
Telephone: (617) 444-6100
www.vrtx.com


NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

May 15, 2008

        Notice hereby is given that the 2008 annual meeting of stockholders of Vertex Pharmaceuticals Incorporated will be held on Thursday, May 15, 2008, at 9:30 a.m. at our headquarters, located at 130 Waverly Street, Cambridge, Massachusetts, to:

        Please refer to the accompanying proxy statement for more complete information concerning the matters to be acted upon at the annual meeting.

        Holders of record of our common stock at the close of business on March 17, 2008, the record date for the annual meeting, are entitled to vote at the annual meeting and at any postponements or adjournments of the annual meeting. All stockholders are invited to attend the annual meeting in person.

        Your vote matters. Whether or not you plan to attend the annual meeting, please ensure your shares are represented, by voting, signing, dating, and returning your proxy in the enclosed envelope, which requires no postage if mailed in the United States. Holders of record of common stock as of the record date who attend the annual meeting and wish to vote in person may revoke their proxies.

    BY ORDER OF THE BOARD OF DIRECTORS

 

 

 

 

 

KENNETH S. BOGER
Secretary
April     , 2008

VERTEX PHARMACEUTICALS INCORPORATED
130 Waverly Street
Cambridge, Massachusetts 02139-4242
Telephone: (617) 444-6100
www.vrtx.com


PROXY STATEMENT

2008 ANNUAL MEETING OF STOCKHOLDERS

To Be Held on May 15, 2008

        This proxy statement, with the enclosed proxy card, is being furnished to stockholders of Vertex Pharmaceuticals Incorporated in connection with the solicitation by our board of directors of proxies to be voted at our 2008 annual meeting of stockholders and at any postponements or adjournments thereof. The annual meeting will be held on Thursday, May 15, 2008, at 9:30 a.m. at our headquarters, located at 130 Waverly Street, Cambridge, Massachusetts.

        This proxy statement and the enclosed proxy card are first being mailed or otherwise furnished to our stockholders on or about April     , 2008. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and materials regarding our company are being mailed to the stockholders with this proxy statement, but do not constitute a part hereof.

VOTING PROCEDURES

        Your Vote is Important.    Whether or not you plan to attend the annual meeting, please take the time to vote by completing and mailing the enclosed proxy card as soon as possible. We have included a postage-prepaid envelope for your convenience.

        Who Can Vote?    In order to vote, you must have been a stockholder of record at the close of business on the record date, which is March 17, 2008. Stockholders whose shares are owned of record by brokers and other nominees should follow the voting instructions provided by the institution that holds their shares. As of the record date, there were 140,356,485 shares of common stock issued, outstanding and entitled to vote. Each share of common stock is entitled to one vote on each matter to be voted upon.

        How Do I Vote?    If your shares are held of record in your own name, you may vote by completing and returning the enclosed proxy card by mail or by voting in person at the annual meeting. If your shares are held in the name of a bank, broker or other holder of record, you will receive instructions from the institution that holds your shares that you must follow in order for your shares to be voted. If your shares are not registered in your own name and you plan to attend the annual meeting and vote your shares in person, you should contact the institution that holds your shares to obtain a broker's proxy card, and bring it to the annual meeting in order to vote.

        Voting By Mail and Revocation of Your Proxy.    You may vote by mail by completing and returning the enclosed proxy card. Your proxy will be voted in accordance with your instructions. If you do not specify a choice on a proposal described in this proxy statement, your proxy will be voted in favor of that proposal.

1



You may revoke your proxy at any time before it is voted by delivering a subsequently dated written revocation or proxy to our corporate secretary or by voting in person at the annual meeting.

        Voting In Person At The Annual Meeting.    If you attend the annual meeting, you may deliver your completed proxy card in person or you may vote by completing a ballot that will be available at the annual meeting.

        What Constitutes a Quorum?    In order for business to be conducted at the annual meeting, a quorum must be present. A quorum is present if the holders of a majority of the shares of common stock issued and outstanding as of the record date are present at the annual meeting in person or by proxy. Shares of common stock held by a person who is present at the annual meeting in person or by proxy but who abstains or does not vote with respect to one or more of the matters to be voted upon will nonetheless be counted for purposes of determining if a quorum exists. If a quorum is not present, it is expected that the annual meeting will be adjourned until a quorum is obtained.

2


  Proposal 1: Election of Directors     The nominees for director who receive the most votes, also known as a "plurality" of the votes, will be elected. Abstentions are not counted for purposes of electing directors. You may vote either FOR or WITHHOLD your vote from, any one or more of the nominees. Votes that are withheld will not be included in the vote tally for the election of directors. Brokerage firms and other nominees have authority to vote shares of their customers that are held by the broker or their nominee in "street name" for the election of directors. If a broker or other nominee does not exercise this authority, their failure to vote, or a "broker non-vote," will have no effect on the results of the election of directors.  
  Proposal 2: Amendment to our Articles of Organization     The affirmative vote of a majority of our outstanding shares of common stock is required to approve the amendment to our Articles of Organization increasing our number of authorized shares. Abstentions will have the same effect on the results of this vote as votes against the proposal. Brokerage firms do not have authority to vote, with respect to this proposal, shares of their customers that are held by the firms in "street name." Therefore, any shares not voted by a customer will be treated as a broker non-vote, and broker non-votes will have the same effect on the result of this vote as votes against the amendment to our Articles of Organization.  
  Proposals 3: Amendment to our 2006 Stock and Option Plan


Proposal 4: Amendment to our Employee Stock Purchase Plan
    The affirmative vote of a majority of the shares of common stock cast by the stockholders present in person or represented by proxy at the annual meeting is required to approve the amendments to our 2006 Stock and Option Plan and Employee Stock Purchase Plan. Abstentions will have no effect on the results of these votes. Brokerage firms do not have authority to vote with respect to these proposals shares of their customers that are held in "street name." Therefore, any shares not voted by a customer will be treated as a broker non-vote, and broker non-votes will have no effect on the results of the vote on these proposals.  
  Proposal 5: Ratification of Independent Registered Public Accounting Firm     The affirmative vote of a majority of the shares of common stock cast by the stockholders present in person or represented by proxy at the annual meeting is required to approve the ratification of our independent registered public accounting firm. Abstentions will have no effect on the results of these votes. Brokerage firms have authority to vote with respect to this proposal shares of their customers that are held in "street name." If a broker does not exercise this authority, such broker non-votes will have no effect on the results of the vote.  

IMPORTANT NOTICE REGARDING AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON MAY 15, 2008

This proxy statement and our Annual Report of Form 10-K for the year ended December 31, 2007 are available at                            .

3



PROPOSAL 1:
ELECTION OF DIRECTORS

        Our board of directors is divided into three classes, the Class I Directors, Class II Directors and Class III Directors, with one class elected each year. Members of each class hold office for a three-year term. Our board currently consists of nine members and there is one vacant board seat. Our by-laws provide that our board shall consist of at least three and not more than eleven members, as may be fixed from time to time by our board. The terms of the three Class I Directors will expire at the 2008 annual meeting. Stuart J. M. Collinson, Eugene H. Cordes and Matthew W. Emmens are the current Class I Directors and the nominees for re-election at the 2008 annual meeting for a three-year term that will expire at the 2011 annual meeting. The terms of the Class II Directors and Class III Directors will expire at the 2009 and 2010 annual meetings, respectively.

        Our board's policy with respect to the election of directors by stockholders is that any nominee for director who receives a greater number of votes "withheld" from the nominee's election than votes "for" the nominee's election in an uncontested election at a stockholders' meeting should promptly tender his or her resignation to the chair of our board following certification of the stockholder vote. Our corporate governance and nominating committee will promptly consider the tendered resignation and recommend to our board either that it accept or reject any such resignation or take some other action. In considering whether to recommend to our board acceptance or rejection of the tendered resignation, our corporate governance and nominating committee shall consider all factors it deems in its discretion to be relevant to its determination. Our board will act on the corporate governance and nominating committee's recommendation, which action shall include either acceptance or rejection of the tendered resignation and may include adoption of measures designed to address perceived issues underlying the election results. Following our board's decision on the corporate governance and nominating committee's recommendation, we will promptly disclose our board's decision, including, if applicable, the reasons for rejecting the tendered resignation. Any director whose resignation is being considered under this policy will not participate in the corporate governance and nominating committee or board considerations, recommendations or actions with respect to the tendered resignation.

        If any of the nominees for election to our board should, for any reason, be unavailable to serve as such, proxies will be voted for such other candidate as may be designated by our board, unless our board reduces the number of directors. Our board has no reason to believe that Dr. Collinson, Dr. Cordes and Mr. Emmens will be unable to serve if elected.

4


        The table below sets forth certain information with respect to the nominees for election to our board and also for those directors whose terms of office are not expiring at the annual meeting.


Nominees

Class I Directors—Present Terms Expiring In 2008 And Proposed Terms To Expire In 2011

Stuart J. M. Collinson, Ph.D.
Director since 2001
Age: 48
Committee Memberships:
Commercial Strategy Committee
Science and Technology Committee
  Dr. Collinson serves as a Partner at Forward Ventures. Prior to our merger with Aurora Biosciences Corporation in 2001, Dr. Collinson served as the President, Chief Executive Officer and Chairman of the Board of Aurora. Dr. Collinson held senior management positions with Glaxo Wellcome from December 1994 to June 1998, most recently serving as Co-Chairman, Hospital and Critical Care Therapy Management Team and Director of Hospital and Critical Care. Dr. Collinson received his Ph.D. in physical chemistry from the University of Oxford, England and his M.B.A. from Harvard University.

Eugene H. Cordes, Ph.D.
Director since 2005
Age: 71
Committee Memberships:
Science and Technology
    Committee—Chair
Corporate Governance and
    Nominating Committee

 

Dr. Cordes has been a scientific advisor to us since 1996. Dr. Cordes was the Chairman of Vitae Pharmaceuticals, Inc., a position he held from January 2002 to March 2006. Prior to joining Vitae Pharmaceuticals, Dr. Cordes was a professor of pharmacy at the University of Michigan. Dr. Cordes received a B.S. degree in chemistry from the California Institute of Technology and a Ph.D. in biochemistry from Brandeis University.

Matthew W. Emmens
Director since 2004
Age: 56
Committee Memberships:
Commercial Strategy Committee—
    Chair
Corporate Governance and
    Nominating Committee
Science and Technology Committee

 

Mr. Emmens is the Chief Executive Officer, Chairman of the Executive Committee and a member of the board of directors of Shire Pharmaceuticals Group plc. Before joining Shire in 2003, Mr. Emmens served as President of Merck KGaA's global prescription pharmaceuticals business in Darmstadt, Germany. In 1999, he joined Merck KGaA and established EMD Pharmaceuticals, its United States prescription pharmaceutical business. Mr. Emmens held the position of President and Chief Executive Officer at EMD Pharmaceuticals from 1999 to 2001. Prior to this, Mr. Emmens held various positions, including Chief Executive Officer, at Astra Merck, Inc. as well as several positions at Merck & Co.,  Inc. Mr. Emmens also serves as a director of Incyte Corporation. Mr. Emmens received a B.S. degree in business management from Farleigh Dickinson University.

5



Continuing Members of Our Board of Directors

Class II Directors—Terms Expiring In 2009

Eric K. Brandt
Director since 2003
Age: 45
Committee Memberships:
Audit and Finance Committee—
    Chair
Commercial Strategy Committee
Corporate Governance and
    Nominating Committee
  Mr. Brandt is Senior Vice President and Chief Financial Officer of Broadcom Corporation, which he joined in March 2007. From September 2005 through March 2007, he was the President, Chief Executive Officer and a member of the board of directors of Avanir Pharmaceuticals. Prior to joining Avanir, Mr. Brandt held various positions at Allergan Inc. from 1999 to 2005, including Executive Vice President, Finance and Technical Operations and Chief Financial Officer from February 2005 to September 2005, Executive Vice President, Finance, Strategy and Business Development, and Chief Financial Officer from 2003 until February 2005, and Corporate Vice President and Chief Financial Officer from May 1999 to 2003. From January 2001 to January 2002, he also assumed the duties of President, Global Consumer Eye Care Business, at Allergan. Prior to that, he held various positions with the Boston Consulting Group, most recently serving as Vice President and Partner, and a senior member of the BCG Health Care practice. Mr. Brandt also serves as a director of Dentsply International Inc. Mr. Brandt holds a B.S. in chemical engineering from the Massachusetts Institute of Technology and an M.B.A. from Harvard University.

Roger W. Brimblecombe, Ph.D., D.Sc.
Director since 1993
Age: 78
Committee Memberships:
Management Development and
    Compensation Committee—
    Chair
Science and Technology Committee

 

Dr. Brimblecombe served as Chairman of Vanguard Medica plc from 1991 to 2000, of Core Group plc from 1997 to 1999, of Oxford Asymmetry International plc from 1997 to 2000 and pSivida Ltd. from 2002 to 2007. From 1979 to 1990, he held various Vice Presidential posts in SmithKline & French Laboratories' research and development organization, including Vice President R&D for Europe and Japan. He is currently a Partner in MVM Life Science Partners LLP and a director of Tissue Science Laboratories plc (listed on the AIM market in the United Kingdom). He has also been a member of the Board of Vertex Pharmaceuticals (Europe) Ltd. since 2005. He holds Ph.D. and D.Sc. degrees in pharmacology from the University of Bristol, England.

6



Continuing Members of Our Board of Directors

Bruce I. Sachs
Director since 1998
Age: 48
Committee Memberships:
Audit and Finance Committee
Management Development and
    Compensation Committee
  Mr. Sachs is a General Partner at Charles River Ventures. From 1998 to 1999, he served as Executive Vice President and General Manager of Ascend Communications, Inc. From 1997 until 1998, Mr. Sachs served as President and CEO of Stratus Computer, Inc. From 1995 to 1997, he served as Executive Vice President and General Manager of the Internet Telecom Business Group at Bay Networks, Inc. From 1993 to 1995, he served as President and Chief Executive Officer at Xylogics, Inc. Mr. Sachs also currently serves as a director of BigBand Networks, Inc. Mr. Sachs holds a B.S.E.E. in electrical engineering from Bucknell University, an M.E.E. in electrical engineering from Cornell University, and an M.B.A. from Northeastern University.

Class III Directors—Terms Expiring In 2010

Joshua S. Boger, Ph.D.
Director since 1989
Age: 57
  Dr. Joshua Boger is the founder of Vertex. He has been our Chief Executive Officer since 1992. He was our Chairman of the Board from 1997 until May 2006. He was our President from our inception in 1989 until December 2000, and was again appointed our President in 2005. He was our Chief Scientific Officer from 1989 until May 1992. Prior to founding Vertex in 1989, Dr. Boger held the position of Senior Director of Basic Chemistry at Merck Sharp & Dohme Research Laboratories in Rahway, New Jersey, where he headed both the Department of Medicinal Chemistry of Immunology & Inflammation and the Department of Biophysical Chemistry. Dr. Boger is Chairman of the Biotechnology Industry Organization (BIO) and the Massachusetts High Technology Council. Dr. Boger holds a B.A. in chemistry and philosophy from Wesleyan University and M.S. and Ph.D. degrees in chemistry from Harvard University.

7



Continuing Members of Our Board of Directors

Charles A. Sanders, M.D.
Director since 1996
Chairman since 2006
Age: 76
Committee Memberships:
Audit and Finance Committee
Corporate Governance and
    Nominating Committee—Chair
  Dr. Sanders has served as our Chairman since May 2006 and has served as our lead outside director since 2003. He retired in 1994 as Chief Executive Officer and in 1995 as Chairman of Glaxo Inc. From 1990 to 1995, he served as a member of the board of Glaxo plc. From 1981 to 1989, Dr. Sanders held a number of positions at Squibb Corporation, including that of Vice Chairman. Dr. Sanders has served in the past on the boards of Merrill Lynch, Reynolds Metals Co., Morton International Inc., Fisher Scientific International and Biopure Corporation. He is currently a director of Biodel Inc., Cephalon Corporation, Genentech, Inc. and Icagen, Inc. Dr. Sanders had his undergraduate education at the University of Texas, and earned an M.D. from the University of Texas Southwestern Medical School.

Elaine S. Ullian
Director since 1997
Age: 60
Committee Memberships:
Commercial Strategy Committee
Management Development and
    Compensation Committee

 

Since 1996, Ms. Ullian has served as President and Chief Executive Officer of Boston Medical Center. From 1994 to 1996, she served as President and Chief Executive Officer of Boston University Medical Center Hospital. From 1987 to 1994, Ms. Ullian served as President and Chief Executive Officer of Faulkner Hospital. She also serves as a director of Thermo Fisher Scientific Inc. and Hologic, Inc. Ms. Ullian holds a B.A. in political science from Tufts University and an M.P.H. from the University of Michigan.

Information Regarding Our Board of Directors and its Committees

Corporate Governance Principles and Our Board of Directors

        Our governance practices are documented in our Statement of Corporate Governance Principles, which addresses the role and composition of our board, executive management functioning and succession planning, committees of our board, education and compensation of members of our board and the evaluation of our board. You can learn more about our current corporate governance principles and review our Statement of Corporate Governance Principles, committee charters, and Code of Conduct and Ethics at www.vrtx.com under "Finances/Investor Info—Governance Documents."

Our Board

        Our board of directors met seven times during 2007. Each of our director nominees and continuing directors attended 75% or more of the board meetings during 2007. Each member of our board is encouraged to attend each annual meeting of our stockholders. All of our directors attended our annual meeting of stockholders held in 2007. Our board has determined that the following members of and nominees for the board qualify as "independent" under the definition adopted by The Nasdaq Stock Market, Inc.: Mr. Brandt, Dr. Brimblecombe, Dr. Collinson, Dr. Cordes, Mr. Emmens, Mr. Sachs, Dr. Sanders and Ms. Ullian.

8


Board Committees

        Our board of directors currently has five standing committees: the corporate governance and nominating committee, the audit and finance committee, the commercial strategy committee, the management development and compensation committee, which we refer to as the MDCC, and the science and technology committee. Each of the committees, other than the commercial strategy committee, has the authority to engage legal counsel or other experts or consultants as its members deem appropriate to carry out the committee's responsibilities. Pursuant to our Statement of Corporate Governance Principles, our board has determined that each of the corporate governance and nominating committee, the audit and finance committee and the MDCC must consist solely of "independent directors," as that term is defined by the Securities and Exchange Commission and The Nasdaq Stock Market, Inc. We select "independent directors" as members of these committees with the expectation that they will be free of relationships that might interfere with their exercise of independent judgment. Participation in the commercial strategy committee or science and technology committee is not limited to independent directors.

Corporate Governance and Nominating Committee

        The corporate governance and nominating committee is comprised of Dr. Sanders (Chair), Mr. Brandt, Dr. Cordes and Mr. Emmens. Pursuant to its committee charter, the corporate governance and nominating committee:

In addition, Dr. Sanders, in his role as chairman of our board and an independent director, serves as the presiding director of executive sessions of our outside directors, which generally are held following each of our board meetings.

        In 2007, the corporate governance and nominating committee met three times, and all of its members attended at least 75% of its meetings.

        When assessing potential nominees for election to our board, the corporate governance and nominating committee considers a variety of factors, such as the candidates' education, experience and knowledge of our industry and experience in other industries that are relevant to us, understanding of our technology and the science associated with drug discovery and development, prior service as a director of a public company and relevant commercial experience. The corporate governance and nominating committee may consider candidates recommended by stockholders, as well as recommendations from other sources, such as other directors or officers, third-party search firms or other appropriate sources. Generally, if a stockholder wishes to propose a candidate for consideration as a nominee by the corporate governance and nominating committee, the stockholder should submit any pertinent information regarding the candidate, including biographical information and a statement by the proposed candidate that he or she is willing to serve if nominated and elected, by mail to our corporate secretary at our offices at 130 Waverly Street, Cambridge, Massachusetts 02139. If a stockholder wishes to nominate a candidate to be considered for election as a director at the 2009 annual meeting of stockholders using the procedures

9



set forth in our by-laws, the stockholder must follow the procedures described in "Stockholder Proposals for the 2009 Annual Meeting and Nominations for Director" on page 71 of this proxy statement. In general, persons recommended to the corporate governance and nominating committee by stockholders will be considered on the same basis as candidates from other sources.

Audit and Finance Committee

        Our audit and finance committee is comprised of Mr. Brandt (Chair), Mr. Sachs and Dr. Sanders. Our board has determined that Mr. Brandt, an independent director who serves as the chair of our audit and finance committee, is an "audit committee financial expert," as that term is defined in applicable regulations of the Securities and Exchange Commission. The primary purposes of the audit and finance committee are to:

In addition, our audit and finance committee focuses on the qualitative aspects of our financial reporting to stockholders, on our processes to manage business and financial risk and on compliance with significant applicable legal, ethical and regulatory requirements relating to our financial operations. Our independent registered public accounting firm reports directly to and is held accountable to the audit and finance committee in connection with the audit of our annual financial statements and related services. Our audit and finance committee has sole authority over the appointment, compensation and oversight of the work of the independent registered public accounting firm, and where appropriate, the replacement of the independent registered public accounting firm.

        In 2007, the audit and finance committee met eleven times, and each member of the audit and finance committee attended at least 75% of its meetings. The report of the audit and finance committee appears at page 23 of this proxy statement.

Commercial Strategy Committee

        The commercial strategy committee is comprised of Mr. Emmens (Chair), Mr. Brandt, Dr. Collinson and Ms. Ullian. Our commercial strategy committee will:

        In 2007, the commercial strategy committee met one time, and each member of the commercial strategy committee attended the meeting.

10


MDCC

        The MDCC is comprised of Dr. Brimblecombe (Chair), Mr. Sachs and Ms. Ullian. Pursuant to its charter, our MDCC:

        In 2007, the MDCC met six times, and each member of the MDCC attended at least 75% of its meetings. The report of the MDCC appears at page 41 of this proxy statement.

Science and Technology Committee

        The science and technology committee is comprised of Dr. Cordes (Chair), Dr. Brimblecombe, Dr. Collinson and Mr. Emmens. The science and technology committee discharges our board's responsibilities relating to the oversight of our investment in pharmaceutical research and development. In furtherance of that oversight function, the science and technology committee:

        In 2007, the science and technology committee met four times, and each member of the science and technology committee attended at least 75% of its meetings.

Board Recommendation

        Our board of directors recommends that our stockholders vote FOR the election of each of the nominees to the board. A plurality of the votes cast in person or by proxy at the annual meeting is required to elect each nominee as director.

11



PROPOSAL 2:
APPROVAL OF AN AMENDMENT TO OUR RESTATED ARTICLES OF ORGANIZATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK

        On March 28, 2008 our board of directors adopted, subject to stockholder approval, an amendment to our Restated Articles of Organization to increase the authorized number of shares of common stock from 200,000,000 to 300,000,000.

        The additional common stock to be authorized by adoption of the amendment will have rights identical to our currently authorized common stock. Adoption of the proposed amendment and issuance of the common stock will not affect the rights of the holders of currently outstanding common stock, except for effects incidental to increasing the number of shares of common stock outstanding if and when the additional shares are issued. If the amendment is adopted, it will become effective upon the filing of Articles of Amendment of our Restated Articles of Organization with the Secretary of State of The Commonwealth of Massachusetts.

        At March 17, 2008, there were 140.4 million shares of our common stock outstanding. In addition, as of the same date, 17.5 million shares of common stock were reserved for issuance under our stock and option plans, Employee Stock Purchase Plan and 401(k) plan, and we are seeking stockholder approval pursuant to this proxy statement for an increase in the number of shares authorized under our 2006 Stock and Option Plan of 6.6 million shares and an increase in the number of shares authorized under our Employee Stock Purchase Plan of 2.0 million shares. In addition, we have reserved 12.4 million shares for issuance upon conversion of our outstanding convertible notes. Accordingly, if we obtain approval for the increases to our 2006 Stock and Option Plan and Employee Stock Purchase Plan, we will have approximately 21.1 million shares of common stock available for future issuance, prior to the addition of the shares for which we are seeking approval pursuant to this Proposal 2.

        Although at present the board of directors has no specific plans to issue shares of common stock in excess of the number previously authorized, the board believes it is desirable to have a significant number of available and authorized shares, to provide the board with flexibility to use capital stock for business and financial purposes in the future. The additional shares may be issued without further stockholder approval, except as may be required by law, regulatory authorities, or the rules of the Nasdaq Stock Market, Inc. or any other stock exchange on which our shares may be listed at the time of any proposed issue. The additional shares may be used for various purposes including, without limitation, raising capital, providing equity incentives to employees and directors, establishing strategic relationships with other companies, expanding our business or research and development programs through the acquisition of other businesses and products, and stock splits and dividends.

Board Recommendation

        Our board of directors recommends a vote for the approval of the amendment to our restated Articles of Organization. The affirmative vote of a majority of the shares of common stock outstanding is required for such approval.

12



PROPOSAL 3:
AMENDMENT TO 2006 STOCK AND OPTION PLAN

        In 2006, our board of directors adopted and our stockholders approved our 2006 Stock and Option Plan, or 2006 Plan. The number of shares of our common stock originally available for awards under the 2006 Plan was 7,302,380 shares. Our board has approved amendments to the 2006 Plan increasing the number of shares authorized for issuance under the 2006 Plan by 6,600,000 shares, subject to stockholder approval. Of that total, the board issued non-qualified options to purchase 536,625 shares to our executive officers, which represented all of the options issued by our board to members of our executive team for 2007 performance in February 2008. These stock options were issued contingent upon obtaining stockholder approval of an amendment to our 2006 Plan approving them. They may not be exercised before the related amendment to the 2006 Plan has been approved by our stockholders, and they will terminate if approval of an amendment to our 2006 Plan is not obtained at or before our 2009 annual meeting of stockholders.

        The purpose of the 2006 Plan is to encourage ownership of shares of our common stock by our employees, directors, consultants and advisors in order to attract such persons, to induce them to work for our benefit and to provide additional incentive for them to promote our success. Our board of directors believes that our equity compensation program is an essential tool to attract, retain and motivate individuals with the requisite experience and ability necessary to facilitate our advancement.

        Approval of the amendment to the 2006 Plan is required by the rules of the Nasdaq Stock Market, Inc. In addition, the amendment to the 2006 Plan is being submitted to our stockholders to ensure (i) favorable federal income tax treatment for any grants of incentive stock options under Section 422 of the Internal Revenue Code of 1986, or the Code, and (ii) continued eligibility to receive a federal income tax deduction with respect to compensation earned upon exercise of options under our 2006 Plan by complying with Rule 162(m) of the Code.

        If our stockholders approve the amendment to increase the number of shares authorized under the 2006 Plan, the Plan will also be amended to provide (i) that no options to purchase our common stock can be issued under our 2006 Plan with an exercise price less than the fair market value on the date of grant, with fair market value determined as provided in the 2006 Plan and (ii) that after May 15, 2008 only 20% of shares available—including shares that become available through the cancellation of outstanding options or through the repurchase of restricted stock at cost—may be granted as any type of award other than a stock option award.

        Our stock and option plans consist of our 1991 Stock Option Plan, 1994 Stock and Option Plan, 1996 Stock and Option Plan, the 2006 Plan and the 2007 New Hire Stock and Option Plan. As of March 17, 2008, there were 246,512 shares remaining available for award under our 2006 Plan and 750,000 shares remaining available for award under our 2007 New Hire Stock and Option Plan. No additional awards may be granted under the 1991 Stock and Option Plan, the 1994 Stock and Option Plan or the 1996 Stock and Option Plan. Our 2007 New Hire Stock and Option Plan is scheduled to expire on June 1, 2008, but will be earlier terminated on May 15, 2008 if we receive stockholder approval of the amendment to our 2006 Plan. If we issue any awards under the 2007 New Hire Stock and Option Plan on or prior to May 15, 2008, the number of shares available for grant pursuant to the proposed amendment to our 2006 Plan will be decreased by the number of shares issued under the 2007 New Hire Stock and Option Plan, subject to adjustment in the case of a stock split, stock dividend, combination, recapitalization or similar transaction.

13


        As of March 17, 2008, options to purchase an aggregate of 5,723,938 shares having a weighted-average exercise price of $29.99 and a weighted-average term before expiration of 9.04 years were outstanding under our 2006 Plan and options to purchase an aggregate of 10,564,689 shares having a weighted-average exercise price of $26.90 and a weighted-average term before expiration of 4.66 years were outstanding under our other stock and option plans. In addition, if the amendment is approved, the options to purchase 536,625 shares of common stock at an exercise price of $18.93 per share that were issued to our executive officers as contingent stock options on February 7, 2008 will be ratified. Also on March 17, 2008, there were outstanding 1,206,693 unvested shares of restricted stock granted under our 2006 Stock Plan and an additional 723,755 unvested shares of restricted stock granted under our other stock and option plans.

        On March 27, 2008, the last sales price for our common stock on the Nasdaq Global Select Market was $19.23 per share.

        The principal features of the 2006 Plan, which assume that stockholder approval of this proposal is obtained, are set forth below. A copy of the Amended and Restated 2006 Plan, which would become effective upon stockholder approval of this proposal, is attached to this proxy statement as Appendix A.

Summary Description of the 2006 Plan

        The 2006 Plan is administered by our board of directors or any committee to which it delegates all or a part of its administrative responsibilities under the 2006 Plan. Our board of directors has delegated the administration of the 2006 Plan to the MDCC. Subject to the provisions of the 2006 Plan, the MDCC has the authority to determine the persons to whom awards under the 2006 Plan will be granted, the number of shares to be covered by each award, the exercise price per share and the manner of exercise, and the terms and conditions upon which awards are granted, to accelerate the vesting or extend the date of exercise of any installment of any award, and to interpret the provisions of the 2006 Plan. Awards may be granted under the 2006 Plan to our employees, including officers and directors who are employees, and to our consultants, advisors and non-employee directors. As of March 17, 2008, we and our subsidiaries had 1,182 employees eligible to participate in the 2006 Plan.

        The 2006 Plan provides for the award of stock options, stock grants, and other stock-based awards.

        Stock options granted under the 2006 Plan may be awarded as either incentive stock options within the meaning of Section 422 of the Code, referred to as ISOs, or as non-qualified options. Stock options provide award recipients with the right, subject to the terms and conditions that are specified in connection with the option grant, to purchase a specified number of shares of our common stock at a specified option price. Only our employees are eligible to receive ISOs. The maximum value of shares of common stock—determined at the time of grant—that may be subject to ISOs that become exercisable by an employee in any one year is limited to $100,000. Stock options granted under the 2006 Plan may not be granted with an exercise price that is less than the fair market value of our common stock on the date of grant. ISOs may not be granted with an exercise price that is less than 110% of fair market value in the case of employees or officers holding 10% or more of our voting stock. ISOs granted under the 2006 Plan must expire not more than ten years from the date of grant, and not more than five years from the date of grant in the case of

14


ISOs granted to an employee or officer holding 10% or more of our voting stock. No participant may be granted options and stock-based awards in any calendar year for more than 600,000 shares, subject to adjustment for stock splits and similar recapitalizations.

        Options granted under the 2006 Plan are exercisable during the optionholder's lifetime only by the optionholder and are not transferable except by the laws of descent and distribution or pursuant to qualified domestic relations orders or Title I of the Employee Retirement Income Security Act.

        The 2006 Plan provides specifically for option grants to non-employee directors under our director compensation program. On the date of initial election to our board of directors, each newly elected non-employee director will automatically be granted a non-qualified stock option to purchase a specified number of shares of common stock determined from time to time by our board of directors at a purchase price equal to 100% of the fair market value per share of our common stock on the date of grant, vesting in equal quarterly installments over a period of four years from the date of grant. Currently, a newly elected non-employee director receives an option to purchase 30,000 shares of our common stock. In addition, each non-employee director serving in office on June 1 of any year is granted a non-qualified stock option to purchase a specified number of shares determined from time to time by our board of directors and the chairman of our board receives an additional grant, at an exercise price equal to 100% of the fair market value per share of our common stock on the date of grant. Currently, each annual grant is for 20,000 shares of common stock and the additional grant to the chairman of our board is for 20,000 shares of common stock. These options are fully exercisable immediately and have a term of ten years.

        The 2006 Plan permits the MDCC to determine the manner of payment of the exercise price of options. Such methods include payment by cash, by check, by means of a broker-assisted "cashless exercise," by surrender to us of shares of our common stock, by any combination of such methods, or by any other lawful means, excluding delivery of a promissory note, approved by the MDCC.

        A stock grant is an award of shares of common stock. Stock grants may be issued subject to restrictions on transfer and vesting requirements, as determined by the MDCC. Vesting requirements may take the form of our lapsing right to repurchase the stock from the award recipient, based on either continued employment for specified time periods or on the attainment of specified business performance goals set by our board of directors or the MDCC. Subject to the transfer restrictions and our repurchase rights, if any, the grantee will have all rights with respect to the shares of common stock issued under a stock grant as are possessed by our other stockholders, including all voting and dividend rights, during any such restriction period.

        The 2006 Plan provides that MDCC may grant other stock-based awards, including share grants based upon specified conditions, the grant of securities convertible into shares, or the grant of stock appreciation rights, phantom stock awards or stock units, in each case upon terms and conditions established by the MDCC.

        The number of shares subject to stock rights and other terms applicable to such rights shall be adjusted equitably in the case of the issuance by us of a stock dividend or a stock split, recapitalization, or

15


reorganization. In addition, in the event of certain consolidations or acquisitions or a sale of substantially all of our assets, either (i) the MDCC or the entity assuming our obligations under the 2006 Plan shall make appropriate provision for the continuation of all outstanding stock rights under the 2006 Plan or grant of replacement stock rights on an equitable basis as determined by the MDCC, or (ii) the vesting of all outstanding and unvested stock rights under the 2006 Plan will be accelerated and such stock rights will become fully exercisable immediately prior to such consolidation, acquisition or sale.

        The 2006 Plan was originally adopted by our board of directors on March 29, 2006 and will terminate on March 28, 2016. Our board of directors may terminate or amend the 2006 Plan at any time, subject to stockholder approval under certain circumstances provided in the 2006 Plan. No amendment or termination of the 2006 Plan will adversely affect the rights provided in any award made under the 2006 Plan prior to the plan amendment or termination. No award may be made under the 2006 Plan after the plan expiration date. Awards made prior to the plan expiration may extend beyond such date.

        The discussion of federal income tax consequences that follows is based on an analysis of the Code as currently in effect, existing law, judicial decisions and administrative regulations and rulings, all of which are subject to change.

        Non-Qualified Stock Options.    Options that are designated as non-qualified options are not intended to qualify for treatment under Section 422 of the Code. Options otherwise qualifying as ISOs, to the extent the aggregate fair market value of shares with respect to which such options are first exercisable by an individual in any calendar year exceeds $100,000 also will be treated as options that are not ISOs.

        A non-qualified option ordinarily will not result in income to the optionee or a deduction for us at the time of grant. The optionee will recognize compensation income at the time of exercise of such non-qualified option in an amount equal to the excess of the fair market value at the time of exercise of the shares over the option exercise price. Such compensation income may be subject to withholding taxes, and a deduction may then be allowable to us in an amount equal to the optionee's compensation income.

        An optionee's initial basis in shares so acquired will be the amount paid on exercise of the non-qualified option plus the amount of any corresponding compensation income. Any gain or loss as a result of a subsequent disposition of the shares so acquired will be capital gain or loss.

        Incentive Stock Options.    ISOs are intended to qualify for treatment under Section 422 of the Code. An ISO does not result in taxable income to the optionee or deduction for us at the time it is granted or exercised, provided that no disposition is made by the optionee of the shares acquired pursuant to the option within two years after the date of grant of the option nor within one year after the date of issuance of shares to the optionee, referred to as the ISO holding period. However, the difference between the fair market value of the shares on the date of exercise and the option price will be an item of tax preference includible in alternative minimum taxable income. Upon disposition of the shares after the expiration of the ISO holding period, the optionee will generally recognize long-term capital gain or loss based on the difference between the disposition proceeds and the option price paid for the shares. If the shares are disposed of prior to the expiration of the ISO holding period, the optionee generally will recognize taxable compensation, and we will have a corresponding deduction, in the year of the disposition, equal to the

16



excess of the fair market value of the shares on the date of exercise of the option over the option price. Any additional gain realized on the disposition normally will constitute capital gain. If the amount realized upon such a disqualifying disposition is less than fair market value of the shares on the date of exercise, the amount of compensation income will be limited to the excess of the amount realized over the optionee's adjusted basis in the shares.

        Stock Grants.    With respect to stock grants that result in the issuance of shares that are either not restricted as to transferability or not subject to a substantial risk of forfeiture, the grantee must generally recognize ordinary income equal to the fair market value of shares received. Thus, deferral of the time of issuance generally will result in the deferral of the time the grantee will be liable for income taxes with respect to such issuance. We generally will be entitled to a deduction in an amount equal to the ordinary income recognized by the grantee.

        With respect to stock grants involving the issuance of shares that are restricted as to transferability and subject to a substantial risk of forfeiture, the grantee generally must recognize ordinary income equal to the fair market value of the shares received at the first time the shares become transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. A grantee may elect to be taxed at the time of receipt of shares rather than upon lapse of restrictions on transferability or substantial risk of forfeiture, but if the grantee subsequently forfeits such shares, the grantee would not be entitled to any tax deduction, including as a capital loss, for the value of the shares on which the grantee previously paid tax. The grantee must file such election with the Internal Revenue Service within 30 days of the receipt of the shares. We generally will be entitled to a deduction in an amount equal to the ordinary income recognized by the grantee.

Board Recommendation

        Our board of directors recommends a vote FOR the approval of the amendment to our 2006 Stock and Option Plan to increase the number of shares of common stock available for issuance by 6,600,000. The affirmative vote of a majority of the votes cast in person or by proxy on this matter is required for the approval of this proposal.

17



PROPOSAL 4:
AMENDMENT TO OUR EMPLOYEE STOCK PURCHASE PLAN

        The Vertex Pharmaceuticals Incorporated Employee Stock Purchase Plan, or ESPP, was adopted by our board of directors in 1992, and has been approved by the stockholders. Under the ESPP, eligible employees have the right to purchase our common stock through payroll deductions. The ESPP provides an important employee benefit that we believe helps us attract and retain employees and encourage their participation in and commitment to our business and financial success. As of December 31, 2007, approximately 1,132 persons were eligible to participate in the ESPP. As of March 17, 2008, there were approximately 207,000 shares available for future issuances under the ESPP.

        On March 28, 2008, our board of directors approved an amendment to the ESPP to increase the number of shares of our common stock available for issuance under the ESPP by 2,000,000.

Summary of ESPP

        The ESPP is administered by the MDCC, which has the power to construe and interpret the ESPP and to determine all questions that arise under the ESPP. A copy of the ESPP, as proposed to be amended, is attached as Appendix B. Because participation in the ESPP is voluntary and employees may withdraw from the ESPP at any time during a purchase period without penalty, the benefits to be received by any particular person or group are not determinable by us at this time.

        Individuals are eligible to participate in the ESPP if they are employed on an offering date, they are regularly employed by us for more than 20 hours a week and for more than five months in a calendar year and they do not own five percent or more of our outstanding common stock. If we receive requests from employees to purchase more than the number of shares available during any offering, the available shares will be allocated on a pro rata basis to subscribing employees.

        We make two offerings to purchase common stock under the ESPP each year, one on May 15 and one on November 15. The ESPP provides that each offering period extends either for twelve months, or, if an employee so elects within the 30 day period prior to the six month anniversary of the offering date, for six months. Each twelve-month offering period consists of two six-month purchase periods.

        The price at which an employee may purchase common stock under the ESPP is 85% of the lower of (i) the mean of the highest and lowest quoted selling prices of the common stock on the day an offering period commences, and (ii) the mean of the highest and lowest quoted selling prices on the day the purchase period ends.

        Our board of directors may at any time terminate or amend the ESPP. However, our board may not amend the ESPP if any such amendment would increase the number of shares of common stock reserved under the ESPP without approval of our stockholders.

Summary of U.S. Federal Tax Consequences

        The following is a summary of the United States federal income tax consequences that generally will arise with respect to purchases made under the ESPP and with respect to the sale of common stock acquired under the ESPP. A copy of the ESPP is attached to this proxy statement as Appendix B.

18


        The ESPP is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. In general, an employee will not recognize U.S. taxable income upon enrolling in the ESPP or upon purchasing shares of common stock. Instead, if an employee sells common stock acquired under the ESPP for an amount that exceeds the purchase price, then the employee will recognize taxable income in an amount equal to the excess of the sale price of the common stock over the purchase price, partially as ordinary income and partially as capital gain, depending upon the date of the sale. If the employee sells the common stock more than one year after acquiring it and more than two years after the applicable offering date, and the sale price of the common stock is higher than the purchase price, then the employee will recognize ordinary income in an amount equal to the lesser of (i) 85% of the fair market value of the common stock on the offering date; and (ii) the excess of the sale price of the common stock over the purchase price. The balance of the income will be treated as long-term capital gain. If the sale price of the common stock is less than the price at which the employee purchased the common stock, then the employee will recognize long-term capital loss in an amount equal to the excess of the purchase price over the sale price of the common stock.

        If the employee sells the common stock within one year after acquiring it or within two years after the offering date, which is referred to as a Disqualifying Disposition, then the employee will recognize as ordinary compensation income an amount equal to the excess of the fair market value of the common stock on the date that it was purchased over the purchase price plus either (i) capital gain in an amount equal to the excess of the sale price of the common stock over the fair market value of the common stock on the date that it was purchased, or (ii) capital loss in an amount equal to the excess of the fair market value of the common stock on the date that it was purchased over the sale price of the common stock. This capital gain or loss will be a long-term capital gain or loss if the employee held the common stock for more than one year prior to the date of the sale and will be a short-term capital gain or loss if the employee held the common stock for a shorter period.

        The offerings of common stock under the ESPP will have no tax consequences to us. Moreover, in general, neither the purchase nor the sale of common stock acquired under the ESPP will have any federal income tax consequences to us except that we will be entitled to a compensation deduction with respect to any ordinary compensation income recognized by an employee upon making a Disqualifying Disposition. Any such deduction will be subject to the limitations on deductions for certain employee remuneration contained in Section 162(m) of the Code.

Board Recommendation

        Our board of directors recommends a vote for the approval of the amendment to our ESPP to increase the number of shares of our common stock available for issuance by 2,000,000 shares. The affirmative vote of a majority of the votes cast in person or by proxy on this matter is required for the approval of this proposal.

19



EQUITY COMPENSATION PLAN INFORMATION

        The following table provides aggregate information with respect to all of our equity compensation plans in effect as of December 31, 2007.

Plan Category

  Number of Securities
to be Issued Upon
Exercise of
Outstanding Options

  Weighted-Average
Exercise Price of
Outstanding Options

  Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans (excluding
securities reflected in first
column)

Equity Compensation Plans Approved by Stockholders (1)   12,522,936   $ 31.15   2,083,728
Equity Compensation Plans not Approved by Stockholders (2)   2,408,446   $ 11.93   750,000
   
       
Total (3)   14,931,382   $ 28.05   2,833,728
   
 
 

(1)
These plans consist of our 1991 Stock Option Plan, 1994 Stock and Option Plan and the ESPP, awards granted and available for grant under our 2006 Stock and Option Plan for which we obtained stockholder approval, and awards granted under our 1996 Stock Option Plan for which we obtained stockholder approval.

(2)
This category consists of certain options issued under our 1996 Stock and Option Plan for which we were not required and did not obtain stockholder approval, certain options issued subject to stockholder approval under our 2006 Stock and Option Plan and awards that are available for grant under our 2007 New Hire Stock and Option Plan.

(3)
This table does not include options outstanding on December 31, 2007 to purchase an aggregate of 426,209 shares of our common stock at a weighted-average exercise price of $51.42 that were assumed by us in connection with our acquisition of Aurora Biosciences Corporation on July 18, 2001.

        Please refer to Note C, "Common and Preferred Stock," to the consolidated financial statements included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 11, 2008, for a description of the material features of the 1996 Stock and Option Plan and 2007 New Hire Stock and Option Plan.

20



PROPOSAL 5:
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

        Our audit and finance committee is responsible for the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm. Our audit and finance committee appointed Ernst & Young LLP to perform the independent audit, review and attestation services with respect to our financial statements for the fiscal year ended December 31, 2007 and has appointed Ernst & Young LLP to perform these services for the fiscal year ending December 31, 2008. Although stockholder approval of the appointment of Ernst & Young LLP is not required, we are providing stockholders an opportunity to ratify this appointment.

        If this proposal is not approved at the annual meeting, our audit and finance committee will reconsider the selection of Ernst & Young LLP for the ensuing fiscal year, but may determine that continued retention of Ernst & Young LLP is in our company's and our stockholders' best interests. Even if the appointment is ratified, the audit and finance committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in our company's and our stockholders' best interests.

        We expect representatives of Ernst & Young LLP to be present at the annual meeting. They will have the opportunity to make a statement if they desire to do so and will also be available to respond to appropriate questions from stockholders.

Board Recommendation

        Our board of directors recommends a vote for the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2008.


INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Policy on Audit Committee Pre-approval of Audit and Permissible Non-audit Services of Independent Registered Public Accounting Firm

        Our audit and finance committee has established a policy to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm. Prior to the engagement of the independent registered public accounting firm for each year's audit, management submits to our audit and finance committee for approval a description of services expected to be rendered during that year for each of the following four categories of services and a budget for those services in the aggregate.

21


        Prior to engagement, our audit and finance committee pre-approves these services by category of service. The fees are budgeted and our audit and finance committee requires the independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, our audit and finance committee requires specific pre-approval before engaging our independent registered public accounting firm.

        The audit and finance committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to our audit and finance committee at its next scheduled meeting.

Independent Registered Public Accounting Firm Fees

        Aggregate fees billed to us for the fiscal years ended December 31, 2007 and 2006 by our independent registered public accounting firm Ernst & Young LLP were as follows:

 
  2007
  2006
Audit fees:   $ 778,095   $ 687,000
Audit-related fees:     98,500     91,400
Tax fees:     111,310     88,900
All other fees:     1,500    
   
 
  Total   $ 989,405   $ 867,300
   
 

        "Audit fees" represented the aggregate fees billed to us for professional services rendered for the audit of our annual consolidated financial statements, and our internal controls over financial reporting, for the reviews of the consolidated financial statements included in our Form 10-Q filings for each fiscal quarter, for statutory audits of our international operations, consents, preparation of comfort letters and providing consents with respect to registration statements.

        "Audit-related fees" consisted principally of fees for accounting consultations.

        "Tax fees" consisted principally of fees related to tax compliance and reporting.

        "All other fees" consisted of licensing fees paid to Ernst & Young LLP for access to its proprietary accounting research database.

        The percentage of services set forth above in the categories "audit-related fees" and "tax fees" that were approved by our audit and finance committee pursuant to Rule 2-01(c)(7)(i)(C), which relates to the approval of a de minimis amount of non-audit services after the fact but before completion of the audit, was 0%.

22



AUDIT COMMITTEE REPORT

        The Audit and Finance Committee of the Board of Directors (the "Audit Committee") of Vertex Pharmaceuticals Incorporated (the "Company"), which consists entirely of directors who meet the independence and experience requirements of the Securities and Exchange Commission and the Nasdaq Stock Market, has furnished the following report:

        The Audit Committee assists the Company's Board of Directors in overseeing and monitoring the integrity of the Company's financial reporting process, compliance with legal and regulatory requirements and the quality of internal and external audit processes. The committee's roles and responsibilities are set forth in a written charter, which is available on the Company's website www.vrtx.com under "Finances/Investor Info—Corporate Governance—Governance Documents." Among its duties, the Audit Committee is responsible for recommending to the Company's Board of Directors that the Company's financial statements be included in the Company's Annual Report on Form 10-K. As a basis for that recommendation, the Audit Committee engaged in the following activities. First, the Audit Committee discussed with Ernst & Young LLP ("Ernst & Young"), the Company's independent registered public accounting firm for 2007, those matters that Ernst & Young is required to communicate to and discuss with the Audit Committee under Statement on Auditing Standards No. 61 (Communication with Audit Committees), which included information regarding the scope and results of the audit. These communications and discussions are intended to assist the Audit Committee in overseeing the financial reporting and disclosure process. Second, the Audit Committee discussed with Ernst & Young the firm's independence, and received from Ernst & Young the written disclosures and the letter concerning independence as required by Independent Standards Board No. 1 (Independence Discussions with Audit Committees). This discussion and disclosure informed the Audit Committee of Ernst & Young's relationships with the Company and was designed to assist the Audit Committee in considering Ernst & Young's independence. Finally, the Audit Committee reviewed and discussed, with the Company's management and with Ernst & Young, the Company's audited consolidated balance sheets at December 31, 2007, and the Company's consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for the year ended December 31, 2007, including the notes thereto.

        Management of the Company is responsible for the consolidated financial statements and reporting process, including establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)); establishing and maintaining internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)); evaluating the effectiveness of disclosure controls and procedures; evaluating the effectiveness of internal control over financial reporting; and evaluating any change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. The independent registered public accounting firm is responsible for expressing an opinion on the conformity of these consolidated financial statements with accounting principles generally accepted in the United States, as well as expressing an opinion on the effectiveness of internal control over financial reporting.

        During 2007, management tested and evaluated the Company's system of internal control over financial reporting in response to the requirements set forth in Section 404 of the Sarbanes-Oxley Act of 2002 and related regulations. At the conclusion of the process, management provided the Audit Committee with and the Audit Committee reviewed a report on the effectiveness of the Company's internal control over financial reporting. The Audit Committee also reviewed the report of management contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission, as well as Ernst & Young's Report of Independent

23



Registered Public Accounting Firm included in the Company's Annual Report on Form 10-K. The latter report relates to Ernst & Young's audit of (i) the consolidated financial statements and financial statement schedule, and (ii) the effectiveness of internal control over financial reporting.

        Based on the discussions with Ernst & Young concerning the audit, the independence discussions, and the discussions with the Company's management and Ernst & Young concerning the financial statement review and discussions, and such other matters deemed relevant and appropriate by the Audit Committee, the Audit Committee recommended to the Company's Board of Directors that the consolidated financial statements be included in the Company's 2007 Annual Report on Form 10-K. This report is provided by the following independent directors, who comprise the Audit Committee:

Eric K. Brandt (Chair)
Bruce I. Sachs
Charles A. Sanders

24



EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Overview

        We are in the business of discovering, developing and commercializing small molecule drugs for the treatment of serious diseases. Our core purpose is to innovate to transform lives with new medicines, which we believe will create long-term value for our stockholders. We are in a period of rapid expansion because we are preparing for the possible launch and commercialization of telaprevir, our lead drug candidate for the treatment of hepatitis C viral infection. In order to be prepared for the launch of telaprevir, if it is approved, we are building a commercial manufacturing and marketing and sales capability for the first time. Our strategy is to take the opportunity presented by telaprevir to build Vertex into a pharmaceutical company with capabilities in all areas necessary for drug discovery, development and commercialization.

        We have built, and expect to continue to build, an executive leadership team with the expertise and experience that we need as we expand our capabilities in late-stage drug development, drug supply, registration and commercialization of pharmaceuticals. The market for these individuals is very competitive. In order to attract and retain talented executives, we aim to provide shorter-term compensation elements that rival our competitors', such as base salary, a performance-based annual cash bonus opportunity, and a generous benefits program. However, we also try to conserve our cash resources, because we require significant amounts of capital to fund our operations and are not yet profitable. We do not fund retirement programs, company cars, or other expensive perquisites for our executives. Our compensation program provides for a significant portion of each executive's annual compensation in the form of stock option grants and restricted stock grants that vest over time, or upon achievement of pre-determined goals. We expect the value of these grants to reflect our performance over the longer term. We believe that the inclusion of equity-based awards in our compensation program will attract and motivate executives to set and achieve goals that drive us to long-term success.

Executive Summary

        Compensation Objectives and Philosophy:    The objective of our executive compensation program is to attract, retain and motivate talented, experienced leaders responsible for executing our business plan. We regularly review our compensation philosophy, elements and amounts, and make adjustments as changing circumstances require. Our philosophy is that the compensation paid to executives should:

        Compensation Elements:    The elements of our annual executive compensation program are:

25


        We set target levels for cash bonuses and equity awards at amounts designed to make us competitive for talent. Each executive's annual cash bonus and equity awards are adjusted from target levels on the basis of company and individual performance for the prior year. The application of these "performance-multipliers" can result in compensation that is significantly lower or higher than target levels, which we believe provides a significant performance incentive.

        We also occasionally make supplemental grants of restricted stock or stock options to our current executive officers, as business needs dictate. When we hire new executives, we typically pay sign-on bonuses, award new hire grants of restricted stock and stock options and reimburse moving expenses. We also have entered into employment contracts with severance and change of control payments with each of the eight members of our executive team, including all of the named executive officers, because we believe that they are a fair and effective way to maintain focus on our business in the face of market and other volatility in our industry.

        Compensation Decision Making Process:    The MDCC oversees the design, development and implementation of the compensation program for all of our executive officers. Compensation decisions generally are made on an annual basis. The board of directors sets performance goals and salaries for each year at its first meeting in the year, and assigns performance ratings and awards bonuses and equity grants shortly after completion of the year, in each case at a regularly-scheduled meeting. The MDCC consults with members of our human resources department, particularly our director of compensation, and engages independent consultants to advise it on specific matters when it deems it appropriate. The MDCC reviews and may adjust compensation elements or amounts throughout the year. In 2007, the MDCC engaged Hewitt Associates to conduct a review of available compensation data from comparator group companies to consider whether or not adjustments to the salaries, target levels of cash and equity compensation, or performance-based adjustment factors of our compensation program was warranted. The materials that management provides to the MDCC often include recommendations with respect to compensation levels and performance ratings, which the MDCC considers but does not give undue weight. Final compensation decisions are approved by our full board of directors, after discussion of the MDCC's recommendations. Dr. Boger, our president and chief executive officer, discusses his compensation with the MDCC, but does not participate in board decisions regarding his own compensation.

        2007 Compensation of Named Executive Officers Compared to 2006:    We did not make any significant changes to the elements of our compensation program during 2007. Our company performance rating for 2007 was "Strong," and the executive bonus pool factor was 86% of target levels, compared to a company performance rating for 2006 of "Leading," with an executive bonus pool factor of 140%, resulting in significantly lower annual bonus awards to the named executive officers for 2007 performance as compared to 2006 performance. In general, 2007 individual ratings for our named executive officers were lower than for 2006, which resulted in lower average equity grant amounts for 2007 performance than 2006 performance. The salaries of our executive officers, which are adjusted only for market-based factors, were increased by 3% in both the first quarter of 2007 and the first quarter of 2008. Compensation paid to the named executive officers for 2006 and 2007 and information regarding cash bonuses and equity awards based on our performance in 2006 and 2007 are detailed below under the heading Compensation and Equity Tables—Summary Compensation Table.

26


Detailed Analysis and Discussion

Elements of Compensation

        The elements of our annual executive compensation program are base salary, annual cash bonus, stock option grants, restricted stock grants, and health and other benefits available to all our employees, including matching payments under our 401(k) plan and payment of life insurance premiums. Each year we review the balance of the elements of our executive compensation program to ensure that we have appropriately designed each element in light of our goals of aligning the program with our stockholders' interests, the competitive environment and our business strategy. We expect that we may adjust our approach to some or all of these elements over time as our company and our business evolve.

Base Salary

        The MDCC adjusts the executive officers' base salary levels at the beginning of each calendar year in conjunction with our annual performance review process, which is described more fully below under the heading Performance-Based Elements of Compensation—Annual Cash Bonus and Equity Awards.

        The MDCC currently sets base salaries for each of our executive officers on the basis of a market analysis, on a position-by-position basis. At the beginning of the year we prepare tables for the MDCC's review, showing a comparison of each executive's prior year base salary and bonus opportunity, at the target level, to salaries and bonuses reported for executives with similar responsibilities at specified comparator companies. For a discussion of our practices in selecting comparator companies, the identity of our comparator companies, and our use of comparative compensation data, see the discussion below at Compensation Decision Making Process—Analysis of Compensation Practices of Comparator Companies. We do not benchmark to a particular level of compensation relative to compensation levels at the comparator companies, but rather, make a subjective judgment about where each executive should fall in comparison with executives with similar responsibilities at the comparator companies, taking into account the executive's general level of experience and mastery, significance of job responsibilities to achievement of our business strategy and company goals, and general performance over time, including demonstration of the values and desirable behaviors under our core values program. On the basis of that information, and taking into consideration the executive's base salary for the previous year, the MDCC independently determines an appropriate salary for each named executive officer.

        In January 2007 and February 2008, the MDCC analyzed each named executive's base salary and concluded that there was no need to make adjustments other than an across-the-board 3% increase. In making these determinations, the MDCC was provided and considered comparator group proxy data, industry survey data, the levels of named executives' salaries relative to one another, and our recommendation, as prepared by our director of compensation. The 2006, 2007 and 2008 salary levels for the named executive officers are set forth in a table under the heading Compensation and Equity Tables—Summary Compensation Table—Base Salary.

Performance-Based Elements of Compensation—Annual Cash Bonus and Equity Awards

        Two of the principal elements of our executive compensation program—annual cash bonus and annual equity awards—are awarded in amounts determined on the basis of performance, which is evaluated on an annual basis. The annual cash bonus is determined based on a formula that incorporates the executive's base salary, target bonus and both company-wide and individual performance ratings for the completed

27



year. Annual equity award amounts are adjusted to reflect the executive's individual performance rating for the preceding year.

        At the beginning of each calendar year, our board of directors, in consultation with our chief executive officer, establishes company-wide goals for that year. Actual company performance against these goals is the most important factor considered by the board in accessing our performance, but our board also considers all other factors it deems relevant in its evaluation. The performance ratings are intended to reflect performance at one of the following levels:


 
   
 

Company Rating
 
  Level of Company Performance
 
  Leading     Exceptional performance across our business, including successful execution of our business plan, achievement of a very high proportion of our original goals, significant additional accomplishments exceeding our original goals, and the absence of significant business setbacks.  
  Strong     A high level of performance, in which a substantial majority of performance goals were met, and accomplishment of our business plan for the year.  
  Building     Failure to successfully implement the approved goals or to meet a substantial portion of the annual performance goals for any reason, including a failure of management to execute our business plan, or due to events outside our control that nonetheless had a meaningful negative impact on our performance.  
  Not Building     Unacceptable and disappointing performance. Significant improvement required and expected.  

        The MDCC evaluates executives' individual performances on a "results-based, values-tempered" basis, which takes into account not only "what" was accomplished, but "how" it was accomplished. The results-based component evaluates the executive officer's performance in his individual role and as a leader of our company in achieving our objectives. The possible individual results-based performance ratings are "leading," "strong," "building" or "not building," with standards comparable to the company ratings set forth in the above table. The values-tempered component of the individual evaluations builds upon our three company core values: "innovation is our lifeblood;" "fearless pursuit of excellence;" and "'we wins." Under our Values into Practice program, we expect all employees to demonstrate our company core values in all aspects of job performance. We further expect that our executives will be stewards of our core values, and the performance ratings assigned to them incorporate our board's assessment of the strength of their leadership with respect to, and demonstration of, values-based behavior. This evaluation results in ratings of "not demonstrating," "living the values" or "exemplary demonstration." The "results" and "values" components of the individual rating combine for an overall individual rating of "leading-exemplary," "leading," "strong," "building" or "not building" as set forth in the following table.

 
   
 
   
 
   
 
Values Evaluation

  Results Evaluation

 
 
 
  Not Building
 
  Building
 
  Strong
 
  Leading
 
  Exemplary Demonstration     Not Possible     Strong     Leading     Leading/Exemplary  
  Living the Values     Not Building     Building     Strong     Leading  
  Not Demonstrating     Not Building     Not Building     Building     Not Possible  

28


        The company-wide and individual performance ratings, along with other factors as described below, are applied to determine the size of awards made to the executives under our annual cash bonus program and stock and option plans.

        Our annual cash bonus program is designed to reward our employees, including the named executive officers, in the near term, for accomplishment of the previous year's annual performance objectives. The amount to be paid to each of the named executive officers under the annual cash bonus program is determined on the basis of the following formula:

Target Bonus
   
  Performance Factors
   
   
    
   
   
   
   
   
   
   
Base Salary   ×   Individual Incentive Target (expressed as a percentage of base salary)   ×   Company Performance Factor (expressed as a percentage of the target bonus)   ×   Individual Performance Factor (expressed as a percentage of the target bonus)   =   Annual Cash Bonus Award

        Target Bonus:    The amount calculated by multiplying an employee's base salary by his or her individual incentive target is referred to as the target bonus. Individual incentive targets are established solely on the basis of responsibility level, and are higher for positions of greater responsibility. Thus, a greater portion of annual cash compensation—salary plus bonus—is "at risk" for our executives than for our non-executive employees, which is consistent with our policy that a significant portion of executive compensation should be performance-based and "at-risk."

        The individual incentive targets assigned to each level were determined in 2005 using available information about comparator group companies at that time. In 2007, the MDCC engaged Hewitt Associates to conduct a review of available data about comparator company compensation. As a result of its analysis of these data, the MDCC concluded that the aggregate cash compensation—base salary plus target bonus—using the current incentive targets was in the appropriate range. Accordingly, the MDCC made no change to the executive bonus targets for 2007 from those in effect for 2006. The 2007 target bonus percentages were:



Position
 
  Individual Incentive Target
(expressed as a percentage of base salary)

   
  Chief Executive Officer     60 %  
  Executive Vice President     40 %  
  Senior Vice President and Member of Executive Team     35 %  

        Performance Factors:    The target bonus is subject to adjustment on the basis of performance factors for the applicable year, based on both the individual and company performance ratings. These adjustments allow for payouts significantly above the target bonus in a year where both the individual executive and Vertex significantly exceed performance expectations. It also provides for awards significantly below the target bonus in years in which Vertex and/or the executive falls short of performance expectations.

        Company Performance Factors.    When our board of directors assigns a performance rating for the completed year, it also assigns two company performance factors—one for our executives and one for all

29



other employees. The possible company ratings and corresponding company performance factor ranges for our executive officers are set forth in the table below.



Company Rating
 
  Company Performance Factor
 
  Not Building     0%-25%  
  Building     0%-80%  
  Strong     80%-120%  
  Leading     120%-150%  

        Individual Performance Factors.    The possible individual ratings and corresponding individual performance factor ranges for our executive officers are set forth in the table below:



Individual Rating
 
  Individual Performance Factor
 
  Not Building     0%  
  Building     50%-80%  
  Strong     80%-120%  
  Leading     120%-150%  

        Stock awards made under our stock and option plans are granted to all eligible employees, including the named executive officers, for the purpose of creating a link between compensation and stockholder return, and to enable the named executive officers and employees to develop and maintain a significant stock ownership position in our company that will vest over time and act as an incentive for the employee to remain employed by us. The number of shares awarded increases with increased responsibility and with higher year-end individual performance ratings.

        Under our current annual equity compensation program, each of the named executive officers is eligible for a combined grant of stock options and restricted stock, in amounts finally determined by the board of directors during the annual performance review process. Grants to employees typically are made under a stockholder-approved stock and option plan and are subject to vesting. All stock option awards are granted with an exercise price determined by averaging the high and low price of our common stock on the date of grant and vest quarterly over four years. Accordingly, the intrinsic value of any stock option grant is proportional to both the increase in fair market value of the stock between grant and exercise, and to the increasing number of vested shares over time. Accordingly, we grant stock options as a retention tool, progressively rewarding an executive for time-in-service. Stock options also serve to motivate executives to achieve company financial success, as stock options have realizable value only if the value of our common stock increases after the grant date.

        All restricted stock awards made under our annual program to our named executive officers are issued at par value, or $0.01, and vest on the fourth anniversary of the grant date, subject to accelerated vesting for certain performance-based factors. Shares that are vested may be sold by the holder without transfer restrictions. For all outstanding annual restricted stock grants made to executive officers, 50% of the shares vest if the market price of our stock achieves and maintains a pre-determined level, and 50% of the shares vest if our common stock price outperforms the Amex Biotechnology Index, or BTK Index, for two

30



consecutive years. We consider the price target to be confidential information, and choose it with the objective of triggering accelerated vesting only upon significant above-market performance of our stock. For all of these outstanding performance accelerating restricted stock awards, the pre-determined price was at least 50% greater than the fair market value of our common stock on the date of grant. For example, on March 17, 2004, when our stock price was $9.69, the stock price target was set at $20.00 per share and on February 3, 2005, when our stock price was $10.41, the stock price target was set at $20.00 per share. 50% of each of these grants vested on November 9, 2005, because the market price of our common stock achieved and maintained this stock price target. Restricted stock grants serve principally as a retention tool, because their value on the vesting date corresponds directly to the prevailing stock price at any point in time—rather than to any increase over the prevailing stock price on the date of grant. Accordingly, restricted shares have value to the named executive officer even if we have suffered a setback and the price of our common stock has declined, assuming that the shares vest. They also are linked to performance, however, in the sense that they are more valuable if the stock price increases, and because they vest sooner if the performance-based accelerators are achieved. Additional information regarding our equity grant practices is set forth under the heading Compensation Decision Making Process—Equity Grant Practices.

        Beginning in 2005, including for 2007 performance, the named executive officers were eligible for equity grants in the amounts set forth in the following table:

 
 
   
 


  Rating



  Building

  Strong

  Leading

  Leading and
Exemplary


 
 
 
  Restricted
Shares

 
  Options
 
  Restricted
Shares

 
  Options
 
  Restricted
Shares

 
  Options
 
  Restricted
Shares

 
  Options
 
  Chief Executive Officer     22,027     165,200     31,467     236,000     39,334     295,000     47,201     354,000  
  Executive Vice President     6,767     50,750     9,667     72,500     12,084     90,625     14,501     108,750  
  Senior Vice President and Member of Executive Team     5,693     42,700     8,133     61,000     10,166     76,250     12,200     91,500  

        In each year beginning in 2003, our board of directors has, at its regularly scheduled summer meeting, awarded a mid-year stock option grant. Ordinarily, our board grants stock options to all eligible employees, including the named executive officers, in an amount that is 50% of the number of shares for a "strong" performance. This grant is considered part of the annual equity award related to performance in that year. Upon completion of the individual's annual performance evaluation early in the following year employees typically receive a second option award. At that time, we determine the aggregate number of shares to be awarded for the entire year on the basis of table above, and award the balance after subtracting the amount granted in the mid-summer award. The restricted stock award portion of annual equity compensation, as adjusted on the basis of the executive officer's individual performance rating, is made to each executive officer in a single grant in conjunction with the annual year-end review process.

31


        In February 2008, the board of directors issued equity awards to all employees on account of 2007 performance. As a result of our rapid growth, there were insufficient shares available for issuance under our 2006 Stock and Option Plan for all grants to be made under our annual performance-based program. Accordingly, our board of directors amended the 2006 Stock and Option Plan to add 536,625 shares, which corresponds to the number of shares subject to awards to our executive officers. This amendment is subject to stockholder approval. As a result, all grants to our executive officers, including the named executive officers, awarded in February 2008 on account of 2007 performance, are contingent upon obtaining stockholder approval of the February 2008 amendment to the 2006 Stock and Option Plan. These grants will terminate if approval of the amendment to our 2006 Plan is not obtained at or before our 2009 annual meeting of stockholders. See Proposal 3 on page 13.

        Company Rating—For 2007, our board of directors evaluated overall 2007 performance against four high-level goals summarized below:

        Our board determined that our company performance rating was "Strong," and set the company performance factor for the executive bonus pool at 86%, which was at the low end of the possible range of performance factors (80% - 120%) based on a "Strong" rating. This rating was based on balancing positive accomplishments in advancing the telaprevir clinical development program and our portfolio of other drug candidates, and expanding our drug development, supply chain management and commercialization organizations, tempered by some delays in our telaprevir clinical development program and a decline in our stock price at the end of fiscal 2007 that could have affected our access to capital. In reaching this determination, the board considered the following:

32


Although the directors discuss and analyze our performance as a group, each director makes his or her own judgment about which factors are important, and how to weight those factors in reaching a conclusion. We consider our annual corporate goals to be confidential information and closely guard this information, because we believe that our competitors could use it to modify their strategies to compete more effectively with us. As a result, the preceding discussion provides a more specific discussion of our goals relating to drug candidates in clinical trials, including telaprevir, and our financial goals, than our goals relating to pre-clinical drug candidates and business development activities.

        Our corporate goals for every year are intended to be ambitious. Due to the high risks associated with developing and commercializing pharmaceutical products, we elect to diversify our research and development activities across a relatively broad array of disease indications and drug targets. While we expect that not all of our programs will be successful, we establish our annual goals as if they will be. Accordingly, our company performance ratings have varied widely in the last several years, reflecting successes and setbacks in our business. For example, during the period between 2003 and 2006, our company performance ratings were:

33


        Individual Ratings for Named Executive Officers—The MDCC individual rating recommendations for all of the named executives except for Mr. Kenneth Boger were based principally upon factors known to MDCC members from their interactions with the named executive officers during the year, including each officer's role in accomplishment of corporate goals, and the recommendation of our chief executive officer, Dr. Joshua Boger, made on the basis of Dr. Boger's independent assessment of the named executive's performance in 2007.

        Dr. Boger discussed his own performance in 2007 with the MDCC. Dr. Boger noted that the company's performance rating was on the low end of the "strong" range. Dr. Boger suggested that his own results-based rating for 2007 performance should be "building," because he bore ultimate responsibility for the company's 2007 performance. The MDCC and board of directors agreed. As for values-based behavior, the MDCC believes that Dr. Boger is an exceptional leader who exhibits exemplary values-based behavior, and accordingly, assigned Dr. Boger a values-based rating of "exemplary demonstration."

        Dr. Boger advised the MDCC about both results-based and values-based ratings for each of Mr. Smith, Dr. Mueller and Dr. Alam. With respect to results, Dr. Boger related each executive's performance to overall company results. For example, Dr. Boger recommended that Dr. Mueller receive a rating of "leading," because in addition to consistent and excellent research productivity, Dr. Mueller oversaw a year of extraordinary success for the pharmaceutical operations and chemistry, manufacturing and controls programs, particularly for the telaprevir Phase 3 clinical trial and launch preparation. Dr. Alam's clinical development organization successfully advanced a number of our later stage compounds, including telaprevir and VX-770, and completed the groundwork for obtaining FDA agreement in January 2008 to go forward with Phase 3 clinical trials of telaprevir, earning Dr. Alam a results-based rating of "strong." Mr. Smith's organization, which includes finance and accounting, properties, operations, information systems and strategic communications, also performed at a high level in supporting achievement of the corporate objectives detailed above, earning Mr. Smith a results-based rating of "strong." With respect to values-based evaluation, Dr. Boger recommended that each of

34



Mr. Smith and Dr. Alam be rated "living the values" because they demonstrated strong values-based behavior. Dr. Boger's assessment was that Dr. Mueller is an exemplar for the organization in terms of his commitment to innovation, excellence and synergy, and he recommended an "exemplary demonstration" rating for Dr. Mueller. The MDCC's ultimate assignment of results-based ratings to Mr. Smith, Dr. Mueller and Dr. Alam relied in part on Dr. Boger's recommendations, but diverged in some instances from his conclusion. The MDCC did place a heavy weight on Dr. Boger's recommendations with respect to values-based ratings, which the committee members believe to be more subjective and intangible, and difficult for board members to assess on the basis of limited contact with the executives.

        Dr. Boger plays no role in the performance evaluation of his brother Kenneth S. Boger, who is our senior vice president and general counsel, and who reports directly to the Corporate Governance and Nominating Committee. Mr. Boger's performance rating is established by the board of directors upon the recommendation of the Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee assigned Mr. Boger a results-based rating of "strong" as a result of his demonstrated excellence in advising both our board and executive management about a wide variety of business and legal matters, as well as his stewardship of the legal department. Mr. Boger received a values-based rating of "living the values" because he demonstrated strong values-based behavior.

        Based on the foregoing, the MDCC recommended and the board of directors assigned the following performance ratings on account of 2007 performance to the named executive officers.

 
 
   
 
  Results—Based
Evaluation

 
  Values—Based Evaluation
 
  2007 Overall
Performance Rating

 
  Individual
Performance
Factor

   
    Joshua S. Boger     Building     Exemplary Demonstration     Strong     100 %  
    Ian F. Smith     Strong     Living the Values     Strong     100 %  
    John J. Alam     Strong     Living the Values     Strong     100 %  
    Peter Mueller     Leading     Exemplary Demonstration     Leading/Exemplary     150 %  
    Kenneth S. Boger     Strong     Living the Values     Strong     100 %  

        Annual Cash Bonus and Equity Awards—The annual cash bonuses and annual equity awards for 2006 and 2007 resulting from the company and individual performance ratings are set forth in the tables under the headings Compensation and Equity Tables—Summary Compensation Table—Non-Equity Incentive Plan Compensation—Cash Bonus and Compensation and Equity Tables—Summary Compensation Table—Stock Awards and Options Awards.

Benefits

        Our executives are eligible to participate in all benefits programs on the terms made generally available to our employees, including medical insurance, dental insurance, payment of life insurance premiums, disability coverage, and participation in our Employee Stock Purchase Plan. Our retirement benefits are limited to a defined contribution (401(k)) plan, in which our named executive officers are eligible to participate, subject to all applicable limitations under the plan, including the federal maximum annual contribution amounts. We make matching contributions to the 401(k) plan, which are made in the form of fully vested unitized interests in a Vertex common stock fund, and are subject to certain limitations. The formula for determining the amount of our matching contributions is the same for our

35



named executive officers as for our other employees, but the actual contributions made to the accounts of our named executive officers are at the top end of the formula range, due generally to the executives' higher salaries and corresponding higher cash contribution levels. We do not provide any other retirement benefits to the named executive officers.

Other-Than-Annual Compensation Arrangements

        New Hire Compensation Elements.    The initial compensation terms for newly hired executives are the result of negotiations between us, in consultation with the MDCC and our board, and the executive being recruited. Accordingly, the initial employment terms for each of the named executive officers vary significantly, depending on the level of responsibility, market for the executive's services, value of other opportunities available to the executive and similar considerations. We seek to balance the need to be competitive in a competitive market against the need for the executive's compensation to be comparable with the executive's peers at the company. In general, each newly hired executive is awarded a stock option and restricted stock grant, and in some cases a sign-on bonus, reimbursement of moving expenses, and other benefits. Kurt Graves and Amit Sachdev, the two members of the executive team that we recruited during 2007, each received some or all of these benefits.

        Supplemental Grants of Equity Compensation.    On an occasional basis, the MDCC has recommended that our board of directors make an additional, off-cycle equity award to an executive officer or group of officers in order to achieve one or more of the objectives of our executive compensation program. Our board has made three such awards, beginning in 2004, to some or all of the named executive officers. In May 2004, our board made a retention grant of restricted stock to all of our executives, in order to retain our executive leadership at a time when we had suffered a number of setbacks, particularly with respect to late-stage drug candidates being developed by collaborators. The shares subject to these grants vest in two installments, with 50% vesting on the third anniversary of the grant, and 50% vesting on the fifth anniversary of the grant, or sooner, if we achieve profitability. In February 2006, our board awarded our chief executive officer, Dr. Joshua Boger, an additional option grant for 298,500 shares, to bring the total grant on that date, including grants on account of 2005 performance, to 600,000 shares, all of which vest quarterly over four years. The purpose of this grant was to provide an additional incentive for Dr. Boger, whose performance and leadership are valued very highly by our board of directors, to remain in service as our chief executive officer as we build the company around our later-stage drug candidates. Similarly, in January 2007, our board awarded 20,000 shares of restricted stock to each of our then executive vice presidents—Mr. Smith, Dr. Alam, Dr. Hartmann and Dr. Mueller—as an additional incentive to remain with us over the next several years. Supplemental grants generally are made on an ad hoc basis, when warranted in the judgment of the MDCC and our board. We cannot predict if the board of directors will make additional supplemental grants in the future, or characterize the likely size and/or terms of any such grants.

Post-Termination Compensation and Benefits

        We have entered into agreements and maintain plans that will require us to provide to our named executive officers under specified circumstances cash compensation, benefits and/or acceleration of the vesting of equity awards in the event of termination of employment. The terms of these agreements vary from executive to executive with respect to the amount of severance payments, provisions for accelerated equity award vesting, continuation of benefits and other terms. Prior to 2008, we had entered into agreements with executives primarily at the time they are recruited. The employment contracts had general

36



topics in common, such as severance amounts for voluntary and involuntary terminations, under a variety of circumstances, including in connection with a change of control. However, each employment contract was separately negotiated, taking into account both our interests and the executive's interests under the circumstances at the time of negotiation. There are a number of factors that influenced the outcome of these negotiations with each potential executive. For example, the executives differ significantly from each other in terms of their seniority, experience, talents, motivations, areas of expertise and other individual circumstances. In addition, the executives we are recruiting typically have existing job interests, and we take those interests into account in the negotiations. For example, when we recruit individuals from lucrative private practices, we finds that they are unlikely to join us without assurances of enough pay and severance benefits to compensate them for leaving their practices. Executives who join us from other companies may sacrifice potential bonuses and/or equity payouts, and may seek assurances of compensation elements of similar value. More experienced individuals may seek higher compensation than individuals who are still establishing their careers. We also are mindful that candidates compare their proposed compensation levels with those of their potential peers on the executive team. In October 2007, the MDCC considered new guidelines in order to provide a more consistent approach to our post-termination compensation and benefits to the executive team. This new policy was recommended to and adopted by our full board in February 2008.

        In connection with establishing these guidelines, the MDCC also decided that each of the existing members of the current executive team, including our named executive officers, should receive post-termination compensation and benefits that are no less favorable than those set forth in the new policy. As a result of this determination, in February 2008 we amended and/or entered into new arrangements with three of our named executive officers: John J. Alam, Peter Mueller and Kenneth S. Boger. A further discussion of the terms and projected payments under each of these contracts is set forth below under the heading Employment Contracts and Change of Control Arrangements.

        We use a "double trigger" with respect to benefits that are to be provided in connection with a change of control. In other words, the change of control does not itself trigger benefits; rather, benefits are paid only if the employment of the executive is terminated by us other than for cause, death or disability, or by the executive for good reason during a specified period before or after the change of control. We believe a "double trigger" benefit maximizes stockholder value because it prevents a windfall to executives in the event of change of control in which the executive retains significant responsibility as defined in his or her individual agreements, while still providing our executives appropriate incentives to cooperate in negotiating any change of control in which company executives ultimately believe they may lose their jobs.

        In addition to the benefits that only accrue in connection with a change of control, our agreements with certain of our executive officers provide benefits if we terminate their employment with us without cause or they terminate their employment with us for good reason, as such terms are defined in the applicable agreement with the executive officer. A further discussion of the terms and projected payments under each of these contracts is set forth below under the heading Employment Contracts and Change of Control Arrangements.

37


Compensation Decision-Making Process

Role of MDCC and Chief Executive Officer in Setting Executive Compensation

        The MDCC has primary responsibility for advising our board of directors with respect to developing and evaluating potential candidates for executive positions, including the chief executive officer, and for overseeing the development of executive succession plans. As part of this responsibility, the MDCC oversees the design, development and implementation of the compensation program for the chief executive officer and the other named executive officers.

        The MDCC evaluates the performance of our chief executive officer and recommends to our board for its approval all compensation elements and amounts to be awarded to our chief executive officer. Our chief executive officer, who is a member of our board, does not participate in board decisions relating to his compensation or the compensation of his brother, Kenneth S. Boger.

        The MDCC also assesses the performance of the other executive officers and recommends compensation elements and amounts for their compensation to our board. Our chief executive officer and our senior vice president, human resources, assist the MDCC in reaching compensation recommendations with respect to executive officers, including the named executive officers, other than the chief executive officer. The other named executive officers do not play a role in their own compensation determination. Our board makes all final compensation decisions with respect to our executives.

Role of Compensation Consultant.

        Neither the company nor the MDCC has a contractual arrangement with any compensation consultant who has a role in determining or recommending the amount or form of executive or director compensation. Occasionally, the MDCC has engaged Hewitt Associates to provide information about competitors' compensation practices. In 2007, the MDCC engaged Hewitt on two occasions. In advance of its July 2007 meeting, the MDCC instructed Hewitt to conduct an analysis of all elements of compensation paid to our five most highly compensated executives compared to similar elements paid to similarly-situated executives at companies in our comparator group and to provide a written report and presentation of findings at the July 2007 MDCC meeting. This information was used as described under the headings Executive Summary—Compensation Decision Making-Process, Detailed Analysis and Discussion—Elements of Compensation—Performance-Based Elements of Compensation—Annual Cash Bonus and Equity Awards—Annual Cash Bonus and Compensation Decision Making-Process—Analysis of Compensation Practices of Comparator Companies. The MDCC also invited a representative of Hewitt to attend its October 2007 meeting. At that meeting, the Hewitt representative provided information about our competitors' practices with respect to severance and change of control policies for senior executives, and advised the MDCC about a proposal from management to revise and standardize our policies in that regard. Hewitt does not provide any services directly to Vertex.

Analysis of Compensation Practices of Comparator Companies

        In order to make judgments about elements of executive compensation on a competitive basis, we consider information about the compensation practices of a representative group of companies with whom we compete for executive talent. We select the companies for this comparator group on the basis of industry, annual operating expenses and market capitalization. We review and revise the list of companies on a regular basis. In 2006, we included approximately 20 companies in the comparator group. We chose this number of companies to ensure that we had enough comparative compensation information. In order

38



to include this number of companies in the group, we included companies with operating expenses and/or market capitalizations that were significantly higher or lower than ours. In general, however, due to concerns that data from the largest and smallest companies in the group might distort our analysis, for compensation decisions in 2006 and early 2007, we focused primarily on comparative information reported by a smaller subgroup of the 20 comparator companies, set forth below as the "primary comparator group."

        During 2007, the MDCC reconsidered the composition of the comparator group, and decided that the benefits of having a larger number of companies in the group were outweighed by the disadvantages of including significantly larger and smaller companies. Accordingly, the MDCC decided that the comparator group companies for compensation analyses beginning in mid-2007 would consist of the companies set forth in the right column in the table below:

 
   
Comparator Group 2006 - Mid-2007
  Comparator Group Mid-2007 - 2008







2006 - Mid 2007
Primary Comparator Group


 



GRAPHIC


Biogen Idec Inc.
Shire plc
Genzyme Corporation
Cephalon, Inc.
MedImmune, Inc.
Sepracor Inc.
Millennium Pharmaceuticals, Inc.
Elan Pharmaceuticals
Vertex Pharmaceuticals Incorporated
PDL BioPharma, Inc.
Celgene Corporation
Amylin Pharmaceuticals, Inc.
Endo Pharmaceuticals Holdings Inc.
MGI Pharma, Inc.
OSI Pharmaceuticals, Inc.
Imclone Systems Incorporated
Human Genome Sciences, Inc.
Theravance, Inc.
Icos Corporation
Alkermes, Inc.
   
  
  
Sepracor Inc.
Elan Pharmaceuticals
Amylin Pharmaceuticals, Inc.
Millennium Pharmaceuticals, Inc.
Endo Pharmaceuticals Holdings Inc.
Vertex Pharmaceuticals Incorporated
PDL BioPharma, Inc.
OSI Pharmaceuticals, Inc.
Imclone Systems Incorporated
Medarex, Inc.
Theravance, Inc.

        The MDCC does not benchmark executive compensation awards against comparator company compensation. After choosing the new comparator group in the second quarter of 2007, the MDCC considered comparator group data on two occasions. In July 2007, the MDCC conducted a comprehensive review of our executive compensation program on an element-by-element basis. In connection with this review, the MDCC considered a report prepared by our compensation consultant, Hewitt Associates, which compared target and actual compensation for our executives against corresponding information disclosed by comparator group companies, on both an aggregate and company-by-company basis. The purpose of this evaluation was to confirm that our compensation practices and the result of applying our

39



policies and programs in general resulted in compensation levels that are competitive with those of the comparator companies. Similarly, for the February 2008 determination of equity grants and 2008 base salaries, the MDCC was provided with the comparator company data compiled by Hewitt Associates. In addition, we provide broader industry-specific executive compensation surveys published by Organization Resources Counselors, Inc. and by Towers Perrin to the MDCC for their review.

Interdependence of Elements and Tally Sheets

        The elements of our compensation operate independently from one another, except that an adjustment to an executive's base salary level also will result in a corresponding change in the executive's bonus opportunity, and potentially, any severance or change of control payments.

        Any time the MDCC evaluates an amount to award or pay for a specific compensation element, we provide a tally sheet that sets forth all elements of the executive's compensation, including salary, cash bonus, value of equity compensation, the dollar value to the executive and cost to us of all personal benefits, and the actual projected payout obligations under potential severance and change of control scenarios, and showing the impact of the proposed award or payment on each compensation element and on the executive's aggregate compensation. The purpose of the tally sheets is to provide information to the MDCC to assist in the establishment and administration of an overall executive compensation program that is fair and reasonable both to our executives and to our stockholders. The tally sheets contain categories of information similar to those provided under the caption Compensation and Equity Tables. However, because the tally sheets are used by the MDCC in connection with forward-looking compensation decisions, we often provide different values in the tally sheets than are reported in these tables. In particular, the tally sheets use more current market prices and use different assumptions regarding the timing and circumstances of any event that could result in a severance payment. For example, tally sheets prepared in 2007 incorporated assumptions that any employment termination in connection with a change of control of the company would take place at least three months in the future and that a buyer would pay a premium over the market price of the company's common stock. The purpose of this information is to permit the MDCC to anticipate the potential payouts under these contract provisions, should they be triggered during the year. Each committee member uses the tally sheets as he or she determines when making compensation decisions. The review of tally sheets does not result in specific awards. Rather, the tally sheets provide background information for the MDCC to use in considering one or more components of compensation. Also, the MDCC uses the tally sheets, together with other resources, to make a determination each year that the aggregate compensation for each named executive is reasonable and not excessive.

        While the tally sheets include information about the current and projected value of each executive's inventory of outstanding vested and unvested equity awards, we believe it is inconsistent with our compensation philosophy to give this "accumulated wealth" weight in setting current executive compensation levels. The value of an executive's equity inventory is largely a function of prior performance, in terms of the size of the grants, the duration of the executive's tenure with us, and the performance of our common stock during that tenure. We do not believe that reducing the amount of an executive's current compensation on account of wealth accumulated for prior performance would be consistent with our compensation objectives of retaining, motivating and rewarding our executives.

40


Tax Considerations

        We would like our compensation program to be reasonably cost and tax effective. To the extent consistent with our other goals, we try to preserve corporate tax deductions, while maintaining the flexibility to approve compensation arrangements that we believe to be in the best interests of the company and our stockholders, but that may not always qualify for full tax deductibility. The adverse tax impact to us of making awards that do not qualify as performance-based compensation, such as certain severance payments and restricted stock grants, currently is minimal, because at this time we do not have net income subject to federal income tax.

Equity Grant Practices

        The exercise price for each stock option awarded to our current executive officers under our equity compensation program is the average of the high and low price for our common stock on the date of grant. As discussed above, our board generally grants employee options two times per year, on the date of its mid-summer meeting, usually in July, and on the date of its first meeting of each new year, usually in late January or early February. Board and committee meetings generally are scheduled at least a year in advance, and scheduling decisions are made without regard to anticipated earnings or other major announcements by the company.

        In general, newly hired employees, including executive officers, are granted options and/or restricted stock effective on the first day of employment, with the options having an exercise price set at the average of the high and low price for our common stock on the employment start date. The employees' start dates are scheduled without regard to anticipated earnings or other major announcements by the company.

Report of Management Development and Compensation Committee on Executive Compensation

        The Management Development and Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed that analysis with management. Based on its review and discussions with management, the Management Development and Compensation Committee recommended to Vertex's Board of Directors that the Compensation Discussion and Analysis be included in Vertex's proxy statement for its 2008 annual meeting of stockholders and incorporated by reference into Vertex's Annual Report on Form 10-K for the year ended December 31, 2007. This report is provided by the following directors who comprise the Management Development and Compensation Committee:

Roger W. Brimblecombe (Chair)
Bruce I. Sachs
Elaine S. Ullian

41


COMPENSATION AND EQUITY TABLES

Summary Compensation Table

        The following table provides summary information concerning compensation earned during the fiscal years ended December 31, 2007 and 2006 by our chief executive officer, chief financial officer and our three other most highly compensated executive officers as well as a former executive officer, who we refer to collectively as our named executive officers.

 
 
Name and Principal Position
 
  Year
 
  Salary
 
  Stock
Awards

 
  Option
Awards

 
  Non-Equity
Incentive Plan
Compensation

 
  All Other
Compensation

 
  Total
 
  Joshua S. Boger, Ph.D.
    President and Chief Executive
    Officer
    2007
2006
    $
$
616,615
593,921
    $
$
1,943,077
579,222
    $
$
5,320,328
4,032,839
    $
$
318,888
705,600
    $
$
12,852
11,376
    $
$
8,211,760
5,922,958
 
  Ian F. Smith
    Executive Vice President and
    Chief Financial Officer
    2007
2006
    $
$
411,595
395,830
    $
$
745,138
209,889
    $
$
1,140,638
983,692
    $
$
141,907
313,995
    $
$
12,543
11,291
    $
$
2,451,821
1,914,697
 
  John J. Alam, M.D.
    Executive Vice President,
    Medicines Development, and
    Chief Medical Officer
    2007
2006
    $
$
411,077
386,061
    $
$
745,138
209,889
    $
$
1,137,981
845,508
    $
$
141,728
313,600
    $
$
12,537
11,248
    $
$
2,448,461
1,766,306
 
  Peter Mueller, Ph.D.
    Executive Vice President, Drug
    Innovation and Realization,
    and Chief Scientific Officer
    2007
2006
    $
$
444,361
429,452
    $
$
747,601
212,297
    $
$
1,444,272
990,435
    $
$
229,804
338,991
    $
$
12,712
11,343
    $
$
2,878,750
1,982,518
 
  Kenneth S. Boger, M.B.A., J.D.
    Senior Vice President and General
    Counsel
    2007
2006
    $
$
387,675
374,668
    $
$
580,922
209,889
    $
$
1,013,210
843,491
    $
$
116,952
258,778
    $
$
12,415
11,277
    $
$
2,111,174
1,698,103
 
  Victor A. Hartmann, M.D.
    Former Executive Vice President,
    Strategic and Corporate
    Development
    2007
2006
    $
$
249,882
449,729
    $
$
467,008
270,550
    $
$
546,199
765,092
    $
$

354,707
    $
$
3,631,350
127,485
    $
$
4,894,439
1,967,563
 

        The base salaries that became effective for our named executive officers in 2006, 2007 and 2008 are set forth in the table below.

 
 
 
 
 
 
  2006 Salary
Level

 
  Percentage
Increase
January 2007

   
  2007 Salary
Level

 
  Percentage
Increase
February 2008

   
  2008 Salary
Level

 
  Joshua S. Boger     $ 600,000     3.0 %     $ 618,000     3.0 %     $ 636,540  
  Ian F. Smith     $ 400,504     3.0 %     $ 412,519     3.0 %     $ 424,895  
  John J. Alam     $ 400,000     3.0 %     $ 412,000     3.0 %     $ 424,360  
  Peter Mueller     $ 432,387     3.0 %     $ 445,359     3.0 %     $ 458,720  
  Kenneth S. Boger     $ 377,228     3.0 %     $ 388,545     3.0 %     $ 400,201  
  Victor A. Hartmann     $ 452,433     3.0 %     $ 466,006     NA         NA  

42


        The amounts set forth under the captions "Stock Awards" and "Option Awards" in the table above represent the stock-based compensation expense recognized during the applicable fiscal year for financial statement reporting purposes in accordance with Statement of Financial Accounting Standard No. 123(R), "Share-Based Payment," relating to outstanding equity awards, disregarding the estimate of forfeitures for service-based vesting conditions. Our methodology, including underlying estimates and assumptions for calculating these values, is set forth in Note D to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 11, 2008.

        The total equity awards made to each of the named executives on account of 2007 performance, excluding supplemental grants, are as follows:

 
 
 
 
 
 
  Individual
Performance
Rating

 
  Stock Options
Awarded in
July 2007

 
  Stock Options
Awarded in
February 2008

 
  Total Stock
Options
Awarded for
2007
Performance

 
  Restricted
Stock
Awarded in
February 2008
for 2007
Performance

 
  Joshua S. Boger     Strong     118,000     118,000     236,000     31,467  
  Ian F. Smith     Strong     36,250     36,250     72,500     9,667  
  John J. Alam     Strong     36,250     36,250     72,500     9,667  
  Peter Mueller     Leading/
Exemplary
    36,250     72,500     108,750     14,501  
  Kenneth S. Boger     Strong     30,500     30,500     61,000     8,133  

        The total equity awards made to each of the named executive officers on account of 2006 performance, excluding supplemental grants, are as follows:

 
 
 
 
 
 
  Individual
Performance
Rating

 
  Stock Options
Awarded in
July 2006

 
  Stock Options
Awarded in
January 2007

 
  Total Stock
Options
Awarded for
2006
Performance

 
  Restricted
Stock
Awarded in
January 2007
for 2006
Performance

 
  Joshua S. Boger     Leading     118,000     177,000     295,000     39,334  
  Ian F. Smith     Leading     36,250     54,375     90,625     12,084  
  John J. Alam     Leading     36,250     54,375     90,625     12,084  
  Peter Mueller     Leading     36,250     54,375     90,625     12,084  
  Kenneth S. Boger     Leading     30,500     45,750     76,250     10,166  
  Victor A. Hartmann     Leading     36,250     54,375     90,625     12,084  

43


        The total supplemental equity awards made during 2007 and 2006 are as follows:

 
 
 
 
 
 
  Restricted Stock
January 2007

 
  Stock Options
February 2006

 
  Joshua S. Boger     NA     298,500  
  Ian F. Smith     20,000     NA  
  John J. Alam     20,000     NA  
  Peter Mueller     20,000     NA  
  Victor A. Hartmann     20,000     NA  

        The amounts set forth under the caption "Non-Equity Incentive Plan Compensation" represent cash bonuses for 2007 performance paid in 2008 and for 2006 performance paid in 2007.

        The cash bonus awards to the named executive officers for 2007 performance were determined as follows:

 
 
 
 
 
 
  2007 Base
Salary
Level

 
  Individual
Incentive
Target

   
  2007
Target
Bonus

 
  Company
Performance
Factor

   
  Individual
Performance
Factor

   
  2007 Bonus
 
  Joshua S. Boger     $ 618,000     60 %     $ 370,800     86 %     100 %     $ 318,888  
  Ian F. Smith     $ 412,519     40 %     $ 165,008     86 %     100 %     $ 141,907  
  John J. Alam     $ 412,000     40 %     $ 164,800     86 %     100 %     $ 141,728  
  Peter Mueller     $ 445,359     40 %     $ 178,144     86 %     150 %     $ 229,804  
  Kenneth S. Boger     $ 388,545     35 %     $ 135,991     86 %     100 %     $ 116,952  

        The cash bonus awards to the named executive officers for 2006 performance were determined as follows:

 
 
 
 
 
 
  2006 Base
Salary
Level

 
  Individual
Incentive
Target

   
  2006
Target
Bonus

 
  Company
Performance
Factor

   
  Individual
Performance
Factor

   
  2006 Bonus
 
  Joshua S. Boger     $ 600,000     60 %     $ 360,000     140 %     140 %     $ 705,600  
  Ian F. Smith     $ 400,504     40 %     $ 160,202     140 %     140 %     $ 313,995  
  John J. Alam     $ 400,000     40 %     $ 160,000     140 %     140 %     $ 313,600  
  Peter Mueller     $ 432,387     40 %     $ 172,955     140 %     140 %     $ 338,991  
  Kenneth S. Boger     $ 377,228     35 %     $ 132,030     140 %     140 %     $ 258,778  
  Victor A. Hartmann     $ 452,433     40 %     $ 180,973     140 %     140 %     $ 354,707  

44


        The amounts set forth under the caption "All Other Compensation" in the table above consist of:

 
 
 
 
 
 
  Year
 
  401(k) Match
 
  Life Insurance
Premiums

 
  Relocation
Expenses

 
  Severance
 
  Total
 
  Joshua S. Boger     2007
2006
    $
$
10,125
9,900
    $
$
2,727
1,476
    $
$

    $
$

    $
$
12,852
11,376
 
  Ian F. Smith     2007
2006
    $
$
10,125
9,900
    $
$
2,418
1,391
    $
$

    $
$

    $
$
12,543
11,291
 
  John J. Alam     2007
2006
    $
$
10,125
9,900
    $
$
2,412
1,348
    $
$

    $
$

    $
$
12,537
11,248
 
  Peter Mueller     2007
2006
    $
$
10,125
9,900
    $
$
2,587
1,443
    $
$

    $
$

    $
$
12,712
11,343
 
  Kenneth S. Boger     2007
2006
    $
$
10,125
9,900
    $
$
2,290
1,377
    $
$

    $
$

    $
$
12,415
11,277
 
  Victor A. Hartmann     2007
2006
    $
$
10,125
9,900
    $
$
721
1,450
    $
$

116,135
    $
$
3,620,504
    $
$
3,631,350
127,485
 

        Dr. Hartmann's employment by us terminated on June 22, 2007. A discussion of severance benefits paid to Dr. Hartmann is included under the caption Severance Benefits for Former Executive Vice President, Strategic and Corporate Development. Included in "Severance" for Dr. Hartmann is twelve months of severance pay of $652,408, of which $326,204 was paid in 2007 and $54,367 will be paid each month from January 2008 through June 2008, as well as the pro-rata share of Dr. Hartmann's 2007 target bonus of $88,350, $17,923 for accrued vacation paid upon employment termination and $15,542 ($7,146 paid in 2007) for our payment of COBRA premiums for 12 months on Dr. Hartmann's behalf. In addition, "Severance" includes non-cash expenses of $1,225,859 related to acceleration of restricted stock awards and $1,620,421 related to acceleration of option awards in connection with the employment termination. Not included in the above table, Dr. Hartmann may receive up to $10,000 for reimbursement of specified legal fees, of which $3,685 was paid in 2007. In 2006, Dr. Hartmann was paid $270,455 for relocation expenses, of which $116,135 were non-qualified (taxable) and $154,320 were qualified (excludable). These amounts were paid to Dr. Hartmann pursuant to the terms of his agreements with us.

45


Grants of Plan—Based Awards

        The following table provides information with respect to grants of awards to each of our named executive officers during 2007:

 
   
 
   
 
 
 
      
 
  Estimated Possible Payouts
Under Non-Equity
Incentive Plan Awards

 
      
 
      
 
      
 
      
 
      
 







   







  Grant
Date









  Threshold









  Target









  Maximum









  Estimated
Future
Payouts
Under
Equity
Incentive
Plan
Awards
(shares)









  All Other
Option
Awards:
Number of
Securities
Underlying
Options
(shares)









  Exercise or
Base Price
of Option
Awards
(per share)









  Closing
Price of
Stock on
Grant Date
(per share)









 
Grant Date
Fair Value of
Stock and
Option
Awards









    Joshua S. Boger       
1/24/07
1/24/07
7/12/07
    $ 0     $ 370,800     $ 834,300      
39,334
      
  
177,000
118,000
   

$
$
  
 
36.30
28.84
   

$
$
  
  
36.27
29.40
   
$
$
$
  
1,427,431
3,592,109
1,752,560
 
    Ian F. Smith       
1/24/07
1/24/07
1/24/07
7/12/07
    $ 0     $ 165,008     $ 371,267      
12,084
20,000
      
  
  
54,375
36,250
   


$
$
  
 
 
36.30
28.84
   


$
$
  
  
  
36.27
29.40
   
$
$
$
$
  
438,528
725,800
1,103,508
538,392
 
    John J. Alam       
1/24/07
1/24/07
1/24/07
7/12/07
    $ 0     $ 164,800     $ 370,800       
12,084
20,000
      
  
  
54,375
36,250
   


$
$
 
  
  
36.30
28.84
   


$
$
  
  
  
36.27
29.40
   
$
$
$
$
 
438,528
725,800
1,103,508
538,392
 
    Peter Mueller      
1/24/07
1/24/07
1/24/07
7/12/07
    $ 0     $ 178,144     $ 400,823       
12,084
20,000
     
 
 
54,375
36,250
   


$
$
  
  
  
36.30
28.84
   


$
$
 
 
 
36.27
29.40
   
$
$
$
$
  
438,528
725,800
1,103,508
538,392
 
    Kenneth S. Boger       
1/24/07
1/24/07
7/12/07
    $ 0     $ 135,991     $ 305,979       
10,166
     
 
45,750
30,500
   

$
$
  
  
36.30
28.84
   

$
$
 
 
36.27
29.40
   
$
$
$
  
368,924
928,469
452,992
 
    Victor A. Hartmann       
1/24/07
1/24/07
1/24/07
    $ 0     $ 186,402     $ 419,405       
12,084
20,000
     
 
 
54,375
   


$
  
  
  
36.30
   


$
 
 
 
36.27
   
$
$
$
  
438,528
725,800
1,103,508
 

        The amounts in the "Estimated Possible Payouts Under Non-Equity Incentive Plan Awards" column represent the minimum, target and maximum amounts that our named executive officers were eligible for pursuant to our 2007 annual cash bonus program. Actual amounts paid to each of the named executive officers under this plan are set forth in the Summary Compensation Table above.

        The amounts in the "Estimated Future Payouts Under Equity Incentive Plan Awards" column represent the number of shares subject to restricted stock grants to the named executive officer in early 2007, on account of 2006 performance. Each of these grants, excluding the grants of 20,000 shares to Mr. Smith, Dr. Alam, Dr. Mueller and Dr. Hartmann discussed below, is characterized as Performance-Accelerated Restricted Stock, which is subject to time-based vesting on the fourth anniversary of grant,

46



with 50% of the shares subject to acceleration of vesting if the market price of our common stock achieves and maintains a pre-determined value that is more than 150% of the fair market value of our common stock on the grant date and 50% of the shares subject to acceleration of vesting if our common stock outperforms the BTK Index for two consecutive years. In addition, each of our Executive Vice Presidents on January 24, 2007 received a restricted stock award for 20,000 shares of common stock. These awards vest as to 5,000 shares on May 6, 2008, and as to 15,000 shares on May 6, 2010. The purchase price for such shares of restricted stock was $0.01 per share.

        In accordance with our stock and option plans, the exercise prices for the stock options granted to our named executive officers during 2007 were equal to the average of the high and the low prices of our common stock on the grant date. As a result, in 2007 the exercise prices of options granted to our named executive officers were higher than the grant date closing price of our common stock for our January 24, 2007 grants and lower than the grant date closing price of our common stock for our July 12, 2007 grants. In the future, we expect that options will continue to be granted with exercise prices equal to the average of the high and low prices of our common stock on the grant date, and that as a result the exercise prices are likely be different from the closing price of our common stock on the grant date. Each stock option set forth in the table above is subject to vesting in 16 quarterly installments during the first four years of its ten-year term.

47


Outstanding Equity Awards at Fiscal Year-End

        The following tables provide information with respect to outstanding equity awards held by each of our named executive officers on December 31, 2007, based on the closing price of $23.23 per share of our common stock on December 31, 2007.

 
 
   
 
 
 
 
 
   
 
   
 


  Option Awards
 
 
 
 

  Stock Awards

 
 
 
  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(shares)

 
  Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(shares)

 
  Option
Exercise
Price
(per share)

 
  Option
Expiration
Date (1)

 
 
 
 
 
  Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(shares)

 
  Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

 
  Joshua S. Boger     Restricted Stock                                    
                                          52,500 (2)     $ 1,219,575  
                                          8,312 (3)     $ 193,088  
                                          47,201 (4)     $ 1,096,479  
                                          39,334 (5)     $ 913,729  
        Stock Options                                    
        42,000     0     $ 9.07     12/10/2013                        
        87,178     0     $ 10.19     9/16/2008                        
        49,629     22,559     $ 10.41     2/2/2015                        
        39,375     13,125     $ 11.27     10/6/2014                        
        166,374     0     $ 13.11     12/1/2009                        
        103,000     0     $ 13.63     12/9/2008                        
        135,719     7,144     $ 15.60     1/17/2013                        
        32,137     0     $ 15.87     7/21/2012                        
        29,531     22,969     $ 17.16     7/19/2015                        
        125,000     0     $ 24.66     12/10/2011                        
        7,375     110,625     $ 28.84     7/11/2017                        
        36,875     81,125     $ 35.35     7/19/2016                        
        262,500     337,500     $ 35.64     2/1/2016                        
        33,187     143,813     $ 36.30     1/23/2017                        
        175,000     0     $ 70.75     12/5/2010                        
  Ian F. Smith     Restricted Stock                                    
                                          32,500 (2)     $ 754,975  
                                          2,850 (3)     $ 66,206  
                                          12,200 (4)     $ 283,406  
                                          12,084 (5)     $ 280,711  
                                          20,000 (6)     $ 464,600  
        Stock Options                                    
        14,400     0     $ 9.07     12/10/2013                        
        20,250     1,350     $ 9.69     3/16/2014                        
        17,016     7,734     $ 10.41     2/2/2015                        
        13,500     4,500     $ 11.27     10/6/2014                        
        8,851     2,213     $ 15.60     1/17/2013                        
        4,821     0     $ 15.87     7/21/2012                        
        10,125     7,875     $ 17.16     7/19/2015                        
        5,000     0     $ 24.66     12/10/2011                        
        19,075     0     $ 26.20     10/25/2011                        
        2,265     33,985     $ 28.84     7/11/2017                        
        11,328     24,922     $ 35.35     7/19/2016                        
        32,156     41,344     $ 35.64     2/1/2016                        
        10,195     44,180     $ 36.30     1/23/2017                        

48


 
 
 
   
 
 
 
 
 
   
 
   
 


  Option Awards
 
 
 
 

  Stock Awards

 
 
 
  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(shares)

 
  Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(shares)

 
  Option
Exercise
Price
(per share)

 
  Option
Expiration
Date (1)

 
 
 
 
 
  Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(shares)

 
  Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

 
  John J. Alam     Restricted Stock                                    
                                          32,500 (2)     $ 754,975  
                                          2,850 (3)     $ 66,206  
                                          12,200 (4)     $ 283,406  
                                          12,084 (5)     $ 280,711  
                                          20,000 (6)     $ 464,600  
        Stock Options                                    
        3,050     0     $ 9.07     12/10/2013                        
        14,174     1,772     $ 9.69     3/16/2014                        
        26,450     0     $ 10.19     9/16/2008                        
        17,016     7,734     $ 10.41     2/2/2015                        
        13,500     4,500     $ 11.27     10/6/2014                        
        36,874     0     $ 13.11     12/1/2009                        
        17,014     0     $ 13.63     12/9/2008                        
        37,170     1,957     $ 15.60     1/17/2013                        
        32,137     0     $ 15.87     7/21/2012                        
        10,125     7,875     $ 17.16     7/19/2015                        
        52,563     0     $ 24.66     12/10/2011                        
        2,265     33,985     $ 28.84     7/11/2017                        
        11,328     24,922     $ 35.35     7/19/2016                        
        32,156     41,344     $ 35.64     2/1/2016                        
        10,195     44,180     $ 36.30     1/23/2017                        
        50,250     0     $ 70.75     12/5/2010                        
  Peter Mueller     Restricted Stock                                    
                                          32,500 (2)     $ 754,975  
                                          3,600 (3)     $ 83,628  
                                          12,200 (4)     $ 283,406  
                                          12,084 (5)     $ 280,711  
                                          20,000 (6)     $ 464,600  
        Stock Options                                    
        14,400     0     $ 9.07     12/10/2013                        
        13,500     900     $ 9.69     3/16/2014                        
        24,750     11,250     $ 10.41     2/2/2015                        
        13,500     4,500     $ 11.27     10/6/2014                        
        120,000     30,000     $ 16.32     7/14/2013                        
        10,125     7,875     $ 17.16     7/19/2015                        
        2,265     33,985     $ 28.84     7/11/2017                        
        11,328     24,922     $ 35.35     7/19/2016                        
        32,156     41,344     $ 35.64     2/1/2016                        
        10,195     44,180     $ 36.30     1/23/2017                        

49


 
 
   
 
 
 
 
 
   
 
   
 


  Option Awards
 
 
 
 

  Stock Awards

 
 
 
  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(shares)

 
  Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(shares)

 
  Option
Exercise
Price
(per share)

 
  Option
Expiration
Date (1)

 
 
 
 
 
  Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(shares)

 
  Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

 
  Kenneth S. Boger     Restricted Stock                                    
                                          32,500 (2)     $ 754,975  
                                          2,850 (3)     $ 66,206  
                                          12,200 (4)     $ 283,406  
                                          10,166 (5)     $ 236,156  
        Stock Options                                    
        2,700     0     $ 9.07     12/10/2013                        
        5,016     7,734     $ 10.41     2/2/2015                        
        13,500     4,500     $ 11.27     10/6/2014                        
        31,500     1,658     $ 15.60     1/17/2013                        
        32,137     0     $ 15.87     7/21/2012                        
        10,125     7,875     $ 17.16     7/19/2015                        
        120,000     0     $ 18.75     9/23/2011                        
        5,000     0     $ 24.66     12/10/2011                        
        1,906     28,594     $ 28.84     7/11/2017                        
        9,531     20,969     $ 35.35     7/19/2016                        
        32,156     41,344     $ 35.64     2/1/2016                        
        8,578     37,172     $ 36.30     1/23/2017                        
  Victor A. Hartmann     Stock Options                                    
        41,500     0     $ 11.40     6/22/2008                        
        20,391     0     $ 35.35     6/22/2008                        
        74,766     0     $ 35.64     6/22/2008                        
        23,789     0     $ 36.30     6/22/2008                        

(1)
Each stock option expiring on or after December 10, 2013 vests in 16 quarterly installments during the first four years of its ten-year term. Each stock option expiring prior to December 10, 2013 vests in 20 quarterly installments during the first five years of its ten-year term, except for Dr. Hartmann's stock options. Dr. Hartmann's options were accelerated in part upon the termination of his employment in accordance with the terms of his employment agreement, and remain exercisable until the first anniversary of the termination of his employment.

(2)
Each of these awards is subject to time-based vesting with shares vesting on May 6, 2009, the fifth anniversary of the grant date. The vesting of the remaining shares will be accelerated if we achieve profitability before May 6, 2009.

(3)
Each of these awards is a Performance-Accelerated Restricted Stock award, with the remaining shares subject to time-based vesting on February 3, 2009, the fourth anniversary of grant.

(4)
Each of these awards is a Performance-Accelerated Restricted Stock award, which is subject to time-based vesting on February 2, 2010, the fourth anniversary of grant. The vesting of 50% of the shares will be accelerated if the market price of our common stock achieves and maintains a pre-determined fair market value that is more than 150% of the fair market value of our common stock on the grant date.

(5)
Each of these awards is a Performance-Accelerated Restricted Stock award, which is subject to time-based vesting on January 24, 2011, the fourth anniversary of grant. The vesting of 50% of the shares will be accelerated if the market price of our common stock achieves and maintains a pre-determined fair market value that is more than 150% of the fair market value of our common stock on the grant date. The vesting of 50% of the shares will be accelerated if our common stock outperforms the BTK Index for two consecutive years.

(6)
Each of these awards is subject to time-based vesting with 5,000 shares vesting on May 6, 2008 and 15,000 shares vesting on May 6, 2010.

50


Options Exercised and Stock Vested

        The following table provides information with respect to the value realized by our named executive officers related to options to purchase common stock exercised by the named executive officers during 2007 and shares of restricted stock that vested during 2007. The value realized per share for options is based on the difference between the exercise price and the fair market value of the shares of common stock at the time the options were exercised. The value realized on vesting of restricted stock awards is based on the fair market value of the shares on the vesting date.

 
 
 
   


  Option Awards

  Stock Awards

 
 
 
  Number of Shares
Acquired on Exercise

 
  Value Realized
on Exercise

 
  Number of Shares
Acquired on Vesting

 
  Value Realized
on Vesting

 
  Joshua S. Boger     213,791     $ 2,542,151     53,900     $ 1,638,070  
  Ian F. Smith     90,925     $ 1,254,765     32,980     $ 1,004,164  
  John J. Alam     54,584     $ 1,182,499     32,980     $ 1,004,164  
  Peter Mueller         $     32,980     $ 1,004,164  
  Kenneth S. Boger     23,700     $ 473,760     32,980     $ 1,004,164  
  Victor A. Hartmann     36,000     $ 719,350     86,228     $ 2,278,144  

Compensation of Directors

        We have designed and implemented our compensation programs for our non-employee directors to attract, motivate and retain individuals who are committed to our values and goals and who have the expertise and experience that we need to achieve those goals. We periodically review and adjust our non-employee director compensation program. Joshua Boger, our president and chief executive officer, does not receive any additional compensation for his service on our board of directors.

        The current annual cash compensation for non-employee directors serving on our board of directors includes an annual retainer of $25,000, payable in quarterly installments, plus $2,500 for each board meeting attended and $500 for each committee meeting attended on a regular board meeting day. If a committee meeting is held on a day other than a regular board meeting day, the committee meeting fee is $1,000. Board and committee meetings held by conference call are compensated at the rate of $1,250 per meeting and $375 per meeting, respectively. The chair of the corporate governance and nominating committee receives an additional annual retainer fee of $20,000, the chair of the audit and finance committee receives an additional annual retainer fee of $20,000, the chair of the commercial strategy committee receives an additional annual retainer fee of $20,000, and the chair of the MDCC receives an additional annual retainer fee of $14,000.

        In addition, each non-employee director, upon initial election or appointment to the board, receives a non-qualified option to purchase 30,000 shares of our common stock at an exercise price equal to the fair market value per share of our common stock on the date of grant. Those options vest quarterly over a four-year period from the date of grant, based on continued service on the board. There were no directors elected to their initial term in 2007. Each non-employee director in office on June 1 of each fiscal year also receives a non-qualified option to purchase 20,000 shares of common stock, exercisable immediately, at a price equal to the fair market value per share of our common stock on the date of grant. The chairman of our board receives an additional non-qualified option to purchase 20,000 shares of common stock,

51



exercisable immediately, at a price equal to the fair market value per share of our common stock on the date of grant.

        The following table provides certain summary information concerning compensation earned during 2007 by our non-employee directors.

 
 
 
   
 
 
 
  Fees Earned or
Paid in Cash (1)

 
  Option
Awards (2)

 
  All Other
Compensation

 
  Total
 
  Charles A. Sanders     $ 64,750     $ 646,324     $     $ 711,074  
  Eric K. Brandt     $ 65,250     $ 339,954     $     $ 405,204  
  Roger W. Brimblecombe     $ 57,500     $ 323,162     $ 7,500 (3)     $ 388,162  
  Stuart J. M. Collinson     $ 41,250     $ 323,162     $     $ 364,412  
  Eugene H. Cordes     $ 40,750     $ 355,554     $ 21,500 (4)     $ 417,804  
  Matthew W. Emmens     $ 62,750     $ 345,558     $     $ 408,308  
  Bruce I. Sachs     $ 42,500     $ 323,162     $     $ 365,662  
  Elaine S. Ullian     $ 42,000     $ 323,162     $     $ 365,162  
  Eve E. Slater (resigned August 1, 2007)     $ 25,833     $ 334,241     $     $ 360,074  

(1)
The cash compensation set forth in the column "Fees Earned or Paid in Cash" consisted of the following:

 
 
 
   
 
 
 
  Annual
Retainer for
Non-Employee
Directors

 
  Annual
Retainer for
Committee
Chairs

 
  Fees for
Participation
in Board and
Committee
Meetings