10-K405

   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              --------------------

                                    FORM 10-K
(Mark One)

  X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                                       OR

      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934

              For the transition period from _________ to ________

                         Commission file number 0-19319

                       VERTEX PHARMACEUTICALS INCORPORATED
             (Exact name of registrant as specified in its charter)

        MASSACHUSETTS                              04-3039129
  (State of incorporation)            (I.R.S. Employer Identification No.)

           130 WAVERLY STREET
        CAMBRIDGE, MASSACHUSETTS                  02139-4242
(Address of principal executive offices)          (Zip Code)

                                 (617) 577-6000
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $0.01 par value
                                (Title of class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  X  No 
                                              ---    ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.        X
                              -------------

As of March 14, 1997 there were outstanding 24,680,649 shares of Common Stock,
$.01 par value per share. The aggregate market value of shares of Common Stock
held by non-affiliates of the registrant, based upon the last sales price for
such stock on that date as reported by The Nasdaq Stock Market, was
approximately $1,130,544,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on May 8, 1997 are incorporated by reference into Part
III.
   2
      This Annual Report on Form 10-K contains forward-looking statements based
on current management expectations. When used in this Report, the words
"expects" "anticipates," "estimates," "plans," and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
risks and uncertainties. Factors that could cause actual results to differ from
these expectations include, but are not limited to, thosed discussed in the
section of Item 1 entitled "Risk Factors." These forward-looking statements
speak only as of the date of this Report. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in the events,
conditions or circumstances on which any such statement is based.

PART I

ITEM 1.  BUSINESS

   Vertex is engaged in the discovery, development and commercialization of
novel, small molecule pharmaceuticals for the treatment of diseases for which
there are currently limited or no effective treatments. The Company is a leader
in the use of structure-based drug design, an approach to drug discovery that
integrates advanced biology, biophysics and chemistry in a coordinated and
simultaneous fashion. The Company believes that this integrated approach is
applicable to therapeutic targets in a broad range of diseases. Vertex's goal is
to create a portfolio of highly specific, proprietary, small molecule drugs
based on its knowledge of the atomic structure of proteins involved in the
control of disease processes. The Company's drug candidates for the treatment of
human immunodeficiency virus ("HIV") infection and acquired immune deficiency
syndrom ("AIDS"), cancer multidrug resistance ("MDR") in cancer and two genetic
hemoglobin disorders are currently in clinical development. In addition, the
Company has preclinical and research programs aimed at developing orally
available small molecule compounds to treat autoimmune diseases, inflammatory
diseases, neurodegenerative diseases and hepatitis C infection.

STRUCTURE-BASED DRUG DESIGN

   Drugs are natural or synthetic compounds that interact with a target
molecule, typically a protein, either to induce or to inhibit that molecule's
function within the human body. Traditionally, pharmaceutical products have been
discovered through the screening of thousands of compounds, either from existing
chemical libraries or from fermentation broths, against a predictive assay for a
particular disease target. The Company believes that traditional pharmaceutical
discovery is an essentially random process which is costly and inefficient.
Advances in biotechnology have led to another method of developing drugs based
on the isolation and production of human recombinant proteins. The Company
believes that this approach also has limitations because the resulting
pharmaceuticals are large molecules that cannot be administered orally, are
difficult to manufacture and have applications which are limited to the disease
state in which the protein is involved.

   Vertex is developing pharmaceutical products using a structure-based drug
design approach, which is distinct from the traditional pharmaceutical and
biotechnological approaches. By determining and modeling the three dimensional
atomic structure of a target protein, the Company intends to rationally design
or alter chemical compounds to specifically interact with the targeted protein.
The Company believes that structure-based drug design increases the chances for
the discovery of multiple lead compounds for selected protein targets, including
targets for which traditional drug discovery has met with limited success.
Moreover, the Company believes that the structure-based drug design process may
accelerate optimization of lead compounds, since modification of a lead compound
may be undertaken with knowledge of the relationship between the compound's
structure and its desired therapeutic effect, rather than through
experimentation


                                      -2-
   3
with randomly generated modifications to that compound.

   The Company's approach to structure-based design is an integrated approach
combining efforts in biology, biophysics and chemistry in a coordinated and
simultaneous fashion. To acquire structural information, Vertex applies advanced
biophysical and computational tools, including x-ray crystallography, nuclear
magnetic resonance spectroscopy and high resolution computer modeling. As
structural information is gathered, the Company uses combinatorial,
computational and medicinal chemistry to design and produce novel, highly
specific small molecule compounds that possess the characteristics required for
therapeutic benefit. To arrive at initial lead compounds, the Company may use
traditional approaches, such as screening chemical libraries, natural products
or combinatorial libraries in addition to using known chemical compounds or may
apply direct computational methods (de novo design). Throughout the process, the
Company develops biological assays and proprietary animal models, some of which
employ the latest advances in genomics techniques, in order to analyze the
function of target proteins. Using these tools, the Company optimizes compounds
for potency and pharmaceutical properties, including tolerability and
pharmacokinetics, and manufacturability. The Company selects clinical candidates
from among optimized compounds based on the results of in vitro and in vivo
tests designed to predict the compounds' safety and efficacy.

   Vertex expects to employ all of its core technologies from the initial phases
of a program through the entire discovery process. Information generated through
the application of one scientific technique becomes part of the information base
from which further advances may be made by Vertex scientists using other
development techniques. Using its approach to structure-based drug design,
Vertex has demonstrated that it is able to solve atomic structures of target
proteins, generate lead compounds that bind to the target in vitro and optimize
those compounds to produce drug candidates with desirable pharmaceutical
attributes. The Company believes that its integrated structure-based approach to
drug discovery and the applicability of this approach to a broad range of
protein targets provides the Company with significant competitive advantages in
the discovery and development of novel therapeutics for a variety of diseases.

CORPORATE STRATEGY

   Vertex is concentrating on the discovery and development of drugs for the
treatment of viral diseases, multidrug resistance in cancer, hemoglobin
disorders, autoimmune diseases, inflammatory diseases and neurodegenerative
diseases. The Company's research and development strategy is to identify
therapeutic areas in which there is (i) an unmet clinical need, (ii) evidence
that interaction with known protein targets will produce a therapeutic effect
and (iii) evidence that the protein targets will be appropriate for structural
analysis using Vertex's scientific approach. The Company's business strategy is
to form collaborations with pharmaceutical companies in programs for which they
can provide resources and access to competencies complementary to Vertex's
in-house capabilities.

PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS

   The following are the Company's most advanced product development and
research programs.

CLINICAL PROGRAMS

HIV PROGRAM

Overview

   Vertex is developing orally deliverable antiviral drugs to treat HIV
infection and AIDS. The Company is collaborating with Glaxo Wellcome plc.
("Glaxo Wellcome") and Kissei


                                      -3-
   4
Pharmaceutical Co., Ltd. ("Kissei") in the development of its most advanced HIV
protease inhibitor, VX-478. Glaxo Wellcome has initiated multi-center Phase III
clinical trials to assess the safety and efficacy of VX-478 in HIV-positive
individuals. The Phase III clinical trials are intended to support the
submission of a New Drug Application ("NDA") for market approval in the United
States and equivalent submissions in Europe and other territories. However,
there can be no assurance that these clinical trials will result in the
submission or approval of an NDA for VX-478.

  Background

   As of June 1996, approximately 548,000 cases of AIDS had been reported to the
U.S. Centers for Disease Control and Prevention and the current population of
surviving AIDS patients in the U.S. was estimated to be approximately 205,000.
The U.S. Centers for Disease Control also estimates that more than 700,000
additional people in the United States are infected with HIV. In 1996, the World
Health Organization reported that approximately 1,500,000 AIDS cases had been
reported worldwide, but it is estimated that the actual total number of cases
was over 8,400,000.

   AIDS is caused by infection with HIV. HIV infection causes severe
immunosuppression and, eventually, death by attacking and destroying T-cells,
which coordinate much of the network of normal immune responses. Progression
from HIV infection to AIDS may take many years. Currently, there are two classes
of antiviral drugs approved for the treatment of AIDS, reverse transcriptase
inhibitors and protease inhibitors. AZT, ddI, ddC and 3TC are drugs that act by
inhibiting reverse transcriptase, an enzyme required for viral replication. The
clinical utility of each of these drugs is limited by significant side effects
and by the development of viral resistance. While certain anti-HIV drugs may be
used alone, the clinical utility of these drugs may be improved if these drugs
are administered in combination. Such combination therapy can delay the onset of
viral resistance. Due to the limitations of AZT and other reverse transcriptase
inhibitors, there has been significant interest in developing anti-HIV agents
that work by alternative mechanisms such as HIV protease inhibitors, which act
by blocking another viral enzyme involved in HIV replication. The FDA has
approved for marketing HIV protease inhibitors developed by Merck & Co., Inc.,
Hoffmann-La Roche, Abbott Laboratories, Inc., and Agouron Pharmaceuticals, Inc.

   The Company believes that the market for protease inhibitors is competitive
and that a protease inhibitor compound's utility may be evaluated based on
several key characteristics. These characteristics include efficacy, convenient
dosing regimen, high bioavailability and pharmacokinetics (i.e., high absorption
into and sustained presence in the bloodstream), the ability to penetrate the
brain and lymph systems from the bloodstream, an acceptable resistance profile,
a favorable side effect profile and practical manufacture.

Clinical Status

   Vertex's HIV and AIDS program is focused on the development of a highly
specific protease inhibitor designed to effectively block the replication of HIV
and to possess key competitive characteristics. In February 1997, Glaxo Wellcome
began a multi-center Phase III clinical trial in the United States, Canada and
Europe to evaluate the tolerability, antiviral efficacy, and durability of the
antiviral response of VX-478 in combination with AZT and 3TC. The protocol calls
for VX-478 to be administered orally at a dose of 1200 mg twice daily in
combination with AZT and 3TC. A second group treated with AZT and 3TC will
provide a comparison arm for the clinical trial. Approximately 290 HIV-positive
adults are expected to enroll in the trial. In addition, the Company anticipates
that Glaxo Wellcome will begin in the first half of 1997 a second multi-center
Phase III clinical trial in the United States and Europe to assess the safety
and efficacy of VX-478 in children. There can be no assurance that clinical
trials will result in the submission or approval of an NDA for VX-478 or that
trials that have not yet begun will commence. See "Risk Factors -- Uncertainties
Related to Clinical Trials" and " -- Manufacturing Uncertainties; Reliance on
Third


                                      -4-
   5
Party Manufacturers."

   In addition to the Phase III trials with AZT and 3TC discussed above,
clinical trials of VX-478 alone and in combination with other anti-HIV agents
are being conducted. In September 1996, Glaxo Wellcome initiated a 12-week
dose-range finding Phase II clinical trial testing the safety and efficacy of
VX-478 in combination with AZT and 3TC. Recently, this study has been amended to
extend dosing to a minimum of 48 weeks. This study has completed enrollment of
approximately 80 participants and the duration of the study has been extended to
24 weeks. In January 1997, Glaxo Wellcome initiated a 24-week Phase II clinical
trial of VX-478 in double protease regimens, pairing VX-478 with saquinavir
(Roche), indinavir (Merck) or nelfinavir (Agouron). Approximately 48 patients
are expected to enroll in the study. Through a collaboration with the ACTG,
Glaxo Wellcome, Kissei and Vertex, a 24-week Phase II clinical trial was
initiated in February 1997 to evaluate the safety and efficacy of VX-478 as a
single agent. A second group treated with VX-478, AZT and 3TC will provide a
comparison for the clinical trial. The trial will be conducted in the United
States at 10 AIDS Clinical Trial Group ("ACTG") clinical centers and is expected
to enroll approximately 84 HIV-positive individuals. In 1997, Glaxo Wellcome
plans to initiate a clinical trial to assess the use of VX-478 in combination
with 1592U89, a new reverse transcriptase inhibitor in development by Glaxo
Wellcome. There can be no assurance, however, that these clinical trials will
commence or proceed as currently anticipated. See "Risk Factors -- Uncertainties
Related to Clinical Trials" and " -- Dependence on Collaborative Partners."

   In January 1997, Glaxo Wellcome reported preliminary results from a
60-patient multi-center Phase I/II clinical trial conducted in the United States
and Europe suggesting that VX-478 is well-tolerated and displays potent
antiviral activity. At the three highest doses of VX-478 administered as a
single agent (900 mg, 1050 mg or 1200 mg twice daily), the median maximal
decrease in viral load ranged from 1.69 to 1.89 logs, indicating potent
antiviral activity. The results indicated that the antiviral activity of VX-478
was dose-dependent, with increasing doses providing better antiviral effect. The
trial also included the administration of VX-478 at a dose of 900 mg (twice
daily) in combination with 1592U89 (300 mg twice daily). For the combination,
five of seven patients had viral loads below the level of detection (400
copies/ml) at four weeks. The median maximal decrease in viral load in this
combination group was 2.08 logs. Adverse events reported in the trial, such as
rash, nausea and loose stool/diarrhea, were mild and reversible in most cases.
The combination of VX-478 and 1592U89 was well-tolerated, with nausea being the
most commonly reported adverse event in this combination. Of the 60 participants
in the trial, five withdrew based on adverse events. The data from this trial is
preliminary and incomplete. There can be no assurance that these results are
predictive of results that will be obtained in any future clinical trials. See
"Risk Factors -- Uncertainties Related to Clinical Trials."

   In January 1997, Glaxo Wellcome also reported preliminary data from the Phase
I/II clinical trial suggesting that resistance did not develop to VX-478
administered as a single agent over the four week time period. The results of
the genotype (sequence) and phenotype (drug sensitivity) analyses of virus
isolated from patients participating in the Phase I/II study (at doses of 300 mg
twice daily; 300 mg three times daily; 900 mg twice daily or 1200 mg twice
daily) indicated that resistance did not appear to develop to VX-478, whether at
the lower doses or at the higher doses, where potent antiviral activity was
observed. There can be no assurance that resistance will not occur when VX-478
is administered for longer periods or in combination with other antiviral
agents. See "Risk Factors -- Early Stage of Development; Technological
Uncertainty."

   In 1995, Kissei completed single dose and multi-dose, placebo-controlled,
Phase I clinical trials. Results from these trials reported in May 1996
indicated that VX-478 was well-tolerated, with no significant adverse
experiences or laboratory test abnormalities observed at the doses tested.
Vertex expects that Kissei will initiate Phase II/III efficacy trials in 1997 in
HIV-positive patients that will be designed based on clinical data from Glaxo
Wellcome. There can be no assurance, however, that these clinical trials will
commence or proceed as currently anticipated. See "Risk Factors -- Uncertainties
Related to Clinical Trials," " -- Manufacturing Uncertainties;


                                      -5-
   6
Reliance on Third Party Manufacturers" and " --  Dependence on Collaborative
Partners."

   In collaboration with Glaxo Wellcome, Vertex also is engaged in research to
develop additional lead classes of HIV protease inhibitors. This research is
focused on designing compounds with resistance profiles distinct from VX-478.

   The Company has one issued United States patent, ten United States patent
applications pending, and foreign counterparts to some of those applications,
that claim classes of chemical compounds and/or their uses which include within
their scope the Company's lead drug candidates for treating HIV infection and
AIDS. The issued patent and five of the ten United States patent applications,
have claims that include VX-478 within their literal scope. Vertex recently
received a Notice of Allowance for claims covering the use of VX-478 to treat
AIDS-related central nervous system disorders. In addition, the Company has one
United States patent application that claims processes for preparing synthetic
intermediates useful in the synthesis of a class of compounds that includes
VX-478. The Company also has a non-exclusive, worldwide license under certain
G.D. Searle & Company ("Searle") patent applications claiming HIV protease
inhibitors. See "Risk Factors -- Uncertainty Related to Patents and Proprietary
Information."

CANCER MULTIDRUG RESISTANCE PROGRAM

  Overview

   Vertex is developing novel compounds to treat and prevent the occurrence of
drug resistance associated with the failure of cancer chemotherapy by inhibiting
cellular mechanisms believed to be responsible for MDR. Two cellular mechanisms
implicated in MDR are P-glycoprotein, or "MDR1," and multidrug resistance
associated protein, or "MRP." In June 1996, Vertex commenced a Phase II
multi-center clinical trial to assess the safety and efficacy of the
co-administration of VX-710 and doxorubicin in patients with liver cancer. In
1997, Vertex plans to initiate a Phase II multi-center clinical trial to assess
the safety and efficacy of the co-administration of VX-710 and paclitaxel in
patients with breast cancer. Vertex is collaborating with BioChem Therapeutic,
Inc. ("BioChem"), a subsidiary of Biochem Pharma (International) Inc., for the
development and commercialization of VX-710 in Canada. The Company expects that
BioChem will initiate Phase II clinical trials of VX-710 for two additional
cancers in Canada in 1997. In April 1996, the Company commenced a Phase I/II
dose escalating clinical trial with a second MDR inhibitor, VX-853, an
orally-administered compound in a chemical class distinct from intravenously
administered VX-710, in combination with doxorubicin in patients with solid
tumors.

  Background

   According to the American Cancer Society, there will be an estimated 530,000
new cases of breast, ovarian, lung, liver and colorectal tumors in the United
States in 1997. In addition, the American Cancer Society also estimates that
there will be an estimated 95,000 new patients each year in the United States
afflicted with blood cancers, such as multiple myeloma, acute myeloid leukemia
and non-Hodgkin's lymphoma. The Company believes that a significant number of
these patients may not be effectively treated by chemotherapy because of MDR.

   Multidrug resistance is frequently associated with the failure of
chemotherapy. A major contributing factor to MDR is the presence of molecular
pumps that function to expel toxins out of the cell. MDR occurs when these
pumps, including MDR1 and MRP, expel chemotherapeutic agents from cancer cells,
preventing the sustained delivery of potent levels of the chemotherapeutic
agents required for therapeutic benefit. As a consequence, such resistant tumor
cells cannot be killed efficiently by anticancer drugs such as methotrexate,
doxorubicin, vincristine and paclitaxel. MDR1 has been implicated in MDR in a
variety of cancers including liver cancer, colon cancer,


                                      -6-
   7
pancreatic cancer, chronic myelogenous leukemia and certain lung cancers. MRP
was recently identified as another drug efflux pump and is believed responsible
for resistance observed in additional tumor types.

   No drug has been approved by the FDA specifically for the treatment of MDR,
however, several compounds are in advanced clinical studies. Certain agents,
such as dex-verapamil and an analog of cyclosporin A, have been shown in
preliminary human studies to have some effectiveness in overcoming clinical
resistance to certain commonly used chemotherapeutic agents. The Company
believes these drugs may have side effects that could limit broad use.

  Clinical Status

   Vertex's lead compound, VX-710, has displayed potent activity in vitro as an
inhibitor of MDR for a number of chemotherapeutic agents in a variety of tumor
types. In June 1996, Vertex initiated a Phase II multi-center clinical trial to
assess the safety and efficacy of the co-administration of VX-710 and
doxorubicin in patients with liver cancer. The comparison arm for the study
involves the administration of doxorubicin alone. Cross-over from the comparison
arm to the study arm is allowed. The clinical trial is expected to enroll up to
70 patients. The Company has recently added additional investigative sites in
order to accelerate enrollment in the trial. In 1997, Vertex plans to initiate a
Phase II multi-center trial to assess the safety and efficacy of the
co-administration of VX-710 and paclitaxel in patients with breast cancer. The
primary efficacy endpoints in both trials will be response rate and time to
disease progression. In addition, BioChem is planning to initiate Phase II
clinical trials of VX-710 in Canada in 1997 in combination with paclitaxel in
patients with ovarian cancer and in combination with doxorubicin in patients
with soft tissue sarcoma. There can be no assurance, however, that clinical
trials will commence or proceed as currently anticipated. See "Risk Factors --
Uncertainties Related to Clinical Trials," " -- Manufacturing Uncertainties;
Reliance on Third Party Manufacturers" and " -- Dependence on Collaborative
Partners."

   In April 1996, a principal investigator for the ongoing Phase I/II trial
reported preliminary results for the VX-710/doxorubicin combination. The
findings, based on 22 patients receiving intravenous doses of up to 160
mg/m(2)/hr, suggest that the regimen was well-tolerated, with generally mild and
reversible side effects at the doses tested. The results also showed that the
regimen can be successfully administered to achieve blood levels shown to
reverse MDR in vitro and in preclinical studies. The investigator also reported
that VX-710 did not appear to alter markedly the clearance or half-life of
doxorubicin, which the Company believes will provide future flexibility for
dosage. Investigators used an imaging agent, which is ordinarily expelled from
the liver by MDR1, as a marker for MDR1 inhibition by VX-710. In this trial, the
level of retention of the imaging agent in the liver suggested that VX-710 was
blocking the activity of MDR1.

   Vertex's research has identified several proprietary compounds, in addition
to VX-710, that are able to return drug resistant cells to a state of drug
sensitivity in vitro. In November 1995, Vertex scientists reported in vitro MDR
inhibition results for VX-853, an orally administered compound in a chemical
class distinct from VX-710. The research showed that VX-853 potently blocks MDR
mediated by both MDR1 and MRP. In April 1996, the Company commenced a Phase I/II
dose-escalating clinical trial of VX-853 in combination with doxorubicin in
patients with solid tumors.

   The Company has one issued United States patent, five United States patent
applications pending and several foreign counterpart applications claiming
VX-710 and other compounds for treating multidrug resistance. Vertex recently
received a Notice of Allowance for claims covering VX-710 and structurally
related compounds. The issued United States patent claims VX-853 and
structurally related compounds. The Company may seek orphan drug status for
certain indications of its MDR compounds.


                                      -7-
   8
HEMOGLOBIN DISORDERS PROGRAM

  Overview

   Vertex is developing VX-366, a drug to treat sickle cell disease and beta
thalassemia, two inherited blood disorders for which there currently are a
limited number of treatments. The Company is collaborating with Alpha
Therapeutic Corporation ("Alpha"), a subsidiary of Green Cross Corporation, and
Ravizza Farmaceutici ("Ravizza"), a subsidiary of BASF, in the development of
its hemoglobin disorder compounds.

  Background

   Sickle cell disease affects one in 375 African-Americans and, to a lesser
extent, persons of Eastern Mediterranean, Indian or Saudi Arabian ancestry.
There were an estimated 75,000 sickle cell cases and 10,000 beta thalassemia
cases in the United States and Europe as of 1994.

   Sickle cell disease and beta thalassemia are inherited disorders caused by
defects in the gene for adult hemoglobin. These diseases are associated with
life-threatening organ damage, cause chronic and recurrent pain and predispose
affected individuals to severe infection.

   There are currently a limited number of treatments for beta thalessemia and
sickle cell disease. Hydroxyurea, an oral compound currently marketed as an
anti-cancer agent, has been shown, in a Phase III study conducted by the
National Institutes of Health, to improve the symptoms of patients with sickle
cell disease. The Company believes, however, that this compound has limitations
due to toxic side effects. Other treatments used to combat symptoms of sickle
cell disease and beta thalassemia include antibiotics, pain killers and blood
transfusions. Several compounds are in clinical development by a number of
companies for the treatment of these diseases.

  Clinical Status

   Vertex's drug in development for hemoglobin disorders is VX-366. Vertex
acquired VX-366, a butyrate compound, in August 1993 under an exclusive license
from Children's Hospital Medical Center of Oakland. In June 1996, Ravizza
reported results of a four-week Phase II trial in 12 patients with beta
thalassemia, which indicated that VX-366 increased participants' levels of
hemoglobin F, a form of hemoglobin that has been shown to improve symptoms and
extend the life span of individuals with sickle cell disease and beta
thalassemia. In September 1995, Vertex entered into a license agreement with
Alpha for the development and commercialization of VX-366 in North, Central and
South America. There can be no assurance, however, that clinical trials
involving VX-366 will proceed or that future trials will commence. See "Risk
Factors -- Uncertainties Related to Clinical Studies," " -- Manufacturing
Uncertainties; Reliance on Third Party Manufacturers" and " -- Dependence on
Collaborative Partners."

   Four United States patents have issued, which are licensed exclusively by
Vertex from Children's Hospital. Three of these patents claim the use of VX-366
in the treatment of hemoglobin disorders, including sickle cell disease and beta
thalassemia. Because Children's Hospital did not foreign file the application
corresponding to that reissue application within one year of filing its
corresponding United States application, the Company's foreign patent rights may
be limited. Vertex has filed three United States patent applications claiming
various compounds and their use in the treatment of hemoglobin disorders.


                                      -8-
   9
PRECLINICAL PROGRAMS

IMPDH PROGRAM

Overview

   Vertex is developing novel, orally deliverable immunosuppressive drugs that
it believes could selectively halt the growth of lymphocytes by blocking inosine
monophosphate dehydrogenase ("IMPDH"), an enzyme which controls DNA synthesis in
lymphocytes. In December 1996, Vertex selected VX-497 as a lead drug development
candidate for autoimmune diseases. Vertex currently is conducting preclinical
trials of VX-497 and plans to initiate clinical trials of VX-497 in 1998.

Background

   The activation and proliferation of lymphocytes are associated with a variety
of autoimmune diseases, including asthma, psoriasis, rheumatoid arthritis and
systemic lupus, as well as with transplant rejection. Vertex believes that
blocking the enzyme IMPDH with an oral compound designed to specifically bind to
the active site of IMPDH may provide a novel way to inhibit the progress of
autoimmune diseases. The Company is aware of only one specific inhibitor of
IMPDH currently on the market in the United States, Hoffmann-La Roche's
mycophenolate mofetil, which is approved for acute kidney transplant rejection.
The Company believes that compound-specific side effects of mycophenolate
mofetil may limit its use for chronic autoimmune disorders.

  Preclinical Status

   Vertex has identified novel lead classes of IMPDH inhibitors. In December
1996, Vertex selected VX-497 as a lead drug development candidate for autoimmune
diseases. In laboratory tests and in models of autoimmune disease and
transplantation performed to date, VX-497 has been a potent and well-tolerated
immunosuppressive agent. Vertex currently is conducting preclinical trials of
VX-497. The Company plans to initiate clinical trials of VX-497 in 1998. Vertex
intends to evaluate VX-497 for psoriasis, an autoimmune disease of the skin, as
the first clinical indication for the compound. There can be no assurance,
however, that clinical trials will commence or proceed as currently anticipated.
See"Risk Factors -- Early Stages of Development; Technological Uncertainty," "
- -- Manufacturing Uncertainties; Reliance on Third Party Manufacturers" and " --
Uncertainties Related to Clinical Trials."

   The Company has two United States patent applications pending, claiming
inhibitors of IMPDH, including VX-497 and related compounds. The Company has
another United States patent application pending that claims the crystal
structure of IMPDH and the use of that structure to design inhibitors.

INFLAMMATION PROGRAM

  Overview

   Vertex is developing novel drugs to treat acute and chronic inflammatory
conditions, including pancreatitis, osteoarthritis and rheumatoid arthritis. The
Company is collaborating with Hoechst Marion Roussel ("HMR") in the development
of compounds to block interleukin-1 beta converting enzyme ("ICE"), which
mediates the production and release of the inflammatory cytokine IL-1 beta, as
well as the production of gamma interferon. In February 1997, Vertex selected
VX-740 as a lead drug development candidate for inflammatory diseases.


                                      -9-
   10
  Background

   Elevation of IL-1 beta levels has been correlated to a number of acute and
chronic inflammatory diseases such as asthma, inflammatory bowel disease,
osteoarthritis, pancreatitis and rheumatoid arthritis. There are approximately
2,500,000 cases of rheumatoid arthritis in the United States alone. ICE was
first characterized in late 1991 and represents a novel target for
anti-inflammatory drug discovery. Although several companies are pursuing ICE as
a drug target, Vertex is not aware of any company with an ICE-inhibiting
compound in clinical development, and there currently are no IL-1 beta
inhibitors approved for marketing.

  Preclinical Status

   Vertex and HMR have designed potential small molecule inhibitors of ICE that
could be used for the treatment of both acute and chronic inflammatory disorders
such as asthma, inflammatory bowel disease, osteoarthritis, pancreatitis and
rheumatoid arthritis. In February 1997, Vertex selected VX-740 as a lead drug
development candidate for inflammatory diseases.

   Vertex scientists recently discovered that ICE plays a key role in the
production of gamma interferon, a key immunoregulator that modulates antigen
presentation, T-cell activation, and cell adhesion. This research was published
in the January 10, 1997 issue of the journal Science. Based on the discovery of
a new role for ICE in the production of gamma interferon, Vertex plans to
investigate ICE inhibitors for additional therapeutic uses such as in metastatic
cancer, diabetes and sepsis. See "Risk Factors -- Early Stages of Development;
Technological Uncertainty," " -- Manufacturing Uncertainties; Reliance on Third
Party Manufacturers" and " -- Uncertainties Related to Clinical Trials."

   The Company has fourteen patent applications pending in the United States and
several foreign counterpart patent applications claiming inhibitors of ICE.
Vertex recently received a Notice of Allowance in one of those applications. The
Company has three patent applications pending in the United States and several
foreign counterpart applications claiming the crystal structure of ICE and
derivatives thereof and various uses of those structures.

RESEARCH PROGRAMS

Neurophilins

   Vertex has designed novel, orally deliverable, small molecule compounds that
have the potential to be developed as drugs to treat neurodegenerative diseases,
including stroke, peripheral neuropathies and Parkinson's disease and
Alzheimer's disease. Vertex has conducted laboratory experiments the results of
which suggest that certain of its compounds stimulate nerve growth. In 1996,
Vertex reported results in a rat model of peripheral nerve injury. The
neurophilin compound accelerated the onset of foot movement and walking compared
to the control. In addition, the compound produced a 50 percent increase in the
average size of nerve cells in the injured area as compared to the control
animals. Vertex has identified several promising lead compounds and plans to
test those compounds in additional models of nerve growth.

   The Company has five United States patent applications claiming the use of
certain of its immunosuppressive compounds and certain of its multidrug
resistance compounds for nerve growth applications. The Company also has one
issued United States patent and nine United States patent applications pending
that claim compounds useful in nerve growth applications.


                                      -10-
   11
Caspases (Apoptosis)

   The goal of Vertex's caspases program is to discover and develop drugs useful
for treating neurodegenerative disorders such as Alzheimer's disease and
Parkinson's disease as well as for the prevention of tissue damage resulting
from myocardial and cerebral ischemia.

   Vertex is conducting research to design novel drugs for apoptosis (programmed
cell death) for neurodegenerative diseases and other neurodegenerative
conditions. This drug discovery effort is based on the Company's knowledge of
ICE and its homologues, the caspases. Vertex has gained a detailed understanding
of apoptotic pathways using biological, genomic, and structural data from ICE
homologues. Vertex has solved the X-ray structure of CPP32, a caspase believed
to be important in neuronal apoptosis, and is using structural information to
design small molecule lead compounds that selectively block CPP32 and other
caspases.

   The Company has one United States patent application claiming a protein
involved in apoptosis.

Hepatitis C Protease

   The Company is conducting discovery research to design orally deliverable
drugs to inhibit hepatitis C protease, an enzyme generally believed to be
essential for replication of the hepatitis C virus ("HCV"). Discovered in 1989,
HCV causes chronic inflammation in the liver. In a majority of patients, HCV
establishes a chronic infection that can persist for decades and eventually lead
to cirrhosis, liver failure and liver cancer. HCV infection represents a
significant medical problem worldwide for which there is inadequate or no
therapy for a majority of patients. Sources at the U.S. Centers for Disease
Control and Prevention recently estimated that approximately 3.9 million
Americans, or more than one percent of the population, may be infected with HCV.
Currently, there is no vaccine available to prevent hepatitis C infection. In
addition, the only drug approved for the treatment of hepatitis C, interferon
alpha, provides long-term therapeutic benefit to less than 25 percent of
patients treated.

   In 1996, Vertex solved the structure of the hepatitis C protease, using X-ray
crystallography. Vertex is utilizing a variety of advanced techniques, as well
as its experience with HIV protease inhibitors, to design inhibitors of HCV
protease enzyme.

   Vertex has one United States patent application pending claiming inhibitors
of HCV protease. Vertex also has one United States patent application pending
claiming the crystal structure of HCV protease and the use of that structure to
design inhibitors. Vertex has an additional United States patent application
claiming methods of identifying HCV protease inhibitors.

MAP Kinases

   Vertex is conducting research to design novel anti-inflammatory drugs based
on small molecule inhibitors of MAP kinases. MAP kinases regulate both
interleukin-1 and tumor necrosis factor, hormones involved in inflammation and
programmed cell death. In 1996, Vertex solved the structure of p38 MAP kinase
using X-ray crystallography. Vertex is conducting research to solve additional
related MAP kinases. Together with the structural information now available,
Vertex is using structure-directed high throughput screening to identify novel
lead inhibitors of p38 MAP kinase.

   Vertex has one United States patent application pending claiming inhibitors
of p38 MAP Kinase.


                                      -11-
   12
CORPORATE COLLABORATIONS

   Vertex has entered into corporate collaborations with pharmaceutical
companies that provide financial and other resources, including capabilities in
research, development and sales and marketing, to support the Company's research
and development programs. To date, the Company has entered into the following
major corporate collaborations.

Glaxo Wellcome plc.

   Vertex and Glaxo Wellcome are collaborating on the development of Vertex's
HIV protease inhibitors. Under the collaborative agreement, which commenced in
December 1993, Glaxo Wellcome is obligated to pay Vertex up to $42.0 million,
comprised of a $15.0 million initial license payment paid in December 1993,
$14.0 million of product research funding over five years and $13.0 million of
development and commercialization milestone payments for an initial drug
candidate. From the inception of the agreement in December 1993 through December
31, 1996, Vertex has recognized as revenue $25.0 million. Glaxo Wellcome is also
obligated to pay to Vertex additional development and commercialization
milestone payments for subsequent drug candidates. In addition, Glaxo Wellcome
is required to bear the costs of development in its territory under the
collaboration. Glaxo Wellcome has exclusive rights to develop and commercialize
Vertex HIV protease inhibitors in all parts of the world except the Far East and
will pay Vertex a royalty on sales. Vertex has retained certain bulk drug
manufacturing rights and certain co-promotion rights in the territories licensed
to Glaxo Wellcome. See " -- HIV Program."

   Glaxo Wellcome has the right to terminate the research collaboration under
its agreement with the Company without cause upon twelve months' notice given at
any time and has the right to terminate the license arrangements under its
agreement with the Company without cause upon twelve months' notice, provided
such notice is not given before the research collaboration has been terminated.
Termination by Glaxo Wellcome of the research collaboration under its agreement
with the Company will relieve Glaxo Wellcome of its obligation to make further
research support payments under the agreement. Termination by Glaxo Wellcome of
the license arrangements under the agreement will relieve Glaxo Wellcome of its
obligation to make further commercialization and development milestone and
royalty payments, and will end any license granted to Glaxo Wellcome by Vertex
thereunder, and could have a material adverse effect on the Company's business
and result of operations. See "Risk Factors -- Dependence on Collaborative
Partners."

   In June 1996, Vertex and Glaxo Wellcome obtained a non-exclusive, worldwide
license under certain Searle patent applications claiming HIV protease
inhibitors to permit Vertex and Glaxo Wellcome to develop, manufacture and
market VX-478 free of the risk of intellectual property claims by Searle. Vertex
and Glaxo Wellcome paid Searle $15.0 million and $10.0 million, respectively,
for the license. In addition, the terms of the license require Vertex to pay
Searle a royalty on sales. In connection with this transaction, Glaxo Wellcome
purchased 151,792 shares of the Company's Common Stock at a price of $32.94 per
share, with net proceeds to the Company of approximately $5.0 million.

Kissei Pharmaceutical Co., Ltd.

   Vertex and Kissei are collaborating on the development of Vertex's VX-478 HIV
protease inhibitor. Under the collaborative agreement, which commenced in April
1993, Kissei is obligated to pay to Vertex up to $20.0 million, comprised of
$9.8 million of product research funding over three years, $7.0 million of
development and commercialization milestone payments and a $3.2 million equity
investment. From the inception of the agreement in April 1993 through December
31, 1996, $17.8 million has been received, including $14.6 million recognized as
revenue and $3.2 million as an equity investment. The Company has received the
full amount of research funding specified under the agreement. Kissei has
exclusive rights to develop and


                                      -12-
   13
commercialize VX-478 in Japan, the People's Republic of China and several other
countries in the Far East and will pay Vertex a royalty on sales. Vertex will
manufacture bulk product for Kissei. See " -- HIV Program."

Hoechst Marion Roussel

   Vertex and HMR are collaborating on the development of ICE inhibitors as
anti-inflammatory agents. Under the collaborative agreement, which commenced in
September 1993, HMR is obligated to pay to Vertex up to $30.5 million, comprised
of $18.5 million of product research funding over five years and $12.0 million
of development and commercialization milestone payments. From the inception of
the agreement in September 1993 through December 31, 1996, $14.5 million has
been recognized as revenue. HMR has exclusive rights to develop and market drugs
resulting from the collaborative effort in Europe, Africa and the Middle East,
and Vertex has exclusive development and marketing rights in the rest of the
world, except the Far East, where Vertex shares those rights with HMR. HMR is
obligated to pay a royalty to Vertex on any sales made in Europe, and Vertex is
obligated to pay a royalty to HMR on any sales made in the United States or the
rest of the Americas. Each party will have the option to co-promote products in
the other party's exclusive territory. Vertex and HMR will each have rights to
develop and market the drugs in Far Eastern countries including Japan.

   HMR has the right to terminate the agreement at any time without cause upon
twelve months' notice. For a period of one year after any such termination, HMR
retains the right to select one or more compounds for development and to license
such compound or compounds from Vertex, provided HMR resumes research funding
and commercialization milestone payments and makes all such payments that would
otherwise have been due but for such termination. See " -- Inflammation
Program."

BioChem Therapeutic, Inc.

   The Company and BioChem are collaborating on the development and
commercialization of VX-710, the Company's lead compound in its cancer multidrug
resistance program. Under the collaborative agreement, which commenced in May
1996, BioChem is obligated to pay the Company up to $4.0 million comprised of an
initial license payment of $500,000 and development and commercialization
milestone payments. BioChem also is obligated to bear the costs of development
of VX-710 in Canada. BioChem has exclusive rights to develop and commercialize
VX-710 in Canada. The Company will supply BioChem's requirements of bulk and
finished forms of VX-710. BioChem will make payments to the Company for those
materials based on sales of products by BioChem, which will cover Vertex's cost
of supplying materials and will provide a profit to Vertex.

   BioChem has the right to terminate the agreement without cause upon six
months' notice at any time after May 8, 1997. Termination will relieve BioChem
of any further payment obligations and will end any license granted to BioChem
by Vertex under the agreement. See " -- Cancer Multidrug Resistance Program."

Alpha Therapeutic Corporation

   Vertex and Alpha are collaborating on the development and commercialization
of VX-366 for the treatment of sickle cell disease and beta thalassemia. Under
the collaborative agreement, which commenced in October 1995, Alpha has agreed
to pay Vertex up to $5.0 million comprised of an initial license payment and
development and commercialization milestone payments. From the inception of the
agreement in October 1995 through December 31, 1996, $500,000 has been
recognized as revenue. In addition, Alpha is obligated to pay the costs of
development of VX-366 under the collaboration. Alpha has exclusive rights to
develop and commercialize VX-366 in


                                      -13-
   14
North, Central and South America. Vertex retains rights in the rest of the world
and retains all manufacturing rights worldwide. Alpha will pay Vertex a royalty
based on commercial product sales and will purchase from Vertex its requirements
for drug product.

   Alpha has the right to terminate the agreement without cause upon six
months' notice at any time. Termination will relieve Alpha of any further
payment obligations under the agreement and will end any license granted to
Alpha by Vertex thereunder. See " --  Hemoglobin Disorders Program."

  Ravizza Farmaceutici S.p.A.

   Vertex and Ravizza are collaborating to conduct clinical trials with VX-366
for beta thalassemia and sickle cell disease. Under the collaboration, which
commenced in September 1994, Vertex and Ravizza will share data generated in
their respective clinical trial programs. Ravizza has completed a Phase II
clinical trial of VX-366 in Italy in patients with beta thalassemia. In
addition, the arrangement creates a framework for negotiation of an agreement
for clinical development and commercialization of VX-366 in Europe. There can be
no assurance, however, that the parties will enter into any such agreement.
See " -- Hemoglobin Disorders Program."

ALTUS BIOLOGICS INC.

   Altus Biologics Inc. ("Altus") is a subsidiary of Vertex established in
January 1993 to develop, manufacture and sell a class of industrial catalysts
based on a novel and proprietary technology for stabilizing proteins. Altus'
initial products use the Company's CLEC(R) technology to produce cross-linked
enzyme crystals.

   Although enzymes are among nature's most efficient catalysts, their
large-scale commercial use has been limited by their instability and general
incompatibility with many industrial chemical processes. As a result of
experiments conducted by Altus and several commercial partners and prospective
customers, the Company believes that CLEC products have properties that overcome
many of these limitations and make them superior to conventional catalysts and
enzymes in certain commercial and industrial processes. The Company believes
that CLEC products can be used as catalysts in the manufacture of
pharmaceuticals, fine chemicals, foods and sweeteners, among other things.

   Since mid-1994, Altus has launched nine commercial catalyst products in two
product families: ChiroCLEC(TM), for the preparation of optically pure
pharmaceuticals and specialty chemicals, and PeptiCLEC(TM), for use in peptide
coupling reactions. Altus expects to launch additional products in 1997.
Approximately 215 companies worldwide have purchased CLEC products for
feasibility testing. Altus recently entered into a research and development
collaboration with Ciba-Geigy Limited for the development of CLEC technology for
commercial use in detergents.

   Altus is conducting research and development aimed at expanding the uses of
its CLEC technology to such applications as nerve gas detoxification,
detergenting and anti-oxidants for cosmetics. Some of this research is supported
by grants from U.S. government agencies including the National Institutes of
Health, National Science Foundation and the Department of Defense.

   The Company has ten United States patent applications and several foreign
counterpart applications and patents relating to its CLEC technology. The
Company recently received a Notice of Allowance in one of these applications.


                                      -14-
   15
PATENTS AND PROPRIETARY INFORMATION

   The Company has rights in certain patents and pending patent applications
that relate to compounds it is developing and methods of using such compounds.
The Company actively seeks, when appropriate, protection for its products and
proprietary information by means of United States and foreign patents,
trademarks and contractual arrangements. In addition, the Company relies upon
trade secrets and contractual arrangements to protect certain of its proprietary
information and products.

   As of February 20, 1997, the Company had a total of six United States patents
and 63 United States pending patent applications. The Company also has an
exclusive license under four United States patents, one of which is subject to a
reissue application and a non-exclusive, worldwide license under certain Searle
patent applications claiming HIV protease inhibitors. Three of the licensed
patents and the reissue application claim the use of compounds, including
VX-366, for treating hemoglobin disorders, including sickle cell disease and
beta thalassemia. The Company has one issued United States patent and ten United
States patent applications claiming antiviral compounds, and/or their uses, for
treating HIV infection and AIDS. The issued patent and five of the ten
applications have claims that include VX-478, the Company's lead drug candidate,
within their literal scope. Vertex recently received a Notice of Allowance for
claims covering the use of VX-478 to treat AIDS-related central nervous system
disorders. Another of the Company's United States patent applications claims
processes for preparing synthetic intermediates useful in the synthesis of a
class of compounds that includes VX-478. The Company's non-exclusive, worldwide
license permits Vertex to develop, manufacture and market VX-478 free of
intellectual property claims by Searle. The Company has one issued United States
patent and five United States patent applications claiming VX-710 and other
compounds for treating multidrug resistance. Vertex recently received a Notice
of Allowance for claims covering VX-710 and structurally related compounds. The
issued patent claims VX-853 and structurally related compounds. The Company has
two United States patent applications pending, claiming inhibitors of IMPDH,
including VX-497 and related compounds. The Company has another United States
patent application pending that claims the crystal structure of IMPDH and the
use of that structure to design inhibitors. The Company has fourteen United
States patent applications pending claiming inhibitors of ICE. Vertex recently
received a Notice of Allowance in one of those applications. The Company has
three patent applications pending in the United States claiming the crystal
structure of ICE and derivatives thereof and various uses of those structures.
The Company has five United States patent applications pending claiming the use
of certain of its immunosuppressive compounds and certain of its multidrug
resistance compounds for nerve growth applications. The Company also has one
issued United States patent and nine patent applications pending that claim
compounds useful in nerve growth application. The Company has three United
States patents and four United States patent applications claiming specific
immunosuppressive compounds. Vertex recently received a Notice of Allowance in
two of those four applications. The Company has one United States patent
application claiming a protein involved in apoptosis. The Company has one United
States patent application pending claiming inhibitors of p38 MAP kinase. The
Company also has one United States patent application pending claiming
inhibitors of HCV protease. The Company has one United States patent application
pending claiming the crystal structure of HCV protease and the use of that
structure to design inhibitors. The Company has ten United States patent
applications claiming CLEC technology. The Company recently received a Notice of
Allowance in one of these applications. The Company has one United States patent
claiming a novel device useful in pharmaceutical research. The Company also has
filed international and foreign counterparts based on several of its United
States patents and patent applications.

   There can be no assurance that any patents will issue from any of the
Company's patent applications or, even if patents issue or have issued, that the
claims thereof will provide the Company with any significant protection against
competitive products or otherwise be valuable commercially. Legal standards
relating to the validity of patents and the proper scope of their


                                      -15-
   16
claims in the biopharmaceutical field are still evolving, and there is no
consistent policy regarding the breadth of claims allowed in biopharmaceutical
patents. No assurance can be given as to the Company's ability to avoid
infringing, and thus having to negotiate a license under, any patents issued to
others, or that a license to such patents would be available on commercially
acceptable terms, if at all. Further, there can be no assurance that any patents
issued to or licensed by the Company will not be infringed by the products of
others, which may require the Company to engage in patent infringement
litigation. In addition to being a party to patent infringement litigation, the
Company could be required to participate in interference proceedings declared by
the United States Patent and Trademark Office. Defense or prosecution of patent
infringement litigation, as well as participation in interference proceedings,
can be expensive and time consuming, even in those instances in which the
outcome is favorable to the Company. If the outcome of any such litigation or
proceeding were adverse, the Company could be subject to significant liabilities
to third parties, could be required to obtain licenses from third parties or
could be required to cease sales of the affected products, any of which could
have a material adverse effect on the Company. See "Risk Factors -- Uncertainty
Related to Patents and Proprietary Information."

   The Company has licensed on an exclusive basis four United States patents and
one United States issue application from Children's Hospital. Three of these
patents and the reissue application claim the use of compounds, including
VX-366, in the treatment of hemoglobin disorders, including sickle cell disease
and beta thalassemia. Because Children's Hospital did not foreign file the
application corresponding to the reissue application within one year of filing
its corresponding United States application, the Company's foreign patent rights
may be limited. In addition, there can be no assurance that others will not
develop independently substantially equivalent technology, obtain access to the
Company's know-how or be issued patents which may prevent the sale of Company
products or require licensing and the payment of significant fees or royalties
by the Company in order for it to carry on its business. Furthermore, there can
be no assurance that any such license will be available.

   Much of the Company's technology and many of its processes are dependent upon
the knowledge, experience and skills of key scientific and technical personnel.
To protect its rights to its proprietary know-how and technology, the Company
requires all employees, consultants, advisors and collaborators to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside the Company. These agreements require disclosure
and assignment to the Company of ideas, developments, discoveries and inventions
made by employees, consultants, advisors and collaborators. There can be no
assurance that these agreements will effectively prevent disclosure of the
Company's confidential information or will provide meaningful protection for the
Company's confidential information if there is unauthorized use or disclosure.
Furthermore, in the absence of patent protection, the Company's business may be
adversely affected by competitors who independently develop substantially
equivalent technology. See " -- Corporate Collaborations," and "Risk Factors --
Dependence on Collaborative Partners" and " -- Uncertainty Relating to Patents
and Proprietary Information."

MANUFACTURING

   The Company relies on third party manufacturers to produce its compounds for
preclinical and clinical purposes and may do so for commercial production of any
compounds that are approved for marketing. The Company has established a quality
assurance program, including a set of standard operating procedures, intended to
ensure that third party manufacturers under contract produce the Company's
compounds in accordance with the FDA's current Good Manufacturing Practices
("cGMP") and other applicable regulations. See " -- Government Regulation."

   The Company believes that all of its existing compounds can be produced
using established manufacturing methods, primarily through standard techniques
of pharmaceutical synthesis. The


                                      -16-
   17
Company currently does not have the capacity to manufacture its potential
products, is dependent on third party manufacturers or collaborative partners
for the production of its compounds for preclinical research and clinical trial
purposes and expects to be dependent on such manufacturers or collaborative
partners for some or all commercial production of any of its compounds that are
approved for marketing. The Company believes that it will be able to continue to
negotiate such arrangements on commercially reasonable terms and that it will
not be necessary for it to develop internal manufacturing capability in order to
successfully commercialize its products. In the event that the Company is unable
to obtain contract manufacturing, or obtain such manufacturing on commercially
reasonable terms, it may not be able to commercialize its products as planned.
The Company's objective is to maintain flexibility in deciding whether to
develop internal manufacturing capabilities for certain of its potential
products. The Company has no experience in manufacturing pharmaceutical or other
products or in conducting manufacturing testing programs required to obtain FDA
and other regulatory approvals, and there can be no assurance that the Company
will develop such capabilities successfully.

   Since the Company's potential products are at an early stage of development,
the Company will need to improve or modify its existing manufacturing processes
and capabilities to produce commercial quantities of any drug product
economically. The Company cannot quantify the time or expense that may
ultimately be required to improve or modify its existing process technologies,
but it is possible that such time or expense could be substantial.

   The production of Vertex's compounds is based in part on technology that the
Company believes to be proprietary. Vertex may license this technology to
contract manufacturers to enable them to manufacture compounds for the Company.
There can be no assurance that such manufacturers will abide by any limitations
or confidentiality restrictions in licenses with Vertex. In addition, any such
manufacturer may develop process technology related to the manufacture of
Vertex's compounds that such manufacturer owns either independently or jointly
with the Company. This would increase the Company's reliance on such
manufacturer or require the Company to obtain a license from such manufacturer
in order to have its products manufactured. There can be no assurance that any
such license would be available on terms acceptable to the Company, if at all.

   Some of the Company's current corporate partners have certain manufacturing
rights with respect to the Company's products under development, and there can
be no assurance that such corporate partners' rights will not impede the
Company's ability to conduct the development programs and commercialize any
resulting products in accordance with the schedules and in the manner currently
contemplated by the Company. See "Risk Factors -- Manufacturing Uncertainties;
Reliance on Third Party Manufacturers."

COMPETITION

   The Company is engaged in pharmaceutical fields characterized by extensive
research efforts, rapid technological progress and intense competition. There
are many public and private companies, including pharmaceutical companies,
chemical companies and biotechnology companies, engaged in developing products
for the human therapeutic applications targeted by Vertex. Further, the Company
believes that interest in the application of structure-based drug design and
related technologies may continue and may accelerate as the technologies become
more widely understood. The Company is aware of efforts by others to develop
products in each of the areas in which the Company has products in development.
For example, Merck & Co., Inc., Abbott Laboratories, Inc., Hoffmann-La Roche,
and Agouron Pharmaceuticals, Inc. have HIV protease inhibitors which have been
approved by the U.S. Food and Drug Administration ("FDA") for marketing. The
Company is also aware of other companies that have HIV protease inhibitors in
development. There also are a number of competitors that have products under
development for the treatment of MDR in cancer and for the treatment of
hemoglobin disorders. In order for the Company to compete successfully


                                      -17-
   18
in these areas, it must demonstrate improved safety, efficacy, ease of
manufacturing and market acceptance over its competitors, who have received
regulatory approval and are currently marketing. Furthermore, academic
institutions, governmental agencies and other public and private research
organizations are conducting research to develop technologies and products that
may compete with those under development by the Company. In addition, other
technologies are, or may in the future become, the basis for competing products.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than any being
developed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. In addition, there can be no assurance that
the Company's products in development will be able to compete effectively with
products which are currently on the market.

   Many of the Company's competitors have substantially greater financial,
technical and human resources than those of the Company. In addition, many of
the Company's competitors have significantly greater experience than the Company
in conducting preclinical testing and human clinical trials of new
pharmaceutical products, and in obtaining FDA and other regulatory approvals of
products. Accordingly, certain of the Company's competitors may succeed in
obtaining regulatory approval for products more rapidly than the Company. If the
Company obtains regulatory approval and commences commercial sales of its
products, it will also compete with respect to manufacturing efficiency and
sales and marketing capabilities, areas in which it currently has no experience.
See "Risk Factors -- Rapid Technological Change and Competition."

PHARMACEUTICAL PRICING AND REIMBURSEMENT

   The Company's ability to commercialize its products successfully will depend
in part on the extent to which appropriate reimbursement levels for the cost of
such products and related treatment are obtained from government authorities,
private health insurers and other organizations, such as health maintenance
organizations ("HMOs"). Third party payors and government authorities are
continuing efforts to contain or reduce the cost of health care. For example, in
certain foreign markets, pricing and/or profitability of prescription
pharmaceuticals are subject to government control. There can be no assurance
that similar controls will not be implemented in the United States. Also, the
trend toward managed health care in the United States and the concurrent growth
of organizations such as HMOs, which could control or significantly influence
the purchase of health care services and products, may result in lower prices
for the Company's products. The cost containment measures that health care
providers and third party payors are instituting and any proposed or future
health care reform measures, including any reductions in Government
reimbursement programs such as Medicaid and Medicare, could affect the Company's
ability to sell its products and may have a material adverse effect on the
Company.

   The success of the Company's products in the United States and other
significant markets will depend, in part, upon the extent to which a consumer
will be able to obtain reimbursement for the cost of such products from
government health administration authorities, third-party payors and other
organizations. Significant uncertainty exists as to the reimbursement status of
newly approved therapeutic products. Even if a product is approved for
marketing, there can be no assurance that adequate reimbursement will be
available. The Company is unable to predict what additional legislation or
regulation relating to the health care industry or third-party coverage and
reimbursement may be enacted in the future or what effect the legislation or
regulation would have on the Company's business. Failure to obtain reimbursement
could have a material adverse effect on the Company.

GOVERNMENT REGULATION

   The Company's development, manufacture and potential sale of therapeutics are
subject to extensive regulation by United States and foreign governmental
authorities. In particular,


                                      -18-
   19
pharmaceutical products are subject to rigorous preclinical and clinical testing
and to other approval requirements by the FDA in the United States under the
Food, Drug and Cosmetic Act and by comparable agencies in most foreign
countries.

   As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animals to identify potential safety
problems. For certain diseases, animal models exist that are believed to be
predictive of human efficacy. For such diseases, a drug candidate is tested in
an animal model. The results of the studies are submitted to the FDA as a part
of the Investigational New Drug application ("IND"), which is filed to comply
with FDA regulations prior to commencement of human clinical testing. For other
diseases for which no appropriately predictive animal model exists, no such
results can be filed. For several of the Company's drug candidates, no
appropriately predictive model exists. As a result, no in vivo evidence of
efficacy would be available until such compounds progress to human clinical
trials.

   Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. In Phase I, which frequently begins with the initial
introduction of the drug into healthy human subjects prior to introduction into
patients, the compound will be tested for safety, dosage tolerance, absorption,
bioavailability, biodistribution, metabolism, excretion, clinical pharmacology
and, if possible, for early information on effectiveness. Phase II typically
involves studies in a small sample of the intended patient population to assess
the efficacy of the drug for a specific indication, to determine dose tolerance
and the optimal dose range and to gather additional information relating to
safety and potential adverse effects. Phase III trials are undertaken to further
evaluate clinical safety and efficacy in an expanded patient population at
geographically dispersed study sites, to determine the overall risk-benefit
ratio of the drug and to provide an adequate basis for physician labeling. Each
trial is conducted in accordance with certain standards under protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Further, each clinical study must be evaluated by an
independent Institutional Review Board ("IRB") at the institution at which the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.

   Data from preclinical testing and clinical trials are submitted to the FDA in
a New Drug Application ("NDA") for marketing approval. The process of completing
clinical testing and obtaining FDA approval for a new drug is likely to take a
number of years and require the expenditure of substantial resources. Preparing
an NDA involves considerable data collection, verification, analysis and
expense, and there can be no assurance that approval will be granted on a timely
basis, if at all. The approval process is affected by a number of factors,
including the severity of the disease, the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials. The FDA
may deny an NDA if applicable regulatory criteria are not satisfied or may
require additional testing or information. Among the conditions for marketing
approval is the requirement that the prospective manufacturer's quality control
and manufacturing procedures conform to the FDA's cGMP regulations, which must
be followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, monies and effort in
the area of production and quality control to ensure full technical compliance.
Manufacturing establishments, both foreign and domestic, also are subject to
inspections by or under the authority of the FDA and by or under the authority
of other federal, state or local agencies.

   Even after initial FDA approval has been obtained, further studies, including
post-marketing studies, may be required to provide additional data on safety and
will be required to gain approval for the use of a product as a treatment for
clinical indications other than those for which the product was initially
tested. Also, the FDA will require post-marketing reporting to monitor the side
effects of the drug. Results of post-marketing programs may limit or expand
further marketing of the products. Further, if there are any modifications to
the drug, including changes in indication,


                                      -19-
   20
manufacturing process, labeling or manufacturing facilities, an NDA supplement
may be required to be submitted to the FDA.

   The Orphan Drug Act provides incentives to drug manufacturers to develop and
manufacture drugs for the treatment of diseases or conditions that affect fewer
than 200,000 individuals in the United States. Orphan drug status can also be
sought for diseases or conditions that affect more than 200,000 individuals in
the United States if the sponsor does not realistically anticipate its product
becoming profitable from sales in the United States. Under the Orphan Drug Act,
a manufacturer of a designated orphan product can seek tax benefits, and the
holder of the first FDA approval of a designated orphan product will be granted
a seven-year period of marketing exclusivity for that product for the orphan
indication. While the marketing exclusivity of an orphan drug would prevent
other sponsors from obtaining approval of the same compound for the same
indication, it would not prevent other types of drugs from being approved for
the same use. The Company has obtained orphan drug status for VX-366 for the
treatment of beta thalessemia and sickle cell disease and, in the future, may
apply for orphan drug status for certain indications of MDR in cancer.

   Under the Drug Price Competition and Patent Term Restoration Act of 1984, a
sponsor may be granted marketing exclusivity for a period of time following FDA
approval of certain drug applications if FDA approval is received before the
expiration of the patent's original term. This marketing exclusivity would
prevent a third party from obtaining FDA approval for a similar or identical
drug through an Abbreviated New Drug Application ("ANDA"), which is the
application form typically used by manufacturers seeking approval of a generic
drug. The statute also allows a patent owner to extend the term of the patent
for a period equal to one-half the period of time elapsed between the filing of
an IND and the filing of the corresponding NDA plus the period of time between
the filing of the NDA and FDA approval. The Company intends to seek the benefits
of this statute, but there can be no assurance that the Company will be able to
obtain any such benefits.

   Whether or not FDA approval has been obtained, approval of a drug product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. Historically,
the requirements governing the conduct of clinical trials and product approvals,
and the time required for approval, have varied widely from country to country.

   In addition to the statutes and regulations described above, the Company is
also subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state and local regulations. See "Risk Factors -- Extensive Government
Regulation."

HUMAN RESOURCES

   As of December 31, 1996, Vertex had 178 full-time employees, including 136 in
research and development, 23 in laboratory support services and 19 in general
and administrative functions, and three part-time employees. The Company's
scientific staff members (58 of whom hold Ph.D. and/or M.D. degrees) have
diversified experience and expertise in molecular and cell biology,
biochemistry, animal pharmacology, synthetic organic chemistry, protein x-ray
crystallography, protein nuclear magnetic resonance spectroscopy, computational
chemistry, biophysical chemistry, medicinal chemistry, clinical pharmacology and
clinical medicine. In addition, the Company's Altus subsidiary had 19 full-time
employees as of December 31, 1996. The Company's employees are not covered by a
collective bargaining agreement, and the Company considers its relations with
its employees to be good.


                                      -20-
   21
EXECUTIVE OFFICERS

The names, ages and positions held by the executive officers of the Company are
as follows:

Name                          Age    Position
- ----                          ---    --------
Joshua S. Boger, Ph.D.....    45     Director, President and Chief
                                     Executive Officer

Richard H. Aldrich........    42     Senior Vice President and Chief Business
                                     Officer

Vicki L. Sato, Ph.D.......    48     Senior Vice President of Research and
                                     Development and Chief Scientific Officer;
                                     Chair of the Scientific Advisory Board

Iain P. M. Buchanan.......    43     Vice President of European Operations;
                                     Managing Director of Vertex Pharmaceuticals
                                     (Europe) Limited

Thomas G. Auchincloss, Jr.    35     Vice President of Finance and Treasurer

      All executive officers are elected by the Board of Directors to serve in
their respective capacities until their successors are elected and qualified or
until their earlier resignation or removal.

   Dr. Boger is a founder of the Company and was its President and Chief
Scientific Officer from its inception in 1989 until May 1992, when he became
President and Chief Executive Officer. Dr. Boger has been a director since the
Company's inception. Prior to founding the Company 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 also a Director of Millennium
Pharmaceuticals, Inc. 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.

   Mr. Aldrich served as Vice President of Business Development of the Company
from June 1989 to May 1992, when he became Vice President and Chief Business
Officer. In December 1993, Mr. Aldrich was promoted to Senior Vice President
and Chief Business Officer. He joined Vertex from Integrated Genetics, where he
headed that company's business development group. Previously, he served as
Program Executive at Biogen, Inc., where he coordinated worldwide commercial
development of several biopharmaceuticals, and as Licensing Manager at Biogen
S.A. in Geneva, Switzerland, where he managed European and Far Eastern
licensing. Mr. Aldrich previously worked at the Boston Consulting Group, an
international management consulting firm. Mr. Aldrich received a B.S. degree
from Boston College and an M.B.A. from the Amos Tuck School of Business,
Dartmouth College.

   Dr. Sato joined Vertex in September 1992 as Vice President of Research and
was appointed Senior Vice President of Research and Development in September
1994. Previously, she was Vice President, Research and a member of the
Scientific Board of Biogen, Inc. As research head at Biogen, she directed
research programs in the fields of inflammation, immunology, AIDS therapy and
cardiovascular therapy from early research into advanced product development.
Dr. Sato received an A.B. in biology from Radcliffe College and A.M. and Ph.D.
degrees from Harvard University. Following postdoctoral work in chemistry and
immunology at the University of


                                      -21-
   22
California at Berkeley and Stanford Medical School, she was appointed to the
faculty of Harvard University in the Department of Biology.

   Mr. Buchanan joined the Company in April 1994 from Cilag AG, a subsidiary of
Johnson & Johnson based in Zug, Switzerland, where he served as its Regional
Licensing Director since 1987. He previously held the position of Marketing
Director of Biogen, Inc. in Switzerland. Prior to Biogen, Mr. Buchanan served
in Product Management at Merck Sharp & Dohme (UK) Limited. Mr. Buchanan holds a
B.Sc. from the University of St. Andrews, Scotland.

   Mr. Auchincloss joined the Company in October 1994 after serving as an
investment banker at Bear, Stearns & Co. Inc. since 1988, most recently as
Associate Director of the Corporate Finance Department. Prior to Bear Stearns,
Mr. Auchincloss was a financial analyst for PaineWebber, Inc. Mr. Auchincloss
holds a B.S. from Babson College and an M.B.A. from The Wharton School,
University of Pennsylvania.


                                      -22-
   23
SCIENTIFIC ADVISORY BOARD

   The Company's Scientific Advisory Board consists of individuals with
demonstrated expertise in various fields who advise the Company concerning
long-term scientific planning, research and development. The Scientific Advisory
Board also evaluates the Company's research programs, recommends personnel to
the Company and advises the Company on technological matters. The members of the
Scientific Advisory Board, which is chaired by Dr. Vicki L. Sato, are:

    Vicki L. Sato, Ph.D........   Senior Vice President of Research and
                                  Development and Chief Scientific
                                  Officer, Vertex Pharmaceuticals Incorporated.

    Steven J. Burakoff, M.D....   Chair, Department of Pediatric Oncology,
                                  Dana-Farber Cancer Institute; Professor
                                  of Pediatrics, Harvard Medical School.

    Eugene H. Cordes, Ph.D.....   Professor of Pharmacy and Chemistry,
                                  University of Michigan at Ann Arbor.

    Jerome E. Groopman, M.D....   Chief of the Division of Experimental
                                  Medicine, Beth Israel Deaconess Medical
                                  Center; Recanti Chair in Immunology and
                                  Professor of Medicine, Harvard Medical
                                  School.

    Stephen C. Harrison, Ph.D..   Professor of Biochemistry and Molecular
                                  Biology, Harvard University;
                                  Investigator, Howard Hughes Medical
                                  Institute; Professor of Biological
                                  Chemistry and Molecular Pharmacology and
                                  Professor of Pediatrics, Harvard Medical
                                  School.

    Jeremy R. Knowles, D. Phil.   Dean of the Faculty of Arts and
                                  Sciences, Harvard University; Amory
                                  Houghten Professor of Chemistry and
                                  Biochemistry, Harvard University.

    Robert T. Schooley, M.D....   Head, Infectious Disease Division,
                                  University of Colorado Health Sciences
                                  Center; Professor of Medicine,
                                  University of Colorado.

   Other than Dr. Sato, none of the members of the Scientific Advisory Board is
employed by the Company, and members may have other commitments to or consulting
or advisory contracts with their employers or other entities that may conflict
or compete with their obligations to the Company. Accordingly, such persons are
expected to devote only a small portion of their time to the Company. In
addition to its Scientific Advisory Board, Vertex has established consulting
relationships with a number of scientific and medical experts who advise the
Company on a project-specific basis.


                                      -23-
   24
                                  RISK FACTORS

   The following risk factors should be considered carefully in addition to the
other information contained in this Report.

EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY

   The Company was founded in 1989 and has not generated any pharmaceutical
product sales. To achieve profitable operations, the Company, alone or with
others, must successfully develop, clinically test, market and sell its
products. Any products resulting from the Company's product development efforts
are not expected to be available for sale in the near future, if at all.

   The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Such reasons include the possibilities that the potential products
are found ineffective or cause harmful side effects during preclinical testing
or clinical trials, fail to receive necessary regulatory approvals, are
difficult or uneconomical to manufacture on a large scale, fail to achieve
market acceptance or are precluded from commercialization by proprietary rights
of third parties.

   The products that the Company is pursuing will require extensive additional
development, testing and investment, as well as regulatory approvals, prior to
commercialization. No assurance can be given that the Company's product
development efforts will be successful, that required regulatory approvals will
be obtained or that any products, if introduced, will be commercially
successful. Further, the Company has no sales and marketing capabilities, and
even if the Company's products in development are approved for marketing, there
can be no assurance that the Company will be able to develop such capabilities.
In addition, only a limited number of drugs developed through structure-based
drug design have completed clinical trials successfully, been approved by the
FDA and been marketed. One of the Company's potential products, VX-478, is an
HIV protease inhibitor which is currently in Phase II clinical trials. The
Company and its collaborative partners recently began Phase III clinical trials.
To date, HIV has been shown to develop resistance to antiviral drugs, including
currently marketed HIV protease inhibitors. There can be no assurance that such
disease resistance or other factors will not limit the efficacy of the Company's
HIV protease inhibitor. The clinical efficacy of the suppression of mechanisms
of action of MDR in chemotherapy in the treatment of cancer is unproven, and,
therefore, there can be no assurance that the Company's MDR compounds in
development will improve the efficacy of chemotherapy. There also can be no
assurance that drug candidates being pursued by the Company will be safe and
efficacious, will receive regulatory approvals or will result in commercially
successful products. If any of the Company's development programs is not
successfully completed, required regulatory approvals are not obtained, or
products for which approvals are obtained are not commercially successful, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Business -- Product Development and Research
Programs."

UNCERTAINTIES RELATED TO CLINICAL TRIALS

   Before obtaining required regulatory approvals for the commercial sale of
products under development, the Company must demonstrate through preclinical
studies and clinical trials that such products are safe and efficacious for use
in each target indication. The results of preclinical and initial clinical
trials of products under development by the Company are not necessarily
predictive of results that will be obtained from large-scale clinical testing,
and there can be no assurance that clinical trials of products under development
will demonstrate the safety and efficacy of such products or will result in a
marketable product. The safety and efficacy of a therapeutic product under
development by the Company must be supported by extensive data from clinical
trials. A number of companies have suffered significant setbacks in advanced
clinical trials, despite


                                      -24-
   25
promising results in earlier trials. The Company currently has four product
candidates undergoing clinical trials, VX-478, VX-710, VX-853 and VX-366. In
addition, the Company has a number of products undergoing preclinical
development. The data observed to date is preliminary, and there can be no
assurance that the results of ongoing and future trials will be consistent with
results observed in earlier clinical trials or will be sufficient for approval.
The failure to demonstrate adequately the safety and efficacy of a therapeutic
drug under development could delay or prevent regulatory approval of the product
and could have a material adverse effect on the Company. In addition, the FDA
may require additional clinical trials, which could result in increased costs
and significant development delays.

   The administration alone or in combination with other drugs of any product
developed by the Company may produce undesirable side effects in humans. The
occurrence of such side effects could interrupt, delay or halt clinical trials
of such products and could ultimately prevent their approval by the FDA or
foreign regulatory authorities for any or all targeted indications. The Company
or the FDA may suspend or terminate clinical trials at any time if it is
believed that the trial participants are being exposed to unacceptable health
risks. Even after approval by the FDA and foreign regulatory authorities,
products may later exhibit adverse effects that discourage widespread use or
necessitate their withdrawal from the market. There can be no assurance that any
products under development by the Company will be safe when administered to
patients.

   The rate of completion of clinical trials of the Company's products is
dependent upon, among other factors, the rate of patient accrual. Patient
accrual is a function of many factors, including the size of the patient
population, the proximity of patients to clinical sites, the eligibility
criteria for the trial and the availability of clinical trial material. Delays
in planned patient enrollment in clinical trials may result in increased costs,
program delays or both, which could have a material adverse effect on the
Company. There can be no assurance that if clinical trials are completed the
Company will be able to submit an NDA or that any such application will be
reviewed and approved by the FDA in a timely manner, if at all. See "Business --
Government Regulation."

DEPENDENCE ON COLLABORATIVE PARTNERS

   The Company is engaged in research and development collaborations with Glaxo
Wellcome, HMR, Kissei, Alpha and BioChem pursuant to which these parties have
agreed to fund portions of the Company's research and development programs
and/or to conduct certain research and development relating to specified
products, in exchange for certain technology, product and marketing rights
relating to those products. Some of the Company's current corporate partners
have certain rights to control the planning and execution of product development
and clinical programs, and there can be no assurance that such corporate
partners' rights to control aspects of such programs will not impede the
Company's ability to conduct such programs in accordance with the schedules and
in the manner currently contemplated by the Company for such programs.

   If any of the Company's corporate collaborators were to terminate its
relationship with Vertex, it could have a material adverse effect on the
Company's ability to fund related and other programs and to develop, manufacture
and market any products that may have resulted from such collaboration. There
can be no assurance that these collaborations will be completed or successful,
or that the collaborative partners will not pursue alternative means of
developing treatments for the diseases targeted by their collaborative programs
with the Company. Glaxo Wellcome has the right to terminate the research
collaboration under its agreement with the Company without cause at any time
upon twelve months' notice and has the right to terminate the license
arrangements under its agreement with the Company without cause upon twelve
months' notice, provided such notice is not given before the research
collaboration has been terminated. Termination by Glaxo Wellcome of the research
collaboration under its agreement with the Company will relieve Glaxo Wellcome
of its obligation to


                                      -25-
   26
make further research support payments under the agreement. Termination by Glaxo
Wellcome of the license arrangements under the agreement will relieve it of its
obligation to make further commercialization and development milestone and
royalty payments and will end any license granted to Glaxo Wellcome by Vertex.
HMR has the right to terminate its agreement with the Company without cause upon
twelve months' notice at any time. Termination by HMR will relieve HMR of any
further payment obligations under its agreement with the Company. In addition,
for a period of one year after any such termination, HMR retains the right to
select one or more compounds for development and to license such compound or
compounds from Vertex, provided HMR resumes research funding and
commercialization milestone payments and makes all such payments that would
otherwise have been due but for such termination. Alpha has the right to
terminate its agreement with the Company without cause upon six months' notice
at any time. Termination will relieve Alpha of any further payment obligations
under its agreement with the Company and will also terminate any license granted
to Alpha by Vertex. BioChem has the right to terminate its agreement with the
Company without cause upon six month's notice at any time after May 8, 1997.
Termination will relieve BioChem of any further payment obligations under its
agreement with the Company and will terminate any license granted to BioChem
thereunder.

   The Company may seek additional collaborative arrangements to develop and
commercialize its products in the future. There can be no assurance that the
Company will be able to establish acceptable collaborative arrangements in the
future or that such collaborative arrangements will be successful. In addition,
there can be no assurance that collaborative partners will not pursue
alternative technologies or develop alternative compounds either on their own or
in collaboration with others, including the Company's competitors, as a means
for developing treatments for the diseases targeted by their collaborative
programs with the Company or that disagreements over rights to technology, other
proprietary information or the course of the research and development program
will not occur. Such events could result in the delay or cancellation of
programs or product introduction even if regulatory approvals are obtained. See
"Business -- Corporate Collaborations."

RAPID TECHNOLOGICAL CHANGE AND COMPETITION

   The Company is engaged in pharmaceutical fields characterized by extensive
research efforts, rapid technological progress and intense competition. There
are many public and private companies, including pharmaceutical companies,
chemical companies and biotechnology companies, engaged in developing products
for the human therapeutic applications targeted by Vertex. Further, the Company
believes that interest in the application of structure-based drug design and
related technologies may continue and may accelerate as the technologies become
more widely understood. The Company is aware of efforts by others to develop
products in each of the areas in which the Company has products in development.
For example, Merck & Co., Inc., Abbott Laboratories, Inc. and Hoffmann-La Roche
have HIV protease inhibitors which have been approved by the FDA for marketing,
and Agouron Pharmaceuticals, Inc. has filed an NDA for an HIV protease
inhibitor. The Company is also aware of other companies that have HIV protease
inhibitors in development. There also are a number of competitors that have
products under development for the treatment of MDR in cancer and for the
treatment of hemoglobin disorders. In order for the Company to compete
successfully in these areas, it must demonstrate improved safety, efficacy, ease
of manufacturing and market acceptance over its competitors, who have received
regulatory approval and are currently marketing. Furthermore, academic
institutions, governmental agencies and other public and private research
organizations are conducting research to develop technologies and products that
may compete with those under development by the Company. In addition, other
technologies are, or may in the future become, the basis for competing products.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than any being
developed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. In addition, there can be no assurance that
the Company's products in development will be able to compete effectively with
products which are currently on the market.


                                      -26-
   27
   Many of the Company's competitors have substantially greater financial,
technical and human resources than those of the Company. In addition, many of
the Company's competitors have significantly greater experience than the Company
in conducting preclinical testing and human clinical trials of new
pharmaceutical products, and in obtaining FDA and other regulatory approvals of
products. Accordingly, certain of the Company's competitors may succeed in
obtaining regulatory approval for products more rapidly than the Company. If the
Company obtains regulatory approval and commences commercial sales of its
products, it will also compete with respect to manufacturing efficiency and
sales and marketing capabilities, areas in which it currently has no experience.
See "Business -- Competition."

MANUFACTURING UNCERTAINTIES; RELIANCE ON THIRD PARTY MANUFACTURERS

   The Company's ability to conduct clinical trials and its ability to
commercialize its potential products will depend, in part, on its ability to
manufacture its products on a large scale, either directly or through third
parties, at a competitive cost and in accordance with FDA and other regulatory
requirements. Furthermore, for all of the Company's drugs in development,
completion of clinical trials and submission of an NDA will be subject to the
establishment of a commercial formulation and manufacturing process. As
manufacturing process development and formulation activities are ongoing
throughout the development process, the Company or its collaborators may
encounter difficulties at any time that could result in delays in clinical
trials, regulatory submissions and commercialization of its products, or cause
negative financial and competitive consequences. Manufacturing process
development and formulation activities for VX-478 by the Company and Glaxo
Wellcome are continuing while clinical trials are underway. There can be no
assurance that such activities will be completed in a timely and successful
manner, if at all. The failure to complete such activities in a timely and
successful manner could have a material adverse effect on the business,
financial condition or results of operations of the Company.

   The Company currently does not have the capacity to manufacture its potential
products and is dependent on third party manufacturers or collaborative partners
for the production of its compounds for preclinical research and clinical trial
purposes. The Company expects to be dependent on such manufacturers or
collaborative partners for some or all commercial production of any of its
compounds that are approved for marketing. In the event that the Company is
unable to obtain contract manufacturing, or obtain such manufacturing on
commercially reasonable terms, it may not be able to conduct or complete
clinical trials or, if FDA approval is obtained, commercialize its products as
planned. The Company has no experience in manufacturing pharmaceutical or other
products or in conducting manufacturing testing programs required to obtain FDA
and other regulatory approvals, and there can be no assurance that the Company
will successfully develop such capabilities.

   Some of the Company's current corporate partners have certain manufacturing
rights with respect to the Company's products under development, and there can
be no assurance that such corporate partners' manufacturing rights will not
impede the Company's ability to conduct the development programs and
commercialize any resulting products in accordance with the schedules and in the
manner currently contemplated by the Company. See "Business -- Manufacturing."

EXTENSIVE GOVERNMENT REGULATION; UNCERTAINTY OF PRODUCT CLEARANCE AND APPROVAL

   The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of therapeutic pharmaceutical products through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time-consuming procedures. Satisfaction of these
requirements typically takes several years or longer and may vary substantially
based upon the type, complexity and novelty of the pharmaceutical product. The
Company has had only limited experience in conducting preclinical testing and
human clinical trials. In addition, the


                                      -27-
   28
Company has not received FDA or other regulatory approvals for any of its
product candidates. Data obtained from preclinical and clinical activities are
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. In addition, delays or rejections may be encountered based
on changes in, or additions to, regulatory policies for drug approval during the
period of product development and regulatory review.

   The effect of government regulation may be to delay or prevent the
commencement of clinical trials or marketing of Company products, if any are
developed and submitted for approval, for a considerable period of time, to
impose costly procedures upon the Company's activities and to provide a
competitive advantage to larger companies or companies more experienced in
regulatory affairs that compete with the Company. There can be no assurance that
FDA or other regulatory approval for clinical trials or marketing of any
products developed by the Company will be granted on a timely basis or at all.
Delay in obtaining or failure to obtain such approvals would adversely affect
the marketing of the Company's products and the Company's liquidity and capital
resources. Moreover, even if approval is granted, such approval may entail
limitations on the indicated uses for which a compound may be marketed. Even if
such regulatory approval is obtained, a marketed drug or compound and its
manufacturer are subject to continual review, and later discovery of previously
unknown problems with a product or manufacturer may result in restrictions on
such product or manufacturer, including withdrawal of the product from the
market. Failure to comply with applicable regulatory requirements can, among
other things, result in fines, suspensions of regulatory approvals, product
recalls, operating restrictions and criminal prosecution. Further, additional
government regulation may be established which could prevent or delay regulatory
approval of the Company's products.

   The Company has obtained orphan drug status for VX-366 for the treatment of
beta thalassemia and sickle cell disease and may apply for orphan drug status
for certain indications of MDR in cancer. Orphan drug status may, under present
regulations, entitle the Company to certain marketing exclusivity and tax
benefits. While the marketing exclusivity of an orphan drug would prevent other
sponsors from obtaining approval of the same compound for the same indication,
it would not prevent chemically distinct drugs from being approved for the same
use. There can be no assurance that the Company will receive FDA orphan drug
status for any of its compounds under development for which the Company seeks
that status. Moreover, there can be no assurance that the scope of protection or
the level of exclusivity that is currently afforded by orphan drug status will
remain in effect in the future. See "Business -- Government Regulation."

   The Company's research and development activities involve the controlled use
of hazardous materials, chemicals and various radioactive compounds. The risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of an accident, the Company could be held liable for
any damages or fines that result, and the liability could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that statutes or regulations, applicable
to the Company's business which impose substantial additional costs or otherwise
materially adversely affect the Company's operations, will not be adopted.

UNCERTAINTY RELATED TO PATENTS AND PROPRIETARY INFORMATION

   The Company's success will depend, in part, on its ability to obtain United
States and foreign patent protection for its products and their uses, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. Because of the substantial length of time and expense
associated with bringing new products through development and regulatory
approval to the marketplace, the pharmaceutical industry places considerable
importance on obtaining patents and maintaining trade secret protection for new
technologies, products and processes. Patent protection may not be available,
however, for compounds for use in certain medical indications, without a
demonstration of how to use the compounds and proof in clinical trials that such


                                      -28-
   29
compounds may be useful for such target indications. As of February 20, 1997,
the Company had a total of six United States patents and 63 pending United
States patent applications. As of that date, the Company also had a
non-exclusive, worldwide license under certain Searle patent applications
claiming HIV protease inhibitors. The Company also has been granted an exclusive
license under four United States patents, one of which is subject to a reissue
application. The Company also has filed foreign counterparts to some of its
United States patents and patent applications. There can be no assurance that
patents will issue from any of the Company's pending or future patent
applications. There can be no assurance that any issued, licensed, pending or
future patent will not be infringed by the products of others or provide
sufficient protection to exclude others from the Company's present or future
technology or products. The Company has in the past licensed and may in the
future license patent rights from others. There can be no assurance, however,
that such licenses will provide adequate protection for the Company's products.

   Issued United States patents are presumed valid under United States patent
law. No assurance can be given, however, that one or more of the Company's
issued patents will not be declared invalid by a court. Legal standards relating
to the validity of patents and the proper scope of their claims in the
biopharmaceutical field are still evolving, and there is no consistent law or
policy regarding the valid breadth of claims in biopharmaceutical patents or the
effect of prior art on them. Furthermore, no assurance can be given as to the
degree of protection any patents will afford to the Company's technology or as
to the Company's ability to avoid infringing the claims of the patents held by
third parties. Further, there can be no assurance that a license to such patents
would be available on terms acceptable to the Company, if at all. There also can
be no assurance that any patents issued to or licensed by the Company will not
be infringed by others.

   In addition to being a potential party to patent infringement litigation, the
Company could become involved in interference proceedings declared by the United
States Patent and Trademark Office. Defense and prosecution of patent claims, as
well as participation in interference proceedings, can be expensive and
time-consuming, even in those instances in which the outcome is favorable to the
Company. If the outcome of any such litigation or proceeding were adverse, the
Company could be subject to significant liabilities to third parties, could be
required to obtain licenses from third parties or could be required to cease
sales of the affected products, any of which could have a material adverse
effect on the Company.

   The Company has licensed on an exclusive basis four United States patents and
one United States reissue application from Children's Hospital Medical Center of
Oakland (California) ("Children's Hospital"). Three of these patents and the
reissue application claim the use of compounds, including VX-366, in the
treatment of hemoglobin disorders, including sickle cell disease and beta
thalassemia. Because Children's Hospital did not foreign file the application
corresponding to the reissue application within one year of filing its
corresponding United States application, the Company's foreign patent rights may
be limited. In addition, there can be no assurance that others will not develop
independently substantially equivalent technology, obtain access to the
Company's know-how or be issued patents which may prevent the sale of the
Company's products or require licensing and the payment of significant fees or
royalties by the Company in order for it to carry on its business. Furthermore,
there can be no assurance that any such license will be available.

   The Company's management and scientific personnel have been recruited from
other pharmaceutical and biotechnology companies and academic institutions. In
many cases these individuals are conducting research in similar areas with which
they were involved prior to joining Vertex. As a result, the Company, as well as
these individuals, could be subject to allegations of violation of trade secrets
and similar claims. See " -- Dependence on Collaborative Partners" and "Business
- -- Corporate Collaborations" and " -- Patents and Proprietary Information."


                                      -29-
   30
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

   The Company expects to incur substantially increased research and development
and related supporting expenses as it designs and develops existing and future
compounds and undertakes clinical trials of potential drugs resulting from such
compounds. The Company also expects to incur substantial administrative and
commercialization expenditures in the future and substantial expenses related to
the filing, prosecution, defense and enforcement of patent and other
intellectual property claims. The Company's future capital requirements will
depend on many factors, including the progress of its research and development
programs, the scope and results of preclinical studies and clinical trials, the
cost, timing and outcome of regulatory reviews, the costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the establishment of additional collaborative arrangements and the
cost of manufacturing facilities and of commercialization activities and
arrangements. The Company anticipates that it will finance these substantial
cash needs with its existing cash reserves, together with interest earned
thereon, future payments under its collaborative agreements with Glaxo Wellcome,
HMR, Kissei, Alpha and BioChem, facilities and equipment financing and
additional collaborative agreements. To the extent that funds from these sources
are not sufficient to fund the Company's activities, it will be necessary to
raise additional funds through public offerings or private placements of debt or
equity securities or other methods of financing. Any equity financings could
result in dilution to the Company's then existing stockholders. Any debt
financing, if available at all, may be on terms which, among other things,
restrict the Company's ability to pay dividends (although the Company does not
intend to pay dividends for the foreseeable future). If adequate funds are not
available, the Company may be required to curtail significantly or discontinue
one or more of its research, drug discovery or development programs, including
clinical trials, or attempt to obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies or products in research or development. No
assurance can be given that additional financing will be available on acceptable
terms, if at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT

   Vertex has incurred losses since its inception in January 1989. As of
December 31, 1996, the Company's accumulated deficit was approximately $96.9
million. Losses have resulted principally from costs incurred in research and
development of the Company's compounds in development, including clinical trials
and material manufacturing costs, the Company's other research programs and from
general and administrative costs. These costs have exceeded the Company's
revenues, which to date have been generated primarily from collaborative
arrangements, interest income and research grants. The Company expects to incur
additional significant operating losses in the future and does not expect to
achieve profitability from sales of its products in development for several
years, if ever. The Company expects that losses will fluctuate from quarter to
quarter and that such fluctuations may be substantial. There can be no assurance
that the Company will ever achieve product revenues or profitable operations.
Based on the Internal Revenue Code of 1986, as amended, and changes in the
Company's ownership, utilization of net operating loss carryforwards and
research and development credits for federal income tax purposes may be subject
to annual limitations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

UNCERTAINTY RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT

   The Company's ability to commercialize its products successfully will depend
in part on the extent to which appropriate reimbursement levels for the cost of
such products and related treatment are obtained from government authorities,
private health insurers and other organizations, such as health maintenance
organizations ("HMOs"). Third party payors and government


                                      -30-
   31
authorities are continuing efforts to contain or reduce the cost of health care.
For example, in certain foreign markets, pricing and/or profitability of
prescription pharmaceuticals are subject to government control. There can be no
assurance that similar controls will not be implemented in the United States.
Also, the trend toward managed health care in the United States and the
concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and products, may
result in lower prices for the Company's products. The cost containment measures
that health care providers and third party payors are instituting and any
proposed or future health care reform measures, including any reductions in
government reimbursement programs such as Medicaid and Medicare, could affect
the Company's ability to sell its products and may have a material adverse
effect on the Company.

   The success of the Company's products in the United States and other
significant markets will depend, in part, upon the extent to which a consumer
will be able to obtain reimbursement for the cost of such products from
government health administration authorities, third-party payors and other
organizations. Significant uncertainty exists as to the reimbursement status of
newly approved therapeutic products. Even if a product is approved for
marketing, there can be no assurance that adequate reimbursement will be
available. The Company is unable to predict what additional legislation or
regulation relating to the health care industry or third-party coverage and
reimbursement may be enacted in the future or what effect the legislation or
regulation would have on the Company's business. Failure to obtain reimbursement
could have a material adverse effect on the Company.

ABSENCE OF SALES AND MARKETING EXPERIENCE

   The Company currently has no experience in marketing or selling
pharmaceutical products. The Company must either develop a marketing and sales
force or enter into arrangements with third parties to market and sell any of
its product candidates which are approved by the FDA. In the territories where
the Company retains marketing and co-promotion rights, there can be no assurance
that the Company will successfully develop its own sales and marketing
experience or that it will be able to enter into marketing and sales agreements
with others on acceptable terms, if at all. If the Company develops its own
marketing and sales capability, it will compete with other companies that
currently have experienced and well-funded marketing and sales operations. To
the extent that the Company has or enters into co-promotion or other sales and
marketing arrangements with other companies, any revenues to be received by the
Company will be dependent on the efforts of others, and there can be no
assurance that such efforts will be successful.

DEPENDENCE ON KEY MANAGEMENT AND QUALIFIED PERSONNEL

   The Company is highly dependent upon the efforts of its senior management and
scientific team. The loss of the services of one or more members of the senior
management and scientific team might impede the achievement of the Company's
development objectives. Due to the specialized scientific nature of the
Company's business, the Company is also highly dependent upon its ability to
attract and retain qualified scientific, technical and key management personnel.
There is intense competition for qualified personnel in the areas of the
Company's activities, and there can be no assurance that the Company will be
able to continue to attract and retain qualified personnel necessary for the
development of its existing business and its expansion into areas and activities
requiring additional expertise, such as clinical testing, government approvals,
production and marketing. See "Human Resources."

PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE

   The Company's business will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of pharmaceutical
and other products developed by the Company. The use of the Company's products
in clinical trials also exposes the Company to the


                                      -31-
   32
possibility of product liability claims and possible adverse publicity. These
risks will increase to the extent the Company's products receive regulatory
approval and are commercialized. The Company maintains product liability
insurance for clinical trials. The Company does not currently have any other
product liability insurance. There can be no assurance that the Company will be
able to maintain its existing insurance or be able to obtain or maintain such
additional insurance as it may need in the future on acceptable terms or that
the Company's existing insurance or any such additional insurance will provide
adequate coverage against potential liabilities.

VOLATILITY OF SHARE PRICE; OPTION GRANTS

   Market prices for securities of companies such as Vertex are highly volatile,
and the market for the securities of such companies, including the Common Stock
of the Company, has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of these particular
companies. Factors such as announcements of results of clinical trials,
technological innovations or new products by Vertex or its competitors,
government regulatory action, public concern as to the safety of products
developed by the Company or others, patent or proprietary rights developments
and market conditions for pharmaceutical and biotechnology stocks, in general,
could have a significant adverse effect on the future market price of the Common
Stock.

   As of December 31, 1996, the Company had outstanding options for the purchase
of 4,032,609 shares of Common Stock at exercise prices ranging from $6.48 per
share to $37.50 per share. Options for the purchase of 1,624,862 shares of
Common Stock were exercisable as of that date.

ANTI-TAKEOVER PROVISIONS

   The Company's charter provides for staggered terms for the members of the
Board of Directors. The Company's By-laws grant the Directors a right to adjourn
annual meetings of stockholders, and certain provisions of the By-laws may be
amended only with an 80% stockholder vote. Pursuant to the Company's Stockholder
Rights Plan, as amended as of February 21, 1997, each share of Common Stock has
an associated preferred share purchase right (a "Right"). The Rights will not
trade separately from the Common Stock until, and are exercisable only upon, the
acquisition or the potential acquisition through tender offer by a person or
group of 15% or more of the outstanding Common Stock. These charter and By-law
provisions and the Company's Stockholder Rights Plan may discourage certain
types of transactions involving an actual or potential change in control of the
Company which might be beneficial to the Company or its stockholders.

   Shares of any class or series of preferred stock may be issued by the Company
in the future without stockholder approval and upon such terms as the Board of
Directors may determine. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
class or series of preferred stock that may be issued in the future. The
issuance of preferred stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of discouraging a third party from acquiring a majority of the outstanding
Common Stock of the Company. The Company has no present plans to issue any
shares of any class or series of Preferred Stock.


                                      -32-
   33
ITEM 2.  PROPERTIES

      The Company leases an aggregate of approximately 110,000 square feet of
laboratory and office space in five adjacent facilities at 40 Allston Street,
625 Putnam Avenue, 618 Putnam Avenue, 240 Sidney Street and 130 Waverly Street
in Cambridge, Massachusetts. The lease to the 40 Allston Street, 618 Putnam
Avenue and 240 Sidney Street facilities will expire in December 2003. The lease
to the 625 Putnam Avenue facility expires in December 1998, subject to an
option, at the Company's election, to extend the term through December 2000. The
lease to the 130 Waverly Street facility will expire in December 2005. The
Company has occupied approximately 53,000 square feet of space under this lease,
with approximately 7,000 square feet of additional space available for
expansion. The Company believes its facilities are adequate for its current
needs. The Company believes it can obtain additional space on commercially
reasonable terms.

ITEM 3.  LEGAL PROCEEDINGS

      The Company is not a party to any material legal proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO SECURITY HOLDERS

      There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1996.


                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's Common Stock trades on the Nasdaq Stock Market ("Nasdaq")
under the symbol "VRTX." The following table sets forth the high and low last
sale prices for each quarter and the last sale price at the end of each quarter
for the Common Stock as reported by Nasdaq for the periods indicated.



1995                         HIGH           LOW             CLOSE
- ------------------------------------------------------------------
                                                  
First quarter               $16 3/4       $13              $13 1/2
Second quarter               16 3/4        12 3/4           16 3/8
Third quarter                23            13 1/2           18 3/4
Fourth quarter               26 1/2        16 1/4           26 1/2


1996
- ------------------------------------------------------------------
                                                  
First quarter               $29 7/8       $22              $26 1/2
Second quarter               38            26               30 3/8
Third quarter                36 1/4        23 1/4           29 1/2
Fourth quarter               40 1/4        28 7/8           40 1/4


      The last sale price of the Common Stock on March 6, 1997, as reported by
Nasdaq, was $46.00 per share. As of March 5, 1997, there were 297 holders of
record of the Common Stock (approximately 5,200 beneficial holders).

      The Company has never declared or paid any cash dividends on its Common
Stock and currently expects that future earnings will be retained for use in its
business.


                                      -33-
   34
RECENT SALE OF UNREGISTERED SECURITIES

   On June 28, 1996, the Company issued and sold to Glaxo Wellcome, for cash,
151,792 shares of the Company's Common Stock at a purchase price of $32.94 per
share, or an aggregate purchase price of $5,000,028. The securities issued were
not registered under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on the exemption set forth in Section 4(2) of the Securities
Act. The sale to Glaxo Wellcome was a privately negotiated sale by the Company
not involving any public offering.


                                      -34-
   35
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

      The following selected consolidated financial data for each of the five
years in the period ended December 31, 1996 are derived from the Company's
Consolidated Financial Statements audited by Coopers & Lybrand L.L.P.,
independent accountants. This data should be read in conjunction with the
Company's audited financial statements and related notes, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." No
dividends were declared or paid for any of the periods presented.



                                                                        YEAR ENDED DECEMBER 31,
                                             ------------------------------------------------------------------------
                                             *Proforma
                                                  1996       1996         1995         1994         1993       1992
                                             ---------     --------     --------     --------     -------    --------
                                                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                                                
Consolidated Statement of Operations Data:
Revenues:
  Collaborative and other research and
development revenues .....................    $ 13,341     $ 13,341     $ 22,081     $ 19,571     $27,885    $  3,767
  Interest income ........................       5,257        5,257        5,453        3,574       1,409       1,983
                                              --------     --------     --------     --------     -------    --------
         Total revenues ..................      18,598       18,598       27,534       23,145      29,294       5,750
Costs and expenses:
  Research and development ...............      35,212       35,212       41,512       34,761      23,164      11,505
  General and administrative .............       7,929        7,929        7,069        5,540       3,520       2,278
  License Payment ........................      15,000       15,000           --           --          --          --
  Interest ...............................         462          462          481          439         493         453
                                              --------     --------     --------     --------     -------    --------
         Total costs and expenses ........      58,603       58,603       49,062       40,740      27,177      14,236
                                              --------     --------     --------     --------     -------    --------
Net (loss) profit before taxes ...........     (40,005)     (40,005)     (21,528)     (17,595)      2,117      (8,486)
Tax provision ............................          --           --           --           --          80          --
                                              --------     --------     --------     --------     -------    --------
Net (loss) profit ........................    $(40,005)    $(40,005)    $(21,528)    $(17,595)    $ 2,037    $ (8,486)
                                              ========     ========     ========     ========     =======    ========
Net (loss) profit per common share .......    $  (2.13)    $  (2.13)    $  (1.25)    $  (1.11)    $  0.16    $  (0.70)
Weighted average number of common
shares outstanding .......................      18,798       18,798       17,231       15,818      12,451      12,110


                                                                                 DECEMBER 31,
                                               ----------------------------------------------------------------------------
                                               *Proforma
                                                    1996        1996         1995          1994         1993         1992
                                               ---------     ---------     --------     ---------     --------     --------
                                                                                                      
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments ...............................    $ 279,222     $ 130,359     $ 86,978     $ 106,470     $ 52,103     $ 43,701
Total assets ..............................      292,362       143,499       98,981       116,175       60,992       51,043
Obligations under capital leases, excluding
  current portion .........................        5,617         5,617        4,912         4,729        4,208        3,338
Accumulated deficit .......................      (96,944)      (96,944)     (56,939)      (35,411)     (17,816)     (19,853)
Total stockholders' equity . ..............      279,689       130,826       85,272       105,478       49,520       43,850


  *To give effect to the sale of 3,450,000 shares of common stock in a public
 offering on March 12, 1997, with net proceeds to the Company of approximately
             $148,863,000 (see Note N to the Financial Statements).


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

      The Company is engaged in the discovery, development and commercialization
of novel, small molecule pharmaceuticals for the treatment of major diseases for
which there are currently limited or no effective treatments. The Company is a
leader in the use of structure-based drug design, an approach to drug discovery
that integrates advanced biology, biophysics and chemistry.


                                      -35-
   36
The Company is conducting nine significant pharmaceutical research and
development programs to develop pharmaceuticals for the treatment of viral
diseases, multidrug resistance in cancer, hemoglobin disorders, autoimmune
diseases, inflammatory diseases and neurodegenerative disorders. Three of these
programs are in the development phase, and the other six are in the research
phase.

      To date, the Company has not received any revenues from the sale of
pharmaceutical products and does not expect to receive such revenues, if any, in
the near future. The Company has incurred since its inception, and expects to
incur over the next several years, significant operating losses as a result of
expenditures for its research and development programs. The Company expects that
losses will fluctuate from quarter to quarter and that such fluctuations may be
substantial.

RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995.

      The Company's total revenues decreased to $18,598,000 in 1996 from
$27,534,000 in 1995. In 1996, revenues consisted of $12,013,000 under the
Company's collaborative agreements, $5,257,000 in interest earned on invested
funds and $1,328,000 in government grants and other income. Revenue from
collaborative agreements consisted of $6,289,000 from the Glaxo Wellcome
collaboration, $4,196,000 from the HMR collaboration, $692,000 from the Kissei
collaboration, $225,000 from the Alpha collaboration, $577,000 from the BioChem
collaboration and $34,000 from the Chugai collaboration. The research funding
requirements of the Chugai and Kissei collaborative agreements concluded in
1995, although Kissei continues to have certain development funding obligations.
In 1995, revenues consisted of $21,587,000 under the Company's collaborative
agreements, $5,453,000 in interest earned on invested funds and $494,000 in
government grants and other income. Revenue from collaborative agreements
consisted of $10,053,000 from the Glaxo Wellcome collaboration, $5,370,000 from
the Kissei collaboration, $3,749,000 from the HMR collaboration, $1,915,000 from
the Chugai collaboration and $500,000 from the Alpha collaboration.

      The Company's total costs and expenses increased to $58,603,000 in 1996
from $49,062,000 in 1995. The increase in total costs and expenses resulted
principally from the Company's payment of $15,000,000 to obtain a non-exclusive,
world-wide license under certain Searle patent applications claiming HIV
protease inhibitors. Research and development expenses declined to $35,212,000
in 1996 from $41,512,000 in 1995. Although the Company's scientific staffing and
facilities expansion added to expense in 1996, the overall decrease in research
and development expense was due primarily to higher costs incurred in 1995 for
the manufacturing of bulk intermediate drug substance for use in clinical
trials. In addition, general and administrative expenses increased to $7,929,000
in 1996 from $7,069,000 in 1995. The increase in general and administrative
expense principally reflects the impact of personnel additions, the Company's
facilities expansion, and an increase in marketing costs including the addition
of marketing and support personnel for the Company's subsidiary Altus Biologics
Inc. ("Altus"). Interest expense decreased to $462,000 in 1996 from $481,000 in
1995 on higher levels of equipment lease financing due to lower blended rates of
interest charged.


                                      -36-
   37
      The Company recorded a net loss of $40,005,000 or $2.13 per share in 1996
compared to a net loss of $21,528,000 or $1.25 per share in 1995.

Year Ended December 31, 1995 Compared with Year Ended December 31, 1994.

      The Company's total revenues increased to $27,534,000 in 1995 from
$23,145,000 in 1994. In 1995, revenues consisted of $21,587,000 under the
Company's collaborative agreements, $5,453,000 in interest earned on invested
funds and $494,000 in government grants and other income. Revenue from
collaborative agreements consisted of $10,053,000 from the Glaxo Wellcome
collaboration, $5,370,000 from the Kissei collaboration, $3,749,000 from the HMR
collaboration, $1,915,000 from the Chugai collaboration and $500,000 from the
Alpha collaboration. The research funding requirements of the Chugai and Kissei
collaborative agreements concluded in 1995, although Kissei continues to have
certain development funding obligations. In 1994, revenues consisted of
$19,327,000 from collaborative agreements, $3,574,000 in interest earned on
invested funds and $244,000 in government grants and other income. Revenue in
1994 from collaborative agreements consisted of $5,346,000 from the Glaxo
Wellcome collaboration, $5,498,000 from the Kissei collaboration, $3,514,000
from the HMR collaboration and $4,969,000 from the Chugai collaboration.

      The Company's total costs and expenses increased to $49,062,000 in 1995
from $40,740,000 in 1994. Research and development expenses increased 19% to
$41,512,000 in 1995 from $34,761,000 in 1994, due, in part, to the costs
associated with manufacturing drug product for use in ongoing clinical trials of
the Company's drug candidates and, to a lesser extent, increases in the
Company's research staff. General and administrative expenses increased by 28%
to $7,069,000 from $5,540,000 between 1995 and 1994. The increase in general and
administrative expense principally reflects the full year impact of personnel
additions and the opening of an office in the United Kingdom in 1994 to support
the Company's research and business development efforts. Also contributing to
the increase were costs associated with the addition of marketing and support
personnel for Altus. In addition, the Company experienced higher legal fees
associated with its patent activities. Interest expense increased 10% to
$481,000 in 1995 from $439,000 in 1994 as a result of higher levels of equipment
leasing.

      The Company recorded a net loss of $21,528,000 or $1.25 per share in 1995
compared to a net loss of $17,595,000 or $1.11 per share in 1994.

LIQUIDITY AND CAPITAL RESOURCES

      The Company's operations have been funded principally through strategic
collaborative agreements, public offerings and private placements of the
Company's equity securities, equipment lease financing, government grants and
interest income. The Company expects to incur increased research and development
and related supporting expenses and, consequently, continued losses on a
quarterly and annual basis as it continues to develop existing and future
compounds and to conduct clinical trials of potential drugs. The Company also
expects to incur substantial administrative and commercialization expenditures
in the future and additional expenses related to the filing, prosecution,
defense and enforcement of patent and other intellectual property rights.

      The Company expects to finance these substantial cash needs with its
existing cash and investments at December 31, 1996 of approximately $130.4
million ($279.2 million pro forma for the public offering of 3,450,000 shares of
common stock on March 12, 1997), together with interest earned thereon, future
payments under its existing collaborative agreements, and facilities and
equipment financing. To the extent that funds from these sources are not
sufficient to fund the Company's activities, it will be necessary to raise
additional funds through public offerings or private placements of securities or
other methods of financing. There can be no assurance that such financing will
be available on acceptable terms, if at all.


                                      -37-
   38
      The Company and BioChem are collaborating on the development and
commercialization in Canada of VX-710, the Company's lead multidrug resistance
reversal agent. Under the development agreement, BioChem is obligated to pay the
Company up to $4.0 million comprised of an initial licensing fee and payments
for development and commercialization milestones. From the inception of the
agreement in May 1996 through the year ended December 31, 1996, $500,000 has
been recognized as revenue. BioChem will fund development of VX-710 in Canada,
including planned Phase II clinical trials in two different cancer indications.
Vertex will supply BioChem clinical and commercial drug supply needs. In 1996,
the Company received additional revenues related to the sale of clinical trial
material to BioChem. BioChem will pay Vertex a portion of its net sales, which
will cover Vertex's cost of supplying material and will provide a profit to
Vertex.

    The Company and Alpha are collaborating on the development and
commercialization of VX-366 for the treatment of sickle cell anemia and beta
thalassemia. Under the collaborative agreement, Alpha is obligated to pay the
Company up to $5.0 million comprised of an initial license fee and payments for
development and commercialization milestones. From the inception of the
agreement in October 1995 through the year ended December 31, 1996, $500,000 has
been recognized as revenue. In addition, Alpha is obligated to bear the costs of
development of VX-366 under the collaboration. The Company received additional
revenue related to reimbursements for clinical material during 1996. Alpha has
the right to terminate the agreement without cause upon six months notice at any
time. Termination will relieve Alpha of any further payment obligations under
the agreement and will end the license granted to Alpha by Vertex.

    The Company and Glaxo Wellcome are collaborating on the development of
compounds in connection with the Company's HIV Program. Under the collaborative
agreement, Glaxo Wellcome is obligated to pay the Company up to $42.0 million
comprised of a $15.0 million initial license payment paid in 1993, $14.0 million
of product research funding over five years and $13.0 million of development and
commercialization milestone payments. From the inception of the agreement in
December 1993 through the year ended December 31, 1996, $25.0 million has been
recognized as revenue. Glaxo Wellcome is also obligated to pay to Vertex
additional development and commercialization milestone payments for subsequent
drug candidates. In addition, Glaxo Wellcome agreed to bear the costs of
development of drug candidates under the collaboration. The Company has received
additional revenue related to reimbursements for clinical development. Under the
agreement, Glaxo Wellcome is also required to pay Vertex a royalty on sales.
Glaxo Wellcome has the right to terminate the research collaboration without
cause upon twelve months notice given at any time and has the right to terminate
the license arrangements without cause upon twelve months notice given at any
time provided such notice is not given before the research collaboration has
been terminated. Termination by Glaxo Wellcome of the research collaboration
will relieve Glaxo Wellcome of its obligation to make further research support
payments under the agreement. Termination by Glaxo Wellcome of the license
arrangements under the agreement will relieve it of its obligation to make
further commercialization and development milestone and royalty payments and
will end any license granted to Glaxo Wellcome by Vertex thereunder. In June
1996, the Company and Glaxo Wellcome obtained a worldwide, non-exclusive license
under certain Searle patent applications in the area of HIV protease inhibition.
Vertex paid $15.0 million and Glaxo Wellcome paid $10.0 million to Searle for
the license. The Company also agreed to pay Searle a royalty on sales of VX-478,
the Company's lead HIV compound. In connection with this transaction, a $5.0
million equity investment was made to the Company by Glaxo Wellcome.

    The Company and HMR are collaborating on the development of interleukin-1
beta converting enzyme inhibitors as anti-inflammatory agents. Under the
collaborative agreement, HMR is obligated to pay the Company up to $30.5
million, comprised of $18.5 million of product research funding over five years
and $12.0 million of development and commercialization milestone payments. From
the inception of the agreement in September 1993 through the year ended December
31, 1996, $14.5 million has been recognized as revenue. HMR has the right to
terminate the agreement without cause upon twelve months notice at any time. For
a period of one year after


                                      -38-
   39
any such termination, HMR retains the right to select one or more compounds for
development and to license such compound or compounds from Vertex, provided HMR
resumes all research funding and commercialization milestone payments and makes
all such payments that would otherwise have been due but for such termination.
Otherwise, in the case of such termination, all rights to compounds developed
under the research and license agreements will revert to Vertex.

    The Company and Kissei are collaborating on the development of Vertex's
VX-478 protease inhibitor. Under the collaborative agreement, Kissei is
obligated to pay the Company up to $20.0 million, comprised of $9.8 million of
product research funding through 1995, $7.0 million of development milestone and
territory option payments and a $3.2 million equity investment. From the
inception of the agreement in April 1993 through the year ended December 31,
1996, $17.8 million has been received, including $14.6 million recognized as
revenue and $3.2 million as an equity investment. The Company received
additional revenue related to reimbursements for clinical development during
this period. Under the collaboration, Kissei is also required to pay Vertex a
royalty on sales.

      In March 1997, the Company completed a public offering of 3,450,000 shares
of its common stock, which included an over-allotment exercised by the
underwriters for 450,000 shares, at a price to the public of $45.50 per share,
with net proceeds to the Company of approximately $148,863,000. In August 1996,
the Company completed a public offering of 3,450,000 shares of its common stock,
which included an over-allotment option exercised by the underwriters for
450,000 shares, at a price to the public of $24 per share, with net proceeds to
the Company of approximately $77,515,000. In June 1996, Glaxo Wellcome purchased
151,792 shares of the Company's common stock at a price of $32.94 per share,
with net proceeds to the Company of approximately $5.0 million. In November
1994, the Company sold 1,200,000 shares of common stock in a private placement
to a subsidiary of BB Biotech AG at a price of $12.50 per share, with net
proceeds to the Company of approximately $15,000,000. In February 1994, the
Company sold 3,450,000 shares of common stock in a public offering at a price to
the public of $18.00 per share, with net proceeds to the Company of
approximately $58,062,000.

    In March 1995, the Company signed a ten-year operating lease for additional
facilities for occupancy in early 1996. The Company has occupied approximately
53,000 square feet of space under this lease and has agreed to occupy
approximately 60,000 square feet in total during the lease period in order to
meet its longer-term expansion needs. The costs to lease and equip these
facilities will be funded, in whole or in part, through existing cash and
investments and through lease financing, which has been made available to the
Company on acceptable terms. During 1995, the Company deposited $2,316,000 with
its bank to collateralize a conditional letter of credit in the name of the
landlord. The letter of credit is redeemable only if the Company defaults on the
lease under specific criteria. These funds are restricted from the Company's
use, although the Company is entitled to all interest earned on the funds. The
Company expects to continue its current practice of leasing most of its capital
equipment, provided such lease financing continues to be available to the
Company on commercially acceptable terms.

    The Company's aggregate cash and investments were $130,359,000 at December
31, 1996, an increase of $43,381,000 from December 31, 1995. Cash used by
operations was $40,253,000 in the year ended December 31, 1996. The Company
expended $3,983,000 to acquire property and equipment, principally for research
equipment and facilities. To fund these expenditures, the Company entered into
equipment lease financing in the aggregate amount of $3,727,000. In addition,
the Company repaid $2,187,000 of its lease obligations during 1996.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The information required by Item 8 is contained on pages F-1 though F-17
of this report.


                                      -39-
   40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE

      Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information regarding directors required by this Item is included in
the definitive Proxy Statement for the Company's 1997 Annual Meeting of
Stockholders, to be filed with the Commission on or about April 7, 1997 (the
"1997 Proxy Statement"), under "Election of Directors" and is incorporated
herein by reference. The information regarding executive officers required by
this Item is included in Part I of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

      The information required by this Item is included in the 1997 Proxy
Statement under "Executive Compensation" and is incorporated herein by reference
(excluding, however, the "Report on Executive Compensation" and the Performance
Graph contained in the 1997 Proxy Statement, which shall not be deemed
incorporated herein).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by this Item is included in the 1997 Proxy
Statement under "Security Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Not applicable.


                                      -40-
   41
                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS. The Financial Statements required to be filed by
       Item 8 of this Annual Report on Form 10-K, and filed herewith, are as
       follows:

                                                                 Page Number in
                                                                 this Form 10-K
                                                                 --------------
       Report of Independent Accountants ..........................    F-2

       Consolidated Balance Sheets as of December 31, 1996 and 1995    F-3

       Consolidated Statements of Operations for the years ended
       December 31, 1996, 1995 and 1994 ...........................    F-4

       Consolidated Statements of Stockholders' Equity for the
       years ended December 31, 1996, 1995 and 1994 ...............    F-5

       Consolidated Statements of Cash Flows for the years ended
       December 31, 1996, 1995 and  1994 ..........................    F-6

       Notes to Consolidated Financial Statements .................    F-7

(a)(2) FINANCIAL STATEMENT SCHEDULES.

       Financial Statement Schedules have been omitted because they are either
       not applicable or the required information is included in the
       consolidated financial statements or notes thereto.

(a)(3) EXHIBITS.

EXHIBIT                       EXHIBIT
NUMBER                        DESCRIPTION
- ------                        -----------

3.1      Restated Articles of Organization (filed as Exhibit 3.1 to the
         Company's Registration Statement on Form S-1 (Registration No.
         33-43874) and incorporated herein by reference).

3.2      Articles of Amendment filed with the Commonwealth of Massachusetts on
         May 17, 1995 (filed as Exhibit 3.1 to the Company's Quarterly Report on
         Form 10-Q for the quarter ended June 30, 1995 (File No. 0-19319) and
         incorporated herein by reference).

3.3      By-laws of the Company (filed as Exhibit 3.2 to the Company's
         Registration Statement on Form S-1 (Registration No. 33-43874) and
         incorporated herein by reference).

3.4      Certificate of Vote of Directors Establishing a Series of a Class of
         Stock, as filed with the Secretary of the Commonwealth of Massachusetts
         on July 31, 1991 (filed as Exhibit 3.3 to the Company's Registration
         Statement on Form S-1 (Registration No. 33-43874) and incorporated
         herein by reference).


                                      -41-
   42
4.1      Specimen stock certificate (filed as Exhibit 4.1 to the Company's
         Registration Statement on Form S-1 (Registration No. 33-40966) or
         amendments thereto and incorporated herein by reference).

4.2      Stockholder Rights Plan (filed as Exhibit 4.2 to the Company's
         Registration Statement on Form S-1 (Registration No. 33-40966) or
         amendments thereto and incorporated herein by reference).

4.3      First Amendment to Rights Agreement dated as of February 21, 1997
         (filed herewith).

10.1     1991 Stock Option Plan, as amended and restated as of May 13, 1993
         (filed as Exhibit 28.1 to the Company's Registration Statement on Form
         S-8 (No. 33-65742) and incorporated herein by reference).*

10.2     1994 Stock and Option Plan (filed as Exhibit 10.2 to the Company's 1994
         Annual Report on Form 10-K (File No. 0-19319) and incorporated herein
         by reference).*

10.3     1996 Stock and Option Plan (filed herewith).

10.4     Non-Competition and Stock Repurchase Agreement between the Company and
         Joshua Boger, dated April 20, 1989 (filed as Exhibit 10.2 to the
         Company's Registration Statement on Form S-1 (Registration No.
         33-40966) or amendments thereto and incorporated herein by reference).*

10.6     Form of Employee Stock Purchase Agreement (filed as Exhibit 10.3 to the
         Company's Registration Statement on Form S-1 (Registration No.
         33-40966) or amendments thereto and incorporated herein by reference).*

10.7     Form of Employee Non-Disclosure and Inventions Agreement (filed as
         Exhibit 10.4 to the Company's Registration Statement on Form S-1
         (Registration No. 33-40966) or amendments thereto and incorporated
         herein by reference).

10.8     Form of Executive Employment Agreement executed by Richard H. Aldrich,
         Joshua S. Boger, and Vicki L. Sato (filed as Exhibit 10.6 to the
         Company's 1994 Annual Report on Form 10-K (File No. 0-19319) and
         incorporated herein by reference).*

10.9     Form of Amendment to Employment Agreement executed by Richard H.
         Aldrich, Joshua S. Boger and Vicki L. Sato  (filed as Exhibit 10.1 to
         the Company's Quarterly Report on Form 10-Q for the quarter ended June
         30, 1995 (File No. 0-19319) and incorporated herein by reference).

10.10    Series C Convertible Preferred Stock Purchase Agreement between the
         Company and the party named therein, dated September 21, 1990 (filed as
         Exhibit 10.8 to the Company's Registration Statement on Form S-1
         (Registration No. 33-40966) or amendments thereto and incorporated
         herein by reference).

10.11    Stock Purchase Agreement dated November 10, 1994 between the Company
         and Biotech Target S.A. (filed as Exhibit 10.12 to the Company's 1994
         Annual Report on Form 10-K (File No. 0-19319) and incorporated herein
         by reference).

10.12    Lease dated October 1, 1992 between C. Vincent Vappi and the Company
         relating to the premises at 40 Allston Street, 618 Putnam Street, 228
         Sidney Street, and 240 Sidney Street (filed as Exhibit 10.14 to the
         Company's Annual Report on Form 10-K for the year ended December 31,
         1992 (File No. 0-19319) and incorporated herein by


                                      -42-
   43
         reference).

10.13    First Amendment as of March 1, 1995 to the lease between C. Vincent
         Vappi and the Company (filed as Exhibit 10.2 to the Company's Quarterly
         Report on Form 10-Q for the quarter ended June 30, 1995 (File No.
         0-19319) and incorporated herein by reference).

10.14    Second Amendment as of February 12, 1997 to Lease between C. Vincent
         Vappi and the Company (filed herewith).

10.15    Lease dated March 1, 1993, between Fort Washington Realty Trust and the
         Company, relating to the premises at 625 Putnam Avenue, Cambridge, MA
         (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for
         the year ended December 31, 1993 (File No. 0-19319) and incorporated
         herein by reference).

10.16    First Amendment, dated 1 December 1996, to Lease between Fort
         Washington Realty Trust and the Company dated 1 March 1993 (filed
         herewith).

10.17    Lease dated March 3, 1995, between Fort Washington Realty Trust and the
         Company, relating to the premises at 130 Waverly Street, Cambridge, MA
         (filed as Exhibit 10.15 to the Company's 1994 Annual Report on Form
         10-K (File No. 0-19319) and incorporated herein by reference).

10.18    First Amendment to Lease dated March 3, 1995 between Fort Washington
         Realty Trust and the Company (filed as Exhibit 10.15 to the Company's
         1995 Annual Report on Form 10-K (File No. 0-19319) and incorporated
         herein by reference).

10.19    Research and Development Agreement dated April 13, 1993 between the
         Company and Kissei Pharmaceutical Co., Ltd. (with certain confidential
         information deleted) (filed as Exhibit 10.1 to the Company's Quarterly
         Report on Form 10-Q for the quarter ended March 31, 1993 (File No.
         0-19319) and incorporated herein by reference).

10.20    Research, Development, and License Agreement dated September 8, 1993
         between the Company and Roussel Uclaf (with certain confidential
         information deleted) (filed as Exhibit 10.1 to the Company's Quarterly
         Report on Form 10-Q for the quarter ended September 30, 1993 (File No.
         0-19319) and incorporated herein by reference).

10.21    License Agreement dated August 6, 1993 between the Company and
         Children's Hospital Medical Center of Northern California (with certain
         confidential information deleted) (filed as Exhibit 10.2 to the
         Company's Quarterly Report on Form 10-Q for the quarter ended September
         30, 1993 (File No. 0-19319) and incorporated herein by reference).

10.22    Research Agreement and License Agreement, both dated December 16, 1993,
         between the Company and Burroughs Wellcome Co. (with certain
         confidential information deleted) (filed as Exhibit 10.16 to the
         Company's Annual Report on Form 10-K for the year ended December 31,
         1993 (File No. 0-19319) and incorporated herein by reference).

10.23    License Agreement dated October 2, 1995 between the Company and Alpha
         Therapeutic Corporation (with certain confidential information deleted)
         (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
         for the quarter ended September 30, 1995 (File No. 0-19319) and
         incorporated herein by reference).


                                      -43-
   44
10.24    License Agreement and Supply Agreement, both dated May 9, 1996, between
         the Company and BioChem Pharma (International) Inc. (with certain
         confidential information deleted)(filed as Exhibit 10.1 to the
         Company's Quarterly Report on 10-Q for the quarter ended March 31, 1996
         (File No. 0-19319) and incorporated herein by reference).

21       Subsidiaries of the Company (filed as Exhibit 21 to the Company's
         Annual Report on Form 10-K for the year ended December 31, 1995 (File
         no. 0-19319) and incorporated herein by reference).

23       Consent of Independent Accountants (filed herewith).

27       Financial Data Schedule (submitted as an exhibit only in the electronic
         format of this Annual Report on Form 10-K submitted to the Securities
         and Exchange Commission.

- ----------------

*        Compensatory plan or agreement applicable to management and employees.


(b)      Reports on Form 8-K. No reports on Form 8-K were filed by the Company
         during the quarter ended December 31, 1996.


                                      -44-
   45
                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                             VERTEX PHARMACEUTICALS INCORPORATED



      March 27, 1997          By:   /s/Joshua S. Boger
                                    ----------------------------------------
                                    Joshua S. Boger
                                    President and Chief Executive Officer


      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Name                                      Title                        Date
- ----

/s/Joshua S. Boger               Director, President and          March 27, 1997
- -----------------------------    Chief Executive Officer                
Joshua S. Boger                  (Principal Executive Officer)


/s/Thomas G. Auchincloss, Jr.    Vice President of Finance        March 27, 1997
- -----------------------------    and Treasurer                          
Thomas G. Auchincloss, Jr.       (Principal Financial Officer)

/s/Hans D. van Houte             Controller                       March 27, 1997
- -----------------------------                                           
Hans D. van Houte


/s/Barry M. Bloom                Director                         March 25, 1997
- -----------------------------                                           
Barry M. Bloom


                                 Director                         March   , 1997
- -----------------------------                                           
Donald R. Conklin


/s/Roger W. Brimblecombe         Director                         March 27, 1997
- -----------------------------                                           
Roger W. Brimblecombe


/s/William W. Helman IV          Director                         March 27, 1997
- -----------------------------                                           
William W. Helman IV


/s/Charles A. Sanders            Director                         March 25, 1997
- -----------------------------                                           
Charles A. Sanders


                                      -45-
   46
                       VERTEX PHARMACEUTICALS INCORPORATED

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                             Page Number
                                                             -----------
Report of Independent Accountants                                 F-2

Consolidated Balance Sheets as of December 31, 1996 and 1995      F-3

Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994                                  F-4

Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994                      F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and  1994                                 F-6

Notes to Consolidated Financial Statements                        F-7


                                      F-1
   47
REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders
Vertex Pharmaceuticals Incorporated:

We have audited the accompanying consolidated balance sheets of Vertex
Pharmaceuticals Incorporated and Subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Vertex
Pharmaceuticals Incorporated and Subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.



                                    /s/ Coopers & Lybrand L.L.P.
                                    Coopers & Lybrand L.L.P.

Boston, Massachusetts
February 18, 1997


                                      F-2
   48
CONSOLIDATED BALANCE SHEETS
VERTEX PHARMACEUTICALS INCORPORATED



                                                                                           December 31,
                                                                  Pro Forma 1996     -----------------------
(Dollars in thousands)                                      (Note N) (unaudited)        1996          1995
- ------------------------------------------------------------------------------------------------------------
                                                                                                
Assets
  Current assets:
     Cash and cash equivalents                                         $ 183,714     $  34,851     $  28,390
     Short-term investments                                               95,508        95,508        58,588
     Prepaid expenses and other current assets                             1,791         1,791           959
- ------------------------------------------------------------------------------------------------------------
       Total current assets                                              281,013       132,150        87,937
  Restricted cash                                                          2,316         2,316         2,316
  Property and equipment, net                                              8,663         8,663         7,840
  Other assets                                                               370           370           888
- ------------------------------------------------------------------------------------------------------------
       Total assets                                                    $ 292,362     $ 143,499     $  98,981
- ------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
  Current liabilities:
     Obligations under capital lease                                   $   2,910     $   2,910     $   2,075
     Accounts payable                                                      1,391         1,391         3,022
     Accrued expenses                                                      2,755         2,755         3,503
     Deferred revenue                                                         --            --           197
- ------------------------------------------------------------------------------------------------------------
       Total current liabilities                                           7,056         7,056         8,797
  Obligations under capital lease, excluding current portion               5,617         5,617         4,912
- ------------------------------------------------------------------------------------------------------------
       Total liabilities                                                  12,673        12,673        13,709
- ------------------------------------------------------------------------------------------------------------
  Commitments (Note H)
  Stockholders' equity:
     Preferred stock, $.01 par value; 1,000,000 shares  authorized;
       none issued
     Common stock, $.01 par value; 50,000,000 shares authorized;
       21,097,117 and 17,299,139 shares issued and outstanding
       in 1996 and 1995, respectively. (24,547,117 shares issued
       and outstanding, pro forma 1996, unaudited)                           246           211           173
     Additional paid-in capital                                          376,338       227,510       142,038
     Equity adjustments                                                       49            49            --
     Accumulated deficit                                                 (96,944)      (96,944)      (56,939)
- ------------------------------------------------------------------------------------------------------------
       Total stockholders' equity                                        279,689       130,826        85,272
- ------------------------------------------------------------------------------------------------------------
       Total liabilities and stockholders' equity                      $ 292,362     $ 143,499     $  98,981
- ------------------------------------------------------------------------------------------------------------


The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-3
   49
CONSOLIDATED STATEMENTS OF OPERATIONS
VERTEX PHARMACEUTICALS INCORPORATED



                                                               Year Ended December 31,
                                                        ----------------------------------
(In thousands, except per share data)                      1996         1995         1994
- ------------------------------------------------------------------------------------------
                                                                              
Revenues:
  Collaborative and other research and development      $ 13,341     $ 22,081     $ 19,571
  Interest income                                          5,257        5,453        3,574
                                                        --------     --------     --------
     Total revenues                                       18,598       27,534       23,145
- ------------------------------------------------------------------------------------------
Costs and expenses:
  Research and development                                35,212       41,512       34,761
  General and administrative                               7,929        7,069        5,540
  License payment                                         15,000           --           --
  Interest                                                   462          481          439
                                                        --------     --------     --------
     Total costs and expenses                             58,603       49,062       40,740
- ------------------------------------------------------------------------------------------
Net loss                                                $(40,005)    $(21,528)    $(17,595)
- ------------------------------------------------------------------------------------------
Net loss per common share                               $  (2.13)    $  (1.25)    $  (1.11)
Weighted average number of common shares outstanding      18,798       17,231       15,818
- ------------------------------------------------------------------------------------------


The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-4
   50
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
VERTEX PHARMACEUTICALS INCORPORATED



                                                 Common Stock        Additional
                                             -------------------      Paid-In      Equity    Accumulated
(In thousands)                               Shares      Amount       Capital   Adjustments    Deficit       Total
- -------------------------------------------------------------------------------------------------------------------
                                                                                              
Balance, December 31, 1993                   12,484     $    125     $ 67,211                 $(17,816)    $ 49,520
Issuances of common stock:
  Public offering of common stock             3,450           34       58,028                                58,062
  Private placement of common stock           1,200           12       14,988                                15,000
  Benefit plans                                  61            1          693                                   694
Repurchases of common stock, at cost             (6)
Net change in unrealized holding gains/
  losses on marketable securities                                                $   (205)                     (205)
Translation adjustments                                                                 2                         2
Net loss                                                                                       (17,595)     (17,595)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994                   17,189          172      140,920        (203)     (35,411)     105,478
Issuances of common stock:
  Benefit plans                                  93            1        1,118                                 1,119
  Warrant exercise                               17
Net change in unrealized holding gains/
  losses on marketable securities                                                     203                       203
Net loss                                                                                       (21,528)     (21,528)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995                   17,299          173      142,038          --      (56,939)      85,272
Issuances of common stock:
  Public offering of common stock             3,450           34       77,481                                77,515
  Private placement of common stock             152            2        4,998                                 5,000
  Benefit plans                                 196            2        2,993                                 2,995
Net change in unrealized holding gains/
  losses on marketable securities                                                      35                        35
Translation adjustments                                                                14                        14
Net loss                                                                                       (40,005)     (40,005)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                   21,097     $    211     $227,510    $     49     $(96,944)    $130,826
- -------------------------------------------------------------------------------------------------------------------


The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-5
   51
CONSOLIDATED STATEMENTS OF CASH FLOWS
VERTEX PHARMACEUTICALS INCORPORATED



                                                                  Year Ended December 31,
                                                           ----------------------------------
(In thousands)                                                1996         1995         1994
- ---------------------------------------------------------------------------------------------
                                                                                  
Cash flows from operating activities:
  Net loss                                                 $(40,005)    $(21,528)    $(17,595)
  Adjustment to reconcile net income (loss) to net
     cash used by operating activities:
     Depreciation and amortization                            3,160        3,710        3,485
  Changes in assets and liabilities:
     Prepaid expenses and other current assets                 (832)        (549)         619
     Accounts payable                                        (1,631)       1,624       (2,080)
     Accrued expenses                                          (748)       1,231        1,106
     Deferred revenue                                          (197)        (438)        (219)
                                                           --------     --------     --------
       Net cash provided (used) by operating activities     (40,253)     (15,950)     (14,684)
- ---------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Purchases of short-term investments                       (73,035)     (61,862)     (83,850)
  Sales and maturities of short-term investments             36,150       38,304       72,346
  Deposit to collateralize letter of credit                      --       (2,316)          --
  Expenditures for property and equipment                    (3,983)      (3,078)      (4,230)
  Other assets                                                  518          (65)        (690)
                                                           --------     --------     --------
       Net cash provided (used) by investing activities     (40,350)     (29,017)     (16,424)
- ---------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Repayment of capital lease obligations                     (2,187)      (1,790)      (1,902)
  Proceeds from equipment sale/leaseback                      3,727        2,385        2,320
  Proceeds from public offerings of common stock             77,515           --       58,062
  Proceeds from private placement of common stock             5,000           --       15,000
  Proceeds from other issuances of capital stock              2,995        1,119          694
                                                           --------     --------     --------
       Net cash provided (used) by financing activities      87,050        1,714       74,174
- ---------------------------------------------------------------------------------------------
  Effect of exchange rates on cash                               14           --            2
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents              6,461      (43,253)      43,068
Cash and cash equivalents at beginning of year               28,390       71,643       28,575
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                   $ 34,851     $ 28,390     $ 71,643
- ---------------------------------------------------------------------------------------------


The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-6
   52
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. THE COMPANY

Vertex Pharmaceuticals Incorporated (the "Company") uses a range of drug
discovery technologies to identify, design and develop novel, orally deliverable
compounds that have the potential to treat major human diseases. To date, the
Company has not received any revenues from the sale of pharmaceutical products
and does not expect to receive such revenues in the near future. The Company's
revenues during 1996 principally resulted from research support payments from
corporate partners. The Company expects to incur significant operating losses
over the next several years as a result of expenditures for its research and
development programs.

The consolidated financial statements include the accounts of the Company and
its subsidiaries, Altus Biologics Inc., Vertex Securities Corporation, Vertex
Pharmaceuticals (Europe) Limited and Versal Technologies, Inc. All material
intercompany transactions are eliminated.

The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, technological and clinical trial
uncertainty, dependence on collaborative partners, share price volatility, the
need to obtain additional funding, reliance on pharmaceutical pricing and
reimbursement, uncertainties regarding manufacturing and sales and marketing,
product liability and compliance with government regulations.

B.  ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash equivalents, which are debt securities, are valued at cost plus accrued
interest. The Company considers all highly liquid investments with original
maturities of three months or less at the date of purchase to be cash
equivalents. Changes in cash and cash equivalents may be affected by shifts in
investment portfolio maturities as well as by actual cash receipts and
disbursements.

Short-term Investments

Short-term investments consist of marketable securities which are classified as
available-for-sale. Short-term investments are stated at fair value with
unrealized gains and losses included as a component of stockholders' equity
until realized. The fair value of these securities is based on quoted market
prices.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are
provided using the straight-line method over the lesser of the lease terms or
the estimated useful lives of the related assets, generally four or five years
for equipment and furniture and three years for purchased


                                      F-7
   53
software. When assets are retired or otherwise disposed of, the assets and
related allowances for depreciation and amortization are eliminated from the
accounts and any resulting gain or loss is reflected in income.

Revenue Recognition

Revenue under research and development arrangements is recognized as earned
under the terms of the respective agreements. License payments are recorded when
received and the license agreements are signed. Product research funding is
recorded as revenue, generally on a quarterly basis, as research effort is
incurred. Deferred revenue arises from payments received which have not yet been
earned under research and development arrangements. The Company recognizes
milestone payments when the milestones are achieved.

Research and Development

All research and development costs are expensed as incurred.

Income Taxes

The Company provides for federal and state taxes on pretax income at applicable
rates in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Potential future income tax benefits resulting
from net operating losses and unused research and experimentation tax credits
are available to offset future income.

Net Loss per Common Share

Net loss per share is computed on the weighted average number of common shares
outstanding during the period.


                                      F-8
   54
C.  FINANCIAL INSTRUMENTS

Financial instruments consist of the following at December 31 (in thousands):



                                           1996                  1995
                                   -------------------   -------------------
                                     Cost   Fair Value     Cost   Fair Value
- ----------------------------------------------------------------------------
                                                            
Cash                               $21,253    $21,253    $28,390    $28,390
Cash equivalents
    Corporate debt securities       13,598     13,598         --         --
                                   -------    -------    -------    -------
Total cash and cash equivalents    $34,851    $34,851    $28,390    $28,390
                                   =======    =======    =======    =======
Short-term investments
    US Government securities
      Due within 1 year            $ 7,555    $ 7,568    $ 7,622    $ 7,628
      Due within 1 to 5 years           --         --      7,591      7,606
    Corporate debt securities
      Due within 1 year             64,140     64,155     29,590     29,486
      Due within 1 to 5 years       23,780     23,785     13,787     13,868
                                   -------    -------    -------    -------
Total short-term investments       $95,475    $95,508    $58,590    $58,588
                                   =======    =======    =======    =======


Gross unrealized holding gains and losses at December 31, 1996, were $89,000 and
$56,000, respectively, and at December 31, 1995, $154,000 and $156,000,
respectively. The effect of gross realized gains and losses on the financial
statements for the years 1996 and 1995 was immaterial. The cost of securities is
based on specific identification.

D.  RESTRICTED CASH

On March 16, 1995, the Company signed a ten-year operating lease for additional
facilities to be occupied in 1996. In accordance with the lease agreement, the
Company was required to deposit approximately $2,316,000 with its bank to
collateralize a conditional, stand-by letter of credit in the name of the
landlord. The letter of credit is redeemable only if the Company defaults on the
lease under specific criteria. These funds are restricted from the Company's use
during the lease period, although the Company is entitled to all interest earned
on the funds.

E.  PROPERTY AND EQUIPMENT

Property and equipment consist of (in thousands):



                                                     December 31,
                                                    1996       1995
- --------------------------------------------------------------------
                                                           
Leasehold improvements                            $ 4,719    $ 4,558
Furniture and equipment                             2,260      2,244
Purchased software                                  2,418      2,345
Equipment under capital lease                      19,303     15,570
- --------------------------------------------------------------------
                                                   28,700     24,717
Less accumulated depreciation and amortization     20,037     16,877
- --------------------------------------------------------------------
                                                  $ 8,663    $ 7,840
- --------------------------------------------------------------------


The net book value of equipment under capital lease was $7,366,000 and
$6,172,000 at December 31, 1996 and 1995, respectively.


                                      F-9
   55
F.  CAPITAL LEASES

At December 31, 1996, long-term capital lease obligations were as follows (in
thousands):



Year ended December 31,
- ------------------------------------------------------------------------------
                                                                        
1997                                                                    $3,429
1998                                                                     2,358
1999                                                                     1,769
2000                                                                     1,164
2001                                                                     1,030
- ------------------------------------------------------------------------------
  Total                                                                  9,750
Less amount representing interest payments                               1,223
- ------------------------------------------------------------------------------
Present value of minimum lease payments                                  8,527
Less current portion                                                     2,910
- ------------------------------------------------------------------------------
                                                                        $5,617
- ------------------------------------------------------------------------------


During 1996 and 1995, the Company financed under capital lease arrangements an
aggregate of $3,727,000 and $2,385,000, respectively, of asset cost under its
master lease agreements. These agreements have a term of four or five years, and
require that the Company maintain a certain level of cash and investments. At
the end of the lease term, the Company has the right to either return the
equipment to the lessor or purchase the equipment for fair market value at that
time. Interest paid under capital leases was $462,000 and $481,000 in 1996 and
1995, respectively. At December 31, 1996, the Company had availability under its
1996 master lease agreement to finance up to an additional $2,194,000 of
equipment.

G.  ACCRUED EXPENSES

Accrued expenses consist of (in thousands):



                                                               December 31,
                                                             1996         1995
- ------------------------------------------------------------------------------
                                                                     
Professional fees                                          $1,196       $  759
Development contract costs                                    317        1,867
Other                                                       1,242          877
- ------------------------------------------------------------------------------
                                                           $2,755       $3,503
- ------------------------------------------------------------------------------


H.  COMMITMENTS

Facilities and Equipment

The Company's facilities are leased under operating leases. The Company's
long-term facilities leases have terms through the year 2005 and have
noncancelable future minimum payments of $2,655,000 in 1997, $2,636,000 in 1998
and 1999, and $2,033,000 in the years 2000 and 2001. Rental expense was
$3,063,000, $1,281,000, and $842,000 in 1996, 1995 and 1994, respectively.

Software

The Company has certain license and maintenance contracts that contain future,
committed payments for the support and upgrade of specific software programs
currently used in research. For the years 1997, 1998, 1999, 2000 and 2001, these
amounts are $176,000, $194,000, $213,000, $234,000 and $258,000, respectively.


                                      F-10
   56
I.  INCOME TAXES

The Company's federal statutory income tax rate for 1996, 1995 and 1994 was 34%.
The Company recorded no income tax benefit for 1996, 1995 and 1994 due to full
valuation allowance recorded against net operating losses.

Deferred tax liabilities and assets are determined based on the difference
between financial statement and tax bases using enacted tax rates in effect for
the year in which the differences are expected to reverse. The components of the
deferred taxes were as follows (in thousands):



                                    1996         1995
                                 ---------------------
                                             
Net operating loss               $ 30,567     $ 17,191
Tax credits carryforward            4,089        3,233
Property, plant and equipment       1,253        1,327
Other                                 526          416
                                 ---------------------
Gross deferred tax asset           36,435       22,167
Valuation allowance               (36,435)     (22,167)
                                 ---------------------
Net deferred tax balance         $     --     $     --
                                 =====================


For federal income tax purposes, as of December 31, 1996, the Company has
regular tax net operating loss carryforwards of approximately $89,903,000 and
$4,089,000 of tax credits, which may be used to offset future income. These net
operating loss carryforwards expire beginning in 2005, and the tax credit
carryforwards begin to expire in 2004.

The amount of tax credits and net operating loss carryforwards that the Company
may utilize in any one year is limited, in accordance with Internal Revenue Code
Section 382. This limitation arises whenever a cumulative change in ownership in
excess of 50% occurs. A change of ownership has occurred which will limit the
amount of net operating loss and tax credits available prior to the change.
There may also be a second change of ownership subsequent to 1996 which may also
limit the amount of net operating loss and tax credit utilization in a
subsequent year.




J.  COMMON AND PREFERRED STOCK

Common Stock

In August 1996, the Company completed a public offering of 3,450,000 shares of
its common stock at a price of $24 per share with net proceeds to the Company of
approximately $77,515,000. In June 1996, Glaxo Wellcome purchased 151,792 shares
of the Company's common stock at a price of $32.94 per share, with net proceeds
to the Company of approximately $5,000,000. In November 1994, the Company sold
an additional 1,200,000 shares of common stock in a private placement to a
subsidiary of BB Biotech AG at a price of $12.50 per share, with net proceeds to
the Company of approximately $15,000,000. In February 1994, the Company sold
3,450,000 shares of its $.01 par value common stock in an underwritten public
offering at a price to the public of $18.00 per share, with net proceeds to the
Company of approximately $58,062,000.


                                      F-11
   57
During 1996, an additional 100,000 shares were reserved for the Company's 401(k)
Plan and an additional 150,000 shares were reserved for the Company's Employee
Stock Purchase Plan. At December 31, 1996, 5,813,988 shares of the Company's
common stock were reserved for exercise of common stock options granted or to be
granted under its 1991 Stock Option Plan, 1994 Stock and Option Plan, and 1996
Stock and Option Plan, 48,999 shares were reserved for exercise of certain other
options granted in 1991, 125,955 shares of common stock were reserved for
issuance under the Company's 401(k) Plan, and 140,111 shares of common stock
were reserved for issuance under the Company's Employee Stock Purchase Plan.

Stock Option Plans

The Company applies APB Opinion No. 25 and related interpretations in accounting
for its plans. However, pro forma disclosures as if the Company adopted the cost
recognition requirements under FASB Statement No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") in 1996 and 1995 are presented below. No
compensation expense was recognized for these plans in 1996, 1995 and 1994.

The Company's 1991 Stock Option Plan (the "1991 Plan"), reserved shares for
granting up to 2,000,000 options as either options intended to qualify as
"incentive stock options" under the Internal Revenue Code or non-qualified stock
options. The Company's 1994 Stock and Option Plan (the "1994 Plan") reserved an
additional 2,000,000 shares to the number of shares previously reserved under
the 1991 Plan which are not granted under the plan or which cease to be
outstanding by reason of cancellation. The Company's 1996 Stock and Option Plan
(the "1996 Plan"; together with the 1991 Plan and the 1994 Plan, the "Plans")
reserved an additional 2,000,000 shares to the 1991 Plan and the 1994 Plan.
Under the 1994 Plan and the 1996 Plan, stock rights, which are either (i)
incentive stock options, (ii) non-qualified stock options ("NQSOs"), or (iii)
award shares of common stock or the opportunity to make a direct purchase of
shares of common stock ("Stock Awards"), may be granted to employees (including
officers and directors who are employees), consultants, advisors and
non-employee directors (NQSOs and stock awards only), either as options intended
to qualify as "incentive stock options" under the Internal Revenue Code or as
non-qualified stock options. Incentive stock options granted under the Plans may
not be granted at a price less than the fair market value of the common stock on
the date of grant. Non-qualified stock options may be granted at an exercise
price established by the Compensation Committee of the Board of Directors, which
may be less than, equal to or greater than the fair value of the common stock on
the date of grant. Vesting periods, generally four or five years, are determined
by the Compensation Committee. Incentive stock options granted under the Plans
must expire not more than ten years from the date of grant.


                                      F-12
   58
Stock option activity for the years ended December 31, 1996, 1995 and 1994 is as
follows (shares in thousands):



                                     1996                  1995                 1994
                              ------------------   ------------------   ------------------
                                        Weighted             Weighted             Weighted
                                        Average              Average              Average
                                        Exercise             Exercise             Exercise
                              Shares      Price    Shares      Price    Shares      Price
                              ------    --------   ------    --------   ------    --------
                                                                   
Outstanding at
  beginning of year            3,196     $14.63     2,523     $13.13     1,660     $13.36
Granted                        1,056     $31.11       829     $18.77       935     $12.64
Exercised                       (139)    $12.96       (42)    $11.48       (10)    $ 9.72
Canceled                         (80)    $16.11      (114)    $12.51       (62)    $12.46
                              ------                -----                -----
Outstanding at end
  of year                      4,033     $18.98     3,196     $14.63     2,523     $13.13
                              ------                -----                -----
Options exercisable
  at year-end                  1,625     $13.92     1,152     $12.99       662     $12.74
                              ------                -----                -----
Weighted average fair
  value of options granted
  during the year             $15.04                $9.05
                              ------                -----


The fair value of each option granted during 1996 and 1995 was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions: (1) expected life of 5.41 years (2) expected
volatility of 42% (3) risk-free interest rate of 6.30% and (4) no dividend
yield.

The following table summarizes information about stock options outstanding and
exercisable at December 31, 1996 (shares in thousands):



                              Options Outstanding                   Options Exercisable
                   -------------------------------------------    -----------------------
                                     Weighted         Weighted                   Weighted
                                      Average         Average                    Average
Range of              Number         Remaining        Exercise      Number       Exercise
exercise prices    Outstanding    Contractual Life     Price      Exercisable      Price
- ---------------    -----------    ----------------    --------    -----------    --------
                                                                     
$ 6.48 - $ 9.72         145             6.1            $ 8.28          133        $ 8.33
$ 9.73 - $14.58       1,291             7.3            $12.25          822        $12.22
$14.59 - $21.87       1,538             7.9            $17.30          644        $16.48
$21.88 - $32.80       1,002             9.8            $30.73           10        $25.95
$32.81 - $37.50          57             9.5            $37.17           16        $37.14
                      -----                                          -----        
$ 6.48 - $37.50       4,033             8.1            $18.98        1,625        $13.92
                      -----                                          -----        

                                                                              
Employee Stock Purchase Plan

Under the Company's Employee Stock Purchase Plan, substantially all permanent
employees may, through payroll withholdings, purchase shares of the Company's
common stock at a price of 85% of the lesser of fair market value at the
beginning or end of each six-month withholding period.


                                      F-13
   59
During 1996, 32,296 shares of common stock at an average price of $19.21 per
share were issued to employees under the plan. During 1995, 42,445 shares of
common stock at a price of $11.26 per share were issued to employees under the
plan. During 1994, 34,263 shares were issued at an average price of $10.73 per
share. Had the Company adopted SFAS 123, the weighted average fair value of each
purchase right granted during 1996 and 1995 would have been $5.76 and $3.25,
respectively. The fair value was estimated at the beginning of the withholding
period using the Black-Scholes option-pricing model with the following weighted
average assumptions: (1) expected life of one half year for both years (2)
expected volatility of 41% and 35% for 1996 and 1995 respectively (3) risk-free
interest rate of 5.50% for both years and (4) no dividend yield.

Pro forma Disclosures

Had compensation cost for the Company's 1996 and 1995 grants for stock-based
compensation plans been determined consistent with SFAS 123, the Company's net
loss and net loss per share for 1996 and 1995 would approximate the pro forma
amounts below (in thousands except per share data):



                                              1996                1995
                                              ----                ----
                                                             
Net loss              As reported           $(40,005)           $(21,528)
                       Pro forma            $(42,025)           $(21,750)

Net loss per share    As reported           $  (2.13)           $  (1.25)
                       Pro forma            $  (2.24)           $  (1.26)


The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to 1995, and
additional awards in future years are anticipated.

Warrants

During 1995, all remaining warrants, originally issued in connection with
equipment lease financing transactions, were exercised in non-cash, net exercise
transactions to acquire an aggregate of 16,801 shares of common stock.

Rights

Pursuant to the Company's Stockholder Rights Plan, under an amendment approved
by the Board of Directors on February 18, 1997, but not yet executed by the
rights agent, each holder of a share of outstanding common stock also holds one
share purchase right (a "Right") for each share of common stock. Each Right
entitles the holder to purchase from the Company one one-hundredth of a share of
Series A junior participating preferred stock, $.01 par value (the "Junior
Preferred Shares"), of the Company at a price of $270 per one one-hundredth of a
Junior Preferred Share (the "Purchase Price"). The Rights are not exercisable
until the earlier of acquisition by a person or group of 15% or more of the
outstanding common stock (an "Acquiring Person") or the announcement of an
intention to make or commencement of a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 15% or more of the outstanding common stock. In the event that any
person or group becomes an Acquiring Person, each holder of a Right other than
the Acquiring Person will thereafter have the right to receive upon exercise
that number of shares of common stock having a market value of two times the
Purchase Price and, in the event that the Company is acquired in a business
combination transaction or 50% or more of its assets are sold, each holder of a
Right will thereafter have the right to receive upon exercise that number of
shares of common stock of the acquiring company which at the time of the
transaction will have a market value of two times the Purchase Price. Under
certain specified circumstances, the Board of Directors of the Company may cause
the Rights (other than Rights owned by such person or group) to be exchanged, in


                                      F-14
   60
whole or in part, for common stock or Junior Preferred Shares, at an exchange
rate of one share of common stock per Right or one one-hundredth of a Junior
Preferred Share per Right. At any time prior to the acquisition by a person or
group of beneficial ownership of 15% or more of the outstanding common stock,
the Board of Directors of the Company may redeem the Rights in whole at a price
of $.01 per Right.

K.  COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS

The Company and BioChem Therapeutic Inc. ("BioChem") are collaborating on the
development and commercialization in Canada of VX-710, Vertex's lead multidrug
resistance reversal agent. Under the development agreement, BioChem is obligated
to pay Vertex up to $4,000,000 comprised of an initial licensing fee and
payments for development and commercialization milestones. From the inception of
the agreement in May 1996 through the year ended December 31, 1996, $500,000 has
been recognized as revenue. BioChem will fund development of VX-710 in Canada,
including planned Phase II clinical trials in two different cancer indications.
Vertex will supply BioChem's clinical and commercial drug supply needs. In 1996,
the Company received additional revenues related to the sale of clinical trial
material to BioChem. BioChem will pay Vertex a portion of its net sales, which
will cover Vertex's cost of supplying material and will provide a profit to
Vertex. Revenues earned from BioChem were $577,000 in 1996.

The Company and Alpha Therapeutic Corporation ("Alpha") are collaborating on the
development and commercialization of VX-366 for the treatment of sickle cell
disease and beta thalassemia. Under the collaborative agreement, Alpha is
obligated to pay the Company up to $5,000,000 comprised of an initial license
fee and payments for development and commercialization milestones. From the
inception of the agreement in October 1995 through the year ended December 31,
1996, $500,000 has been recognized as revenue. In addition, Alpha is obligated
to bear all costs of development of VX-366 under the collaboration. In 1996, the
Company received additional revenues related to the sale of clinical trial
material to Alpha. Alpha has the right to terminate the agreement without cause
upon six months' notice at any time. Termination will relieve Alpha of any
further payment obligations under the agreement and will end the license granted
to Alpha by Vertex. Vertex will supply Alpha's finished drug product needs and
will receive a royalty based on Alpha's product sales. Revenues earned from
Alpha were $225,000 and $500,000 in 1996 and 1995, respectively.

The Company and Glaxo Wellcome plc ("Glaxo Wellcome") are collaborating on the
development of compounds in connection with the Company's HIV Program. Under the
collaborative agreement, Glaxo Wellcome agreed to pay the Company up to
$42,000,000 comprised of a $15,000,000 initial license payment paid in 1993,
$14,000,000 of product research funding over five years and $13,000,000 of
development and commercialization milestone payments. From the inception of the
agreement in December 1993 through the year ended December 31, 1996,
$25,000,000, including a $2,000,000 milestone payment in December 1995 upon
commencement of a Phase I/II trial, has been recognized as revenue. Glaxo
Wellcome is also obligated to pay to Vertex additional development and
commercialization milestone payments for subsequent drug candidates. In
addition, Glaxo Wellcome agreed to bear all costs of development of drug
candidates under the collaboration. In 1994, 1995 and 1996, the Company received
additional revenue related to reimbursements for clinical development. Under the
agreement, Glaxo Wellcome is also required to pay Vertex a royalty on sales.
Glaxo Wellcome has the right to terminate the research collaboration without
cause upon twelve months' notice given at any time and has the right to
terminate the license arrangements without cause upon twelve months' notice
given at any time provided such notice is not given before the research
collaboration has been terminated. Termination by Glaxo Wellcome of the research
collaboration will relieve Glaxo Wellcome of its obligation to make further
research support payments under the agreement. Termination by Glaxo Wellcome of
the license arrangements under the agreement will relieve it of its obligation
to make further commercialization and development milestone and royalty payments
and will end any


                                      F-15
   61
license granted to Glaxo Wellcome by Vertex thereunder. Revenues earned from
Glaxo Wellcome were $6,289,000, $10,053,000 and $5,346,000 for 1996, 1995 and
1994. In June 1996, the Company and Glaxo Wellcome obtained a worldwide,
non-exclusive license under certain G.D. Searle & Co. ("Searle") patent
applications in the area of HIV protease inhibition. Vertex paid $15,000,000 and
Glaxo Wellcome paid $10,000,000 to Searle for the license. The Company also
agreed to pay Searle a royalty on sales of VX-478, the Company's lead HIV
compound.

The Company and Hoechst Marion Roussel ("HMR") are collaborating on the
development of interleukin-1 beta converting enzyme inhibitors as
anti-inflammatory agents. Under the collaborative agreement, HMR is obligated to
pay the Company up to $30,500,000, comprised of $18,500,000 of product research
funding over five years and $12,000,000 of development and commercialization
milestone payments. From the inception of the agreement in September 1993
through the year ended December 31, 1996, $14,500,000 has been recognized as
revenue. HMR has the right to terminate the agreement without cause upon twelve
months' notice at any time. For a period of one year after any such termination,
HMR retains the right to select one or more compounds for development and to
license such compound or compounds from Vertex, provided HMR resumes all
research funding and commercialization milestone payments and makes all such
payments that would otherwise have been due but for such termination. Otherwise,
in the case of such termination, all rights to compounds developed under the
research and license agreements will revert to Vertex. The Company also received
additional revenue related to reimbursement for patent filings in HMR's
territories. Revenues earned under the HMR agreement were $4,196,000,
$3,749,000, and $3,514,000 in 1996, 1995 and 1994, respectively.

The Company and Kissei Pharmaceutical Co., Ltd. ("Kissei") are collaborating on
the research and development of compounds in connection with the Company's HIV
Program. Under the collaborative agreement, Kissei is obligated to pay the
Company up to $20,000,000, comprised of $9,800,000 of product research funding
through 1995, $7,000,000 of development milestone and territory option payments
and a $3,200,000 equity investment. In December 1995, Vertex recognized
$2,700,000 in revenue which represented a territory option payment Kissei
exercised for the rights to develop VX-478 in certain other Far East countries
in addition to Japan and the People's Republic of China. From the inception of
the agreement in April 1993 through the year ended December 31, 1996,
$17,842,000 has been received including $3,200,000 as an equity investment and
$14,642,000 was recognized as revenue. The Company received additional revenue
related to reimbursements for clinical development in 1996, 1995 and 1994. Under
the collaboration, Kissei is also required to pay Vertex a royalty on sales.
Revenues earned under the Kissei agreement were $692,000, $5,370,000, and
$5,498,000 in 1996, 1995 and 1994, respectively. Product research funding under
this agreement ended at December 31, 1995.


                                      F-16
   62
The Company and Chugai Pharmaceutical Co., Ltd. ("Chugai") entered into a
collaborative agreement for research and development of immunosuppressive
compounds in conjunction with Vertex's Autoimmune Diseases Program. Under the
collaborative agreement, Chugai agreed to pay Vertex up to $30,300,000, composed
of $19,300,000 of product research funding until 1995, $9,000,000 of development
and commercialization milestone payments and a $2,000,000 equity investment.
Research funding under this agreement ended in the first half of 1995 and the
research collaboration ended in October of 1995. Revenues earned under the
Chugai Agreement were $34,000, $1,915,000, and $4,969,000 in 1996, 1995 and
1994, respectively. All of the research funding received from Chugai has been
applied to defray costs of the collaborative research program.

L.  EMPLOYEE BENEFITS

The Company has a 401(k) retirement plan in which substantially all of its
permanent employees are eligible to participate. Participants may contribute up
to 15% of their annual compensation to the plan, subject to statutory
limitations. For 1996, the Company declared discretionary matching contributions
to the plan in the aggregate amount of $444,000, payable in the form of shares
of the Company's common stock. Of these shares, 7,013 were issued as of December
31, 1996 with the remaining 5,734 issuable in 1997. For 1995, the Company
declared discretionary matching contributions to the plan in the aggregate
amount of $354,000, payable in the form of 17,469 shares of the Company's common
stock, issued in 1996. For 1994, the Company declared discretionary matching
contributions to the plan in the aggregate amount of $263,000, payable in the
form of shares of the Company's common stock. Of these shares, 10,063 were
issued as of December 31, 1994 with the remaining 9,750 issued in 1995.

M. RELATED PARTY

A sibling of the Company's president is a partner in the law firm representing
the Company to which $472,000, $255,000, and $437,000 in legal fees were paid in
1996, 1995 and 1994, respectively.

N. SUBSEQUENT EVENT (UNAUDITED)

On March 12, 1997, the Company completed a public offering of 3,450,000 shares
of its common stock. The Company anticipates using the net proceeds of
approximately $148,863,000 primarily to fund research and product development
programs, including clinical trials, and for general corporate purposes. The
unaudited pro forma balance sheet of the Company as of December 31, 1996 has
been adjusted to reflect the issuance and sale of 3,450,000 shares of common
stock on March 12, 1997 and receipt of the net proceeds therefrom.


                                      F-17
   63
EXHIBITS.

EXHIBIT                             EXHIBIT
NUMBER                              DESCRIPTION
- -------                             -----------
3.1      Restated Articles of Organization (filed as Exhibit 3.1 to the
         Company's Registration Statement on Form S-1 (Registration No.
         33-43874) and incorporated herein by reference).

3.2      Articles of Amendment filed with the Commonwealth of Massachusetts on
         May 17, 1995 (filed as Exhibit 3.1 to the Company's Quarterly Report on
         Form 10-Q for the quarter ended June 30, 1995 (File No. 0-19319) and
         incorporated herein by reference).

3.3      By-laws of the Company (filed as Exhibit 3.2 to the Company's
         Registration Statement on Form S-1 (Registration No. 33-43874) and
         incorporated herein by reference).

3.4      Certificate of Vote of Directors Establishing a Series of a Class of
         Stock, as filed with the Secretary of the Commonwealth of Massachusetts
         on July 31, 1991 (filed as Exhibit 3.3 to the Company's Registration
         Statement on Form S-1 (Registration No. 33-43874) and incorporated
         herein by reference).

4.1      Specimen stock certificate (filed as Exhibit 4.1 to the Company's
         Registration Statement on Form S-1 (Registration No. 33-40966) or
         amendments thereto and incorporated herein by reference).

4.2      Stockholder Rights Plan (filed as Exhibit 4.2 to the Company's
         Registration Statement on Form S-1 (Registration No. 33-40966) or
         amendments thereto and incorporated herein by reference).

4.3      First Amendment to Rights Agreement dated as of February 21, 1997
         (filed herewith).

10.1     1991 Stock Option Plan, as amended and restated as of May 13, 1993
         (filed as Exhibit 28.1 to the Company's Registration Statement on
         Form S-8 (No. 33-65742) and incorporated herein by reference).*

10.2     1994 Stock and Option Plan (filed as Exhibit 10.2 to the Company's
         1994 Annual Report on Form 10-K (File No. 0-19319) and incorporated
         herein by reference).*

10.3     1996 Stock and Option Plan (filed herewith).

10.4     Non-Competition and Stock Repurchase Agreement between the Company and
         Joshua Boger, dated April 20, 1989 (filed as Exhibit 10.2 to the
         Company's Registration Statement on Form S-1 (Registration No.
         33-40966) or amendments thereto and incorporated herein by reference).*

10.6     Form of Employee Stock Purchase Agreement (filed as Exhibit 10.3 to
         the Company's Registration Statement on Form S-1 (Registration No.
         33-40966) or amendments thereto and incorporated herein by
         reference).*

10.7     Form of Employee Non-Disclosure and Inventions Agreement (filed as
         Exhibit 10.4 to the Company's Registration Statement on Form S-1
         (Registration No. 33-40966) or amendments thereto and incorporated
         herein by reference).

10.8     Form of Executive Employment Agreement executed by Richard H.
         Aldrich, Joshua S.


   64
         Boger, and Vicki L. Sato (filed as Exhibit 10.6 to the Company's 1994
         Annual Report on Form 10-K (File No. 0-19319) and incorporated herein
         by reference).*

10.9     Form of Amendment to Employment Agreement executed by Richard H.
         Aldrich, Joshua S. Boger and Vicki L. Sato  (filed as Exhibit 10.1
         to the Company's Quarterly Report on Form 10-Q for the quarter ended
         June 30, 1995 (File No. 0-19319) and incorporated herein by
         reference).

10.10    Series C Convertible Preferred Stock Purchase Agreement between the
         Company and the party named therein, dated September 21, 1990 (filed as
         Exhibit 10.8 to the Company's Registration Statement on Form S-1
         (Registration No. 33-40966) or amendments thereto and incorporated
         herein by reference).

10.11    Stock Purchase Agreement dated November 10, 1994 between the Company
         and Biotech Target S.A. (filed as Exhibit 10.12 to the Company's
         1994 Annual Report on Form 10-K (File No. 0-19319) and incorporated
         herein by reference).

10.12    Lease dated October 1, 1992 between C. Vincent Vappi and the Company
         relating to the premises at 40 Allston Street, 618 Putnam Street, 228
         Sidney Street, and 240 Sidney Street (filed as Exhibit 10.14 to the
         Company's Annual Report on Form 10-K for the year ended December 31,
         1992 (File No. 0-19319) and incorporated herein by reference).

10.13    First Amendment as of March 1, 1995 to the lease between C. Vincent
         Vappi and the Company (filed as Exhibit 10.2 to the Company's Quarterly
         Report on Form 10-Q for the quarter ended June 30, 1995 (File No.
         0-19319) and incorporated herein by reference).

10.14    Second Amendment as of February 12, 1997 to Lease between C. Vincent
         Vappi and the Company (filed herewith).

10.15    Lease dated March 1, 1993, between Fort Washington Realty Trust and the
         Company, relating to the premises at 625 Putnam Avenue, Cambridge, MA
         (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for
         the year ended December 31, 1993 (File No. 0-19319) and incorporated
         herein by reference).

10.16    First Amendment, dated 1 December 1996, to Lease between Fort
         Washington Realty Trust and the Company dated 1 March 1993 (filed
         herewith).

10.17    Lease dated March 3, 1995, between Fort Washington Realty Trust and the
         Company, relating to the premises at 130 Waverly Street, Cambridge, MA
         (filed as Exhibit 10.15 to the Company's 1994 Annual Report on Form
         10-K (File No. 0-19319) and incorporated herein by reference).

10.18    First Amendment to Lease dated March 3, 1995 between Fort Washington
         Realty Trust and the Company (filed as Exhibit 10.15 to the Company's
         1995 Annual Report on Form 10-K (File No. 0-19319) and incorporated
         herein by reference).

10.19    Research and Development Agreement dated April 13, 1993 between the
         Company and Kissei Pharmaceutical Co., Ltd. (with certain confidential
         information deleted) (filed as Exhibit 10.1 to the Company's Quarterly
         Report on Form 10-Q for the quarter ended March 31, 1993 (File No.
         0-19319) and incorporated herein by reference).

10.20    Research, Development, and License Agreement dated September 8, 1993
         between the


   65
         Company and Roussel Uclaf (with certain confidential information
         deleted) (filed as Exhibit 10.1 to the Company's Quarterly Report on
         Form 10-Q for the quarter ended September 30, 1993 (File No. 0-19319)
         and incorporated herein by reference).

10.21    License Agreement dated August 6, 1993 between the Company and
         Children's Hospital Medical Center of Northern California (with certain
         confidential information deleted) (filed as Exhibit 10.2 to the
         Company's Quarterly Report on Form 10-Q for the quarter ended September
         30, 1993 (File No. 0-19319) and incorporated herein by reference).

10.22    Research Agreement and License Agreement, both dated December 16, 1993,
         between the Company and Burroughs Wellcome Co. (with certain
         confidential information deleted) (filed as Exhibit 10.16 to the
         Company's Annual Report on Form 10-K for the year ended December 31,
         1993 (File No. 0-19319) and incorporated herein by reference).

10.23    License Agreement dated October 2, 1995 between the Company and Alpha
         Therapeutic Corporation (with certain confidential information deleted)
         (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
         for the quarter ended September 30, 1995 (File No. 0-19319) and
         incorporated herein by reference).

10.24    License Agreement and Supply Agreement, both dated May 9, 1996, between
         the Company and BioChem Pharma (International) Inc. (with certain
         confidential information deleted)(filed as Exhibit 10.1 to the
         Company's Quarterly Report on 10-Q for the quarter ended March 31, 1996
         (File No. 0-19319) and incorporated herein by reference).

21       Subsidiaries of the Company (filed as Exhibit 21 to the Company's
         Annual Report on Form 10-K for the year ended December 31, 1995
         (File no. 0-19319) and incorporated herein by reference).

23       Consent of Independent Accountants (filed herewith).

27       Financial Data Schedule (submitted as an exhibit only in the electronic
         format of this Annual Report on Form 10-K submitted to the Securities
         and Exchange Commission.


*     Compensatory plan or agreement applicable to management and employees.

EX-4.3

   1
                                   EXHIBIT 4.3


                       FIRST AMENDMENT TO RIGHTS AGREEMENT


      AMENDMENT, dated as of February 21, 1997, to the Rights Agreement, dated
as of July 1, 1991 (the "Rights Agreement"), between Vertex Pharmaceuticals
Incorporated, a Massachusetts corporation (the "Company"), and The First
National Bank of Boston, as Rights Agent (the "Rights Agent").

      The Company and the Rights Agent have heretofore executed and entered into
the Rights Agreement. Pursuant to Section 27 of the Rights Agreement, the
Company and the Rights Agent may from time to time supplement or amend the
Rights Agreement in accordance with the provisions of Section 27 thereof. All
acts and things necessary to make this Amendment a valid agreement, enforceable
according to its terms, have been done and performed, and the execution and
delivery of this Amendment by the Company and the Rights Agent have been in all
respects duly authorized by the Company and the Rights Agent.

      In consideration of the foregoing and the mutual agreements set forth
herein, the parties hereto agree as follows:

      1. Section 1(a) of the Rights Agreement is hereby amended in its entirety
to read as follows:

      (a) "Acquiring Person" shall mean any Person (as hereinafter defined) who
or which, together with all Affiliates and Associates (as such terms are
hereinafter defined) of such Person, shall be the Beneficial Owner (as
hereinafter defined) of 15% or more of the Common Shares of the Company then
outstanding, but shall not include the Company, any Subsidiary (as hereinafter
defined) of the Company, any employee benefit plan of the Company or any
Subsidiary of the Company, any entity holding Common Shares for or pursuant to
the terms of any such plan, or any Person who, alone or together, with all
Affiliates and Associates of such Person, is, as of the date of this Agreement,
the Beneficial Owner of 15% or more of the Common Shares of the Company then
outstanding. Notwithstanding the foregoing, no Person shall become an "Acquiring
Person" as a result of an acquisition of Common Shares by the Company which, by
reducing the number of shares outstanding, increases the proportionate number of
shares beneficially owned by such Person to 15% or more of the Common Shares of
the Company then outstanding; provided, however, that if a Person shall become
the Beneficial Owner of 15% or more of the Common Shares of the Company then
outstanding by reason of share purchases by the Company and shall, after such
share purchases by the Company, become the Beneficial Owner of any additional
Common Shares of the Company, then such Person shall be deemed to be an
"Acquiring Person".

      2. Section 3(a) of the Rights Agreement is hereby amended in its entirety
to read as follows:

      (a) Until the earlier of (i) the tenth day after the Shares Acquisition
Date or (ii) the tenth business day (or such later date as may be determined by
action of the Board of Directors prior to such time as any Person becomes an
Acquiring Person) after the date of the commencement by any Person (other than
the Company, any Subsidiary of the Company, any employee benefit plan of the
Company or of any Subsidiary of the Company or any entity holding Common Shares
for or
   2
pursuant to the terms of any such plan) of, or of the first public announcement
of the intention of any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company or any entity holding Common Shares for or pursuant to the terms of any
such plan) to commence, a tender or exchange offer the consummation of which
would result in any Person becoming the Beneficial Owner of Common Shares
aggregating 15% or more of the then outstanding Common Shares (including any
such date which is after the date of this Agreement and prior to the issuance of
the Rights; the earlier of such dates being herein referred to as the
"Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of Section 3(b) hereof) by the certificates for Common Shares
registered in the names of the holders thereof (which certificates shall also be
deemed to be Right Certificates) and not by separate Right Certificates, and (y)
the right to receive Right Certificates will be transferable only in connection
with the transfer of Common Shares. As soon as practicable after the
Distribution Date, the Company will prepare and execute, the Rights Agent will
countersign, and the Company will send or cause to be sent (and the Rights Agent
will, if requested, send) by first-class, insured, postage-prepaid mail, to each
record holder of Common Shares as of the close of business on the Distribution
Date, at the address of such holder shown on the records of the Company, a Right
Certificate, in substantially the form of Exhibit B hereto (a "Right
Certificate"), evidencing one Right for each Common Share so held. As of the
Distribution Date, the Rights will be evidenced solely by such Right
Certificates.

      3. Section 7(b) of the Rights Agreement is hereby modified and amended by
deleting the amount $60 and substituting $270 therefore. There shall be no
adjustment to the Purchase Price as set forth in Section 7(b), as modified and
amended hereby, pursuant to Section 11(a)(i) with respect to any event described
in Section 11(a)(i) which occurred prior to the date of this Amendment.

      4. If any term, provision, covenant or restriction of this Amendment is
held by a court of competent jurisdiction or other authority to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Amendment, and the Rights Agreement, shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.

      5. This Amendment shall be deemed to be a contract made under the laws of
the Commonwealth of Massachusetts and for all purposes shall be governed by and
construed in accordance with the laws of such Commonwealth applicable to
contracts to be made and performed entirely within such Commonwealth.

      6. This Amendment may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and all
such counterparts shall together constitute but one and the same instrument.

      7. In all respects not inconsistent with the terms and provisions of this
Amendment to the Rights Agreement, the Rights Agreement is hereby ratified,
adopted, approved and confirmed. In executing and delivering this Amendment, the
Rights Agent shall be entitled to all the privileges and immunities afforded to
the Rights Agent under the terms and conditions of the Rights Agreement.

      IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and attested, all as of the date and year first above written.



Attest:                                   VERTEX PHARMACEUTICALS
                                          INCORPORATED


By:  /s/ Sarah P. Cecil                   By: /s/ Richard H. Aldrich
   ------------------------------            ----------------------------------
   Name: Sarah P. Cecil                      Name: Richard H. Aldrich
   3
   Title: Corporate Attorney                 Title: Senior Vice President


Attest:                                   THE FIRST NATIONAL BANK OF BOSTON


By:  /s/ Jocelyn J. Turner                By:   /s/ Colleen H. Shea
   ------------------------------            ----------------------------------
   Name:                                     Name:
   Title: Account Manager                    Title: Administration Manager

EX-10.3

   1
                                  EXHIBIT 10.3

                       VERTEX PHARMACEUTICALS INCORPORATED

                           1996 STOCK AND OPTION PLAN

                 (as amended on February 18, 1997 and restated)

1.   DEFINITIONS

     Unless otherwise specified or unless the context otherwise requires, the
following terms, as used in this Vertex Pharmaceuticals Incorporated 1996 Stock
and Option Plan, have the following meanings:

Affiliate means a corporation which, for purposes of Section 424 of the Code, is
a parent or subsidiary of the Company, direct or indirect.

Board of Directors means the Board of Directors of the Company.

Code means the United States Internal Revenue Code of 1986, as amended.

Committee means the Compensation Committee of the Board of Directors or any
successor thereto appointed by the Board of Directors pursuant to Section 4
hereof to administer this Plan.

Common Stock means shares of the Company's common stock, $.01 par value.

Company means Vertex Pharmaceuticals Incorporated, a Massachusetts corporation.

Disability or Disabled means permanent and total disability as defined in
Section 22(e)(3) of the Code.

Exchange Act means the Securities Exchange Act of 1934, as amended.

Fair Market Value of a Share of Common Stock on a particular date shall be the
mean between the highest and lowest quoted selling prices on such date (the
"valuation date") on the securities market where the Common Stock of the Company
is traded, or if there were no sales on the valuation date, on the next
preceding date within a reasonable period (as determined in the sole discretion
of the Committee) on which there were sales. In the event that there were no
sales in such a market within a reasonable period, the fair market value shall
be as determined in good faith by the Committee in its sole discretion.

ISO means an option intended to qualify as an incentive stock option under Code
Section 422.

Key Employee means an employee of the Company or of an Affiliate (including,
without limitation, an employee who is also serving as an officer or director of
the Company or of an Affiliate), designated by the Committee to be eligible to
be granted one or more Stock Rights under the Plan.

NQSO means an option which is not intended to qualify as an ISO.

Non-Employee Director means a member of the Board of Directors who is not an
employee of the Company or any Affiliate.

Option means an ISO or NQSO granted under the Plan.
   2
Participant means a Key Employee, Non-Employee Director, consultant or advisor
of the Company to whom one or more Stock Rights are granted under the Plan. As
used herein, "Participant" shall include "Participant's Survivors" and a
Participant' s permitted transferees where the context requires.

Participant's Survivors means a deceased Participant's legal representatives
and/or any person or persons who acquires the Participant's rights to a Stock
Right by will or by the laws of descent or distribution.

Plan means this Vertex Pharmaceuticals Incorporated 1996 Stock and Option Plan,
as amended from time to time.

Shares means shares of the Common Stock as to which Stock Rights have been or
may be granted under the Plan or any shares of capital stock into which the
Shares are changed or for which they are exchanged within the provisions of
Section 3 of the Plan. The Shares issued upon exercise of Stock Rights granted
under the Plan may be authorized and unissued shares or shares held by the
Company in its treasury, or both.

Stock Agreement means an agreement between the Company and a Participant
executed and delivered pursuant to the Plan, in such form as the Committee shall
approve.

Stock Award means an award of Shares or the opportunity to make a direct
purchase of Shares of the Company granted under the Plan.

Stock Right means a right to Shares of the Company granted pursuant to the Plan
as an ISO, an NQSO or a Stock Award.

2.   PURPOSES OF THE PLAN

     The Plan is intended to encourage ownership of Shares by Key Employees,
Non-Employee Directors and certain consultants and advisors to the Company in
order to attract such persons, to induce them to work for the benefit of the
Company or of an Affiliate and to provide additional incentive for them to
promote the success of the Company or of an Affiliate. The Plan provides for the
granting of Stock Rights to Key Employees, Non-Employee Directors, consultants
and advisors of the Company.

3.   SHARES SUBJECT TO THE PLAN

     The number of Shares subject to this Plan as to which Stock Rights may be
granted from time to time shall be 2,000,000 plus the number of shares of Common
Stock previously reserved for the granting of options under the Vertex
Pharmaceuticals Incorporated 1991 Stock Option Plan and 1994 Stock and Option
Plan but not granted thereunder, or the equivalent of such number of Shares
after the Committee, in its sole discretion, has interpreted the effect of any
stock split, stock dividend, combination, recapitalization or similar
transaction in accordance with Section 17 of this Plan.

     If an Option granted hereunder or any option granted under the 1991 Stock
Option Plan or 1994 Stock and Option Plan ceases to be "outstanding", in whole
or in part, or if the Company shall reacquire any Shares issued pursuant to
Stock Awards, the Shares which were subject to such Option and any Shares so
reacquired by the Company shall also be available for the granting of other
Stock Rights under the Plan. Any Stock Right shall be treated as "outstanding"
until such Stock Right is exercised in full, or terminates or expires under the
provisions of the


                                      -2-
   3
Plan, or by agreement of the parties to the pertinent Stock Agreement, without
having been exercised in full.

4.   ADMINISTRATION OF THE PLAN

     The Plan shall be administered by the Committee. Subject to the provisions
of the Plan, the Committee is authorized to:

   a. Interpret the provisions of the Plan or of any Option, Stock Award or
      Stock Agreement and to make all rules and determinations which it deems
      necessary or advisable for the administration of the Plan;

   b. Determine which employees of the Company or of an Affiliate shall be
      designated as Key Employees and which of the Key Employees, Non-Employee
      Directors, consultants and advisors of the Company and its Affiliates
      shall be granted Stock Rights;

   c. Determine the number of Shares and exercise price for which a Stock
      Right or Stock Rights shall be granted;

   d. Specify the terms and conditions upon which a Stock Right or Stock
      Rights may be granted; and

   e. In its discretion, accelerate the date of exercise of any installment of
      any Stock Right; provided that the Committee shall not accelerate the
      exercise date of any installment of any Option granted to any Key Employee
      as an ISO (and not previously converted into an NQSO pursuant to Section
      20) if such acceleration would violate the annual vesting limitation
      contained in Section 422(d) of the Code, as described in Section 6.2.3.

provided, however, that all such interpretations, rules, determinations, terms
and conditions shall be made and prescribed in the context of preserving the tax
status under Code Section 422 of those Options which are designated as ISOs and
shall be in compliance with any applicable provisions of Rule 16b-3 under the
Exchange Act. Subject to the foregoing, the interpretation and construction by
the Committee of any provisions of the Plan or of any Stock Right granted under
it shall be final, unless otherwise determined by the Board of Directors, if the
Committee is other than the Board of Directors.

      The Committee may employ attorneys, consultants, accountants or other
persons, and the Committee, the Company and its officers and directors shall be
entitled to rely upon the advice, opinions or valuations of such persons. All
actions taken and all interpretations and determinations made by the Committee
in good faith shall be final and binding upon the Company, all Participants, and
all other interested persons. No member or agent of the Committee shall be
personally liable for any action, determination, or interpretation made in good
faith with respect to this Plan or grants hereunder. Each member of the
Committee shall be indemnified and held harmless by the Company against any cost
or expense (including counsel fees) reasonably incurred by him or liability
(including any sum paid in settlement of a claim with the approval of the
Company) arising out of any act or omission to act in connection with this Plan
unless arising out of such member's own fraud or bad faith. Such indemnification
shall be in addition to any rights of indemnification the members of the
Committee may have as directors or otherwise under the by-laws of the Company,
or any agreement, vote of stockholders or disinterested directors, or otherwise.


                                      -3-
   4
5.   ELIGIBILITY FOR PARTICIPATION

     The Committee shall, in its sole discretion, name the Participants in the
Plan, provided, however, that each Participant must be a Key Employee,
Non-Employee Director, consultant or advisor of the Company or of an Affiliate
at the time a Stock Right is granted. Notwithstanding the foregoing, the
Committee may authorize the grant of a Stock Right to a person not then an
employee, Non-Employee Director, consultant or advisor of the Company or of an
Affiliate; provided, however, that the actual grant of such Stock Right shall be
conditioned upon such person becoming eligible to become a Participant at or
prior to the time of execution of the Stock Agreement evidencing such Stock
Right. The granting of any Stock Right to any individual shall neither entitle
that individual to, nor disqualify him or her from, participation in other grant
of Stock Rights. Notwithstanding anything to the contrary contained in this
Plan, no Stock Rights shall be granted to any director or officer of the Company
except in accordance with the applicable rules of the Nasdaq Stock Market or
other securities market where the Common Stock is traded.

6.   TERMS AND CONDITIONS OF OPTIONS

     6.1 General. Each Option shall be set forth in writing in a Stock
Agreement, duly executed by the Company and, to the extent required by law or
requested by the Company, by the Participant. The Committee may provide that
Options be granted subject to such conditions as the Committee may deem
appropriate including, without limitation, subsequent approval by the
shareholders of the Company of this Plan or any amendments thereto, provided,
however, that the option price per share of the Shares covered by each Option
shall not be less than the par value per share of the Common Stock. Each Stock
Agreement shall state the number of Shares to which it pertains, the date or
dates on which it first is exercisable and the date after which it may no longer
be exercised. Option rights may accrue or become exercisable in installments
over a period of time, or upon the achievement of certain conditions or the
attainment of stated goals or events. Exercise of any Option may be conditioned
upon the Participant's execution of a Share purchase agreement in form
satisfactory to the Committee providing for certain protections for the Company
and its other shareholders, including requirements that the Participant's or the
Participant's Survivors' right to sell or transfer the Shares may be restricted,
and the Participant or the Participant's Survivors may be required to execute
letters of investment intent and to acknowledge that the Shares will bear
legends noting any applicable restrictions.

     6.2 ISOs. ISOs shall be issued only to Key Employees. In addition to the
minimum standards set forth in Section 6.1, ISOs shall be subject to the
following terms and conditions, with such additional restrictions or changes as
the Committee determines are appropriate but not in conflict with Code Section
422 and relevant regulations and rulings of the Internal Revenue Service:

         6.2.1 ISO Option Price: The Option price per Share of the Shares
subject to an ISO shall not be less than one hundred percent (100%) of the Fair
Market Value per share of the Common Stock on the date of grant of the ISO;
provided, however that the Option price per share of the Shares subject to an
ISO granted to a Participant who owns, directly or by reason of the applicable
attribution rules in Code Section 424(d), more than ten percent (10%) of the
total combined voting power of all classes of share capital of the Company or an
Affiliate, shall not be less than one hundred ten percent (110%) of the said
Fair Market Value on the date of grant.

         6.2.2 Term of ISO: Each ISO shall expire not more than ten (10) years
from the date of grant; provided, however, that an ISO granted to a Participant
who owns, directly or by reason of the applicable attribution rules in Code
Section 424(d), more than ten percent (10%) of the total combined voting power
of all classes of share capital of the Company or an Affiliate, shall expire not
more than five (5) years from the date of grant.


                                      -4-
   5
         6.2.3 Limitation on Yearly ISO Exercisability: The aggregate Fair
Market Value (determined at the time each ISO is granted) of the stock with
respect to which ISOs are exercisable for the first time by each Participant in
any calendar year (under this or any other ISO plan of the Company or an
Affiliate) shall not exceed the maximum amount allowable under Section 422 of
the Code.

         6.2.4 Limitation on Grant of ISOs: No ISOs shall be granted after
December 8, 2004, the date which is ten (10) years from the earlier of the date
of the adoption of this Plan and the date of the approval of the Plan by the
shareholders of the Company.

     6.3 Non-Employee Directors' Options. Each Non-Employee Director, upon first
being elected or appointed to the Board of Directors, shall be granted an NQSO
to purchase 20,000 Shares. Each such Option shall (i) have an exercise price
equal to eighty-five percent (85%) of the Fair Market Value (per share) on the
date of grant of the Option, (ii) have a term of ten (10) years, and (ii) shall
become cumulatively exercisable in sixteen (16) equal quarterly installments,
upon completion of each full quarter of service on the Board of Directors after
the date of grant. In addition, on June 1 of each year, each Non-Employee
Director shall be granted a NQSO to purchase 5,000 shares. Each such Option
shall (i) have an exercise price equal to the Fair Market Value (per share) on
the date of grant of such Option, (ii) have a term of ten (10) years, and (iii)
be exercisable in full immediately on the date of grant. Any director entitled
to receive an Option grant under this Section may elect to decline the Option.
Notwithstanding the provisions of Section 24 concerning amendment of the Plan,
the provisions of this Subsection shall not be amended more than once every six
months, other than to comport with changes in the Code, the Employee Retirement
Income Security Act, or the rules thereunder. Notwithstanding anything to the
contrary contained in any other provisions of this Plan, the Committee shall
have no discretion to vary the terms of Options granted under this Section 6.3
from those set forth herein. The provisions of Sections 11, 13 and 14 below
shall not apply to Options granted pursuant to this Subsection.

     6.4 Limitation on Number of Options Granted. Notwithstanding anything in
this Plan to the contrary, no Participant shall be granted Options in any
calendar year for the purchase of more than 200,000 Shares.

7.   TERMS AND CONDITIONS OF STOCK AWARDS

     Each Stock Award shall be set forth in a Stock Agreement, duly executed by
the Company and, to the extent required by law or requested by the Company, by
the Participant. The Stock Agreement shall be in the form approved by the
Committee, with such changes and modifications to such form as the Committee, in
its discretion, shall approve with respect to any particular Participant or
Participants. The Stock Agreement shall contain terms and conditions which the
Committee determines to be appropriate and in the best interest of the Company;
provided, however, that the purchase price per share of the Shares covered by
each Stock Award shall not be less than the par value per Share. Each Stock
Agreement shall state the number of Shares to which the Stock Award pertains,
the date prior to which the Stock Award must be exercised by the Participant,
and the terms of any right of the Company to reacquire the Shares subject to the
Stock Award, including the time and events upon which such rights shall accrue
and the purchase price therefor, and any restrictions on the transferability of
such Shares.

8.   EXERCISE OF STOCK RIGHTS AND ISSUANCE OF SHARES

     A Stock Right (or any part or installment thereof) shall be exercised by
giving written notice to the Company, together with provision for payment of the
full purchase price in accordance with this Section for the Shares as to which
such Stock Right is being exercised, and


                                      -5-
   6
upon compliance with any other condition(s) set forth in the Stock Agreement.
Such written notice shall be signed by the person exercising the Stock Right,
shall state the number of Shares with respect to which the Stock Right is being
exercised and shall contain any representation required by the Plan or the Stock
Agreement.

     Payment of the purchase price for the Shares as to which such Stock Right
is being exercised shall be made (a) in United States dollars in cash or by
check, or (b) at the discretion of the Committee, through delivery of shares of
Common Stock already owned by the Participant not subject to any restriction
under any plan and having a fair market value equal as of the date of exercise
to the cash exercise price of the Stock Right, determined in good faith by the
Committee, or (c) at the discretion of the Committee, by any other means,
including a promissory note of the Participant, which the Committee determines
to be consistent with the purpose of this Plan and applicable law, or (d) at the
discretion of the Committee, in accordance with a cashless exercise program
established with a securities brokerage firm, and approved by the Committee, or
(e) at the discretion of the Committee, by any combination of (a), (b), (c) and
(d) above. Notwithstanding the foregoing, the Committee shall accept only such
payment on exercise of an ISO as is permitted by Section 422 of the Code.

     The Company shall then reasonably promptly deliver the Shares as to which
such Stock Right was exercised to the Participant (or to the Participant's
Survivors, as the case may be). In determining what constitutes "reasonably
promptly," it is expressly understood that the delivery of the Shares may be
delayed by the Company in order to comply with any law or regulation which
requires the Company to take any action with respect to the Shares prior to
their issuance. The Shares shall, upon delivery, be fully paid, non-assessable
Shares.

9.   RIGHTS AS A SHAREHOLDER

     No Participant to whom a Stock Right has been granted shall have rights as
a shareholder with respect to any Shares covered by such Stock Right, except
after due exercise thereof and tender of the full purchase price for the Shares
being purchased pursuant to such exercise and registration of the Shares in the
Company's share register in the name of the Participant.

10.  ASSIGNABILITY AND TRANSFERABILITY OF STOCK RIGHTS

     ISOs and, except as otherwise provided in the pertinent Stock Agreement,
NQSOs and Stock Awards shall not be transferable by the Participant other than
by will or by the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Code or Title I of the Employee
Retirement Income Security Act or the rules thereunder, provided, however, that
the designation of a beneficiary of a Stock Right by a Participant shall not be
deemed a transfer prohibited by this Section . Except as provided in the
preceding sentence or as otherwise permitted under an NQSO or Stock Award Stock
Agreement, a Stock Right shall be exercisable, during the Participant's
lifetime, only by such Participant (or by his or her legal representative) and
shall not be assigned, pledged or hypothecated in any way (whether by operation
of law or otherwise) and shall not be subject to execution, attachment or
similar process. Any attempted transfer, assignment, pledge, hypothecation or
other disposition of any Stock Right or of any rights granted thereunder
contrary to the provisions of this Plan, or the levy of any attachment or
similar process upon a Stock Right, shall be null and void.

11.  EFFECT OF TERMINATION OF SERVICE

     11.1 Except as otherwise provided in the pertinent Stock Agreement or as
otherwise provided in Sections 12, 13 or 14, if a Participant ceases to be an
employee, director, consultant or advisor with the Company and its Affiliates (a
"Termination of Service") (for any reason other than termination "for cause",
Disability, or death) before the Participant has exercised all Stock


                                      -6-
   7
Rights, the Participant may exercise any Stock Right granted to him or her to
the extent that the Stock Right is exercisable on the date of such Termination
of Service, but only within the originally prescribed term of the Stock Right.
Notwithstanding the foregoing, except as provided in Section 13, in no event may
an ISO be exercised later than three (3) months after the Participant's
termination of employment with the Company and its Affiliates.

     11.2 The provisions of this Section , and not the provisions of Section 13
or 14, shall apply to a Participant who subsequently becomes disabled or dies 
after the Termination of Service; provided, however, that in the case of a
Participant's death within three (3) months after the Termination of Service,
the Participant's Survivors may exercise the Stock Right within one (1) year
after the date of the Participant's death, but in no event after the date of
expiration of the term of the Stock Right.

     11.3 Notwithstanding anything herein to the contrary, if subsequent to a
Participant's Termination of Service, but prior to the exercise of a Stock
Right, the Committee determines that, either prior or subsequent to the
Participant's Termination of Service, the Participant engaged in conduct which
would constitute "cause" (as defined in Section 12), then such Participant shall
forthwith cease to have any right to exercise any Stock Right.

     11.4 Absence from work with the Company or an Affiliate because of
temporary disability (any disability other than a permanent and total Disability
as defined in Section 1 hereof), or a leave of absence for any purpose, shall
not, during the period of any such absence, be deemed, by virtue of such absence
alone, a Termination of Service, except as the Committee may otherwise expressly
provide.

     11.5 A change of employment or other service within or among the Company
and its Affiliates shall not be deemed a Termination of Service, so long as the
Participant continues to be an employee, director, consultant or advisor of the
Company or any Affiliate; provided, however, that if a Participant's employment
with the Company or an Affiliate should cease (other than to become an employee
of another Affiliate or of the Company), then Section 11.1 above shall apply as
to any ISOs granted to such Participant.

12.  EFFECT OF TERMINATION OF SERVICE FOR "CAUSE"

     Except as otherwise provided in the pertinent Stock Agreement, in the event
of a Termination of Service of a Participant "for cause" all outstanding and
unexercised Stock Rights as of the date the Participant is notified his or her
service is terminated "for cause" will immediately be forfeited. For purposes of
this Section 12, "cause" shall include (and is not limited to) dishonesty with
respect to the Company and its Affiliates, insubordination, substantial
malfeasance or non-feasance of duty, unauthorized disclosure of confidential
information, conduct substantially prejudicial to the business of the Company or
any Affiliate, and termination by the Participant in violation of an agreement
by the Participant to remain in the employ of the Company of an Affiliate. The
determination of the Committee as to the existence of cause will be conclusive
on the Participant and the Company. "Cause" is not limited to events which have
occurred prior to a Participant's Termination of Service, nor is it necessary
that the Committee's finding of "cause" occur prior to termination. If the
Committee determines, subsequent to a Participant's Termination of Service but
prior to the exercise of a Stock Right, that either prior or subsequent to the
Participant's termination the Participant engaged in conduct which would
constitute "cause," then the right to exercise any Stock Right shall be
forfeited. Any definition in an agreement between a Participant and the Company
or an Affiliate which contains a conflicting definition of "cause" for
termination and which is in effect at the time of such termination shall
supersede the definition in this Plan with respect to that Participant.


                                      -7-
   8
13.  EFFECT OF TERMINATION OF SERVICE FOR DISABILITY

     Except as otherwise provided in the pertinent Stock Agreement, in the event
of a Termination of Service by reason of Disability, the Disabled Participant
may exercise any Stock Right granted to him or her to the extent exercisable but
not exercised on the date of Disability. A Disabled Participant may exercise
such rights only within a period of not more than one (1) year after the date
that the Participant became Disabled or, if earlier, within the originally
prescribed term of the Stock Right.

     The Committee shall make the determination both of whether Disability has
occurred and the date of its occurrence (unless a procedure for such
determination is set forth in another agreement between the Company and such
Participant, in which case such procedure shall be used for such determination).
If requested, the Participant shall be examined by a physician selected or
approved by the Committee, the cost of which examination shall be paid for by
the Company.

14.  EFFECT OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT

     Except as otherwise provided in the pertinent Stock Agreement, in the event
of death of a Participant while the Participant is an employee, director,
consultant or advisor of the Company or of an Affiliate, any Stock Rights
granted to such Participant may be exercised by the Participant's Survivors to
the extent exercisable but not exercised on the date of death. Any such Stock
Right must be exercised within one (1) year after the date of death of the
Participant.

15.   PURCHASE FOR INVESTMENT

      Unless the offering and sale of the Shares to be issued upon the
particular exercise of an Stock Right shall have been effectively registered
under the Securities Act of 1933, as now in force or hereafter amended (the
"1933 Act"), the Company shall be under no obligation to issue the Shares
covered by such exercise unless and until the following conditions have been
fulfilled:

   a. The person(s) who exercise such Stock Right shall warrant to the Company,
      at the time of such exercise or receipt, as the case may be, that such
      person(s) are acquiring such Shares for their own respective accounts, for
      investment, and not with a view to, or for sale in connection with, the
      distribution of any such Shares, in which event the person(s) acquiring
      such Shares shall be bound by the provisions of the following legend which
      shall be endorsed upon the certificate(s) evidencing their Shares issued
      pursuant to such exercise or such grant:

            "The shares represented by this certificate have been taken for
            investment and they may not be sold or otherwise transferred by any
            person, including a pledgee, unless (1) either (a) a Registration
            Statement with respect to such shares shall be effective under the
            Securities Act of 1933, as amended, or (b) the Company shall have
            received an opinion of counsel satisfactory to it that an exemption
            from registration under such Act is then available, and (2) there
            shall have been compliance with all applicable state securities
            laws.

   b. The Company shall have received an opinion of its counsel that the Shares
      may be issued upon such particular exercise in compliance with the 1933
      Act without registration thereunder.

      The Company may delay issuance of the Shares until completion of any
action or obtaining of any consent which the Company deems necessary under any
applicable law (including, without limitation, state securities or "blue sky"
laws).


                                      -8-
   9
16.   DISSOLUTION OR LIQUIDATION OF THE COMPANY

      Upon the dissolution or liquidation of the Company, all Stock Rights
granted under this Plan which as of such date shall not have been exercised will
terminate and become null and void; provided, however, that if the rights of a
Participant have not otherwise terminated and expired, the Participant will have
the right immediately prior to such dissolution or liquidation to exercise any
Stock Right to the extent that such Stock Right is exercisable as of the date
immediately prior to such dissolution or liquidation.

17.   ADJUSTMENTS

      Upon the occurrence of any of the following events, a Participant's rights
with respect to any Stock Right granted to him or her hereunder which have not
previously been exercised in full shall be adjusted as hereinafter provided,
unless otherwise specifically provided in the written agreement between the
Participant and the Company relating to such Stock Right or in any employment
agreement between a Participant and the Company or an Affiliate:

    17.1 Stock Dividends and Stock Splits. If the shares of Common Stock shall
be subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of such Stock Right shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock dividend. The number
of Shares subject to options to be granted to Non-Employee Directors pursuant to
Section 6.3 shall also be proportionately adjusted upon the occurrence of such
events.

    17.2 Consolidations or Mergers. If the Company is to be consolidated with or
acquired by another entity in a merger in which the Company is not the surviving
entity, a sale of all or substantially all of the Company's assets or otherwise
(an "Acquisition"), either (i) the Committee or the board of directors of any
entity assuming the obligations of the Company hereunder, shall, as to
outstanding Options, make appropriate provision for the continuation of such
Options by substituting on an equitable basis for the Shares then subject to
such Options either the consideration payable with respect to the outstanding
shares of Common Stock in connection with the Acquisition or securities of any
successor or acquiring entity; or (ii) the vesting of all outstanding Options
shall be accelerated and such Options shall become fully exercisable immediately
prior to the Acquisition, notwithstanding any restrictions or vesting conditions
set forth therein.

    17.3 Recapitalization or Reorganization. In the event of a recapitalization
or reorganization of the Company (other than a transaction described in Section
17.2 above) pursuant to which securities of the Company or of another
corporation are issued with respect to the outstanding shares of Common Stock, a
Participant upon exercising a Stock Right shall be entitled to receive for the
purchase price paid upon such exercise the securities he or she would have
received if he or she had exercised such Stock Right prior to such
recapitalization or reorganization.

    17.4 Modification of ISOs. Notwithstanding the foregoing, any adjustments
made pursuant to Section 17.1, 17.2 or 17.3 with respect to ISOs shall be made
only after the Committee determines whether such adjustments would constitute a
"modification" of such ISOs (as that term is defined in Section 424(h) of the
Code) or would cause any adverse tax consequences for the holders of such ISOs.
If the Committee determines that such adjustments made with respect to ISOs
would constitute a modification of such ISOs, it may refrain from making such
adjustments, unless the holder of an ISO specifically requests in writing that
such

                                      -9-
   10
adjustment be made and such writing indicates that the holder has full knowledge
of the consequences of such "modification" on his or her income tax treatment
with respect to the ISO.

18.   ISSUANCES OF SECURITIES

      Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of Shares subject to Options. Except as
expressly provided herein, no adjustments shall be made for dividends paid in
cash or in property (including without limitation, securities) of the Company.

19.   FRACTIONAL SHARES

      No fractional share shall be issued under the Plan and the person
exercising any Stock Right shall receive from the Company cash in lieu of any
such fractional share equal to the Fair Market Value thereof determined in good
faith by the Board of Directors of the Company.

20.   CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS: TERMINATION OF ISOs

     Any Options granted under this Plan which do not meet the requirements of
the Code for ISOs shall automatically be deemed to be NQSOs without further
action on the part of the Committee. The Committee, at the written request of
any Participant, may in its discretion take such actions as may be necessary to
convert such Participant's ISOs (or any portion thereof) that have not been
exercised on the date of conversion into NQSOs at any time prior to the
expiration of such ISOs, regardless of whether the Participant is an employee of
the Company or an Affiliate at the time of such conversion. Such actions may
include, but not be limited to, extending the exercise period or reducing the
exercise price of the appropriate installments of such Options. At the time of
such conversion, the Committee (with the consent of the Participant) may impose
such conditions on the exercise of the resulting NQSOs as the Committee in its
discretion may determine, provided that such conditions shall not be
inconsistent with this Plan. Nothing in the Plan shall be deemed to give any
Participant the right to have such Participant's ISOs converted into NQSOs, and
no such conversion shall occur until and unless the Committee takes appropriate
action. The Committee, with the consent of the Participant, may also terminate
any portion of any ISO that has not been exercised at the time of such
termination.

21.   WITHHOLDING

      In the event that any federal, state, or local income taxes, employment
taxes, Federal Insurance Contributions Act ("FICA") withholdings or other
amounts are required by applicable law or governmental regulation to be withheld
from the Participant's salary, wages or other remuneration in connection with
the exercise of a Stock Right or a Disqualifying Disposition (as defined in
Section 22), the Participant shall advance in cash to the Company, or to any
Affiliate of the Company which employs or employed the Participant, the amount
of such withholdings unless a different withholding arrangement, including the
use of shares of the Company's Common Stock, is authorized by the Committee (and
permitted by law), provided, however, that with respect to persons subject to
Section 16 of the Exchange Act, any such withholding arrangement shall be in
compliance with any applicable provisions of Rule 16b-3 promulgated under
Section 16 of the Exchange Act. For purposes hereof, the Fair Market Value of
any shares withheld for purposes of payroll withholding shall be determined in
the manner provided in Section 1 above, as of the most recent practicable date
prior to the date of exercise. If the Fair Market Value of the shares withheld
is less than the amount of payroll withholdings required, the Participant my be
required to advance the difference in cash to the Company or the Affiliate


                                      -10-
   11
employer. The Committee in its discretion may condition the exercise of an
Option for less than the then Fair Market Value on the Participant's payment of
such additional withholding.

22.   NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION

      Each Key Employee who receives an ISO must agree to notify the Company in
writing immediately after the Key Employee makes a "Disqualifying Disposition"
of any Shares acquired pursuant to the exercise of an ISO. A Disqualifying
Disposition is any disposition (including any sale) of such shares before the
later of (a) two years after the date the Key Employee was granted the ISO, or
(b) one year after the date the Key Employee acquired Shares by exercising the
ISO. If the Key Employee has died before such Shares are sold, these holding
period requirements do not apply and no Disqualifying Disposition can occur
thereafter.

23.   EFFECTIVE DATE; TERMINATION OF THE PLAN

      The Plan shall be effective on December 12, 1996, the date of its approval
by the Board of Directors. The Plan will terminate on December 12, 2006. The
Plan may be terminated at an earlier date by vote of the Board of Directors;
provided, however, that any such earlier termination will not affect any Stock
Rights granted or Stock Agreements executed prior to the effective date of such
termination.

24.   AMENDMENT OF THE PLAN; AMENDMENT OF STOCK RIGHTS

      The Plan may be amended by the stockholders of the Company. The Plan may
also be amended by the Board of Directors or the Committee, including, without
limitation, to the extent necessary to qualify any or all outstanding Stock
Rights granted under the Plan or Stock Rights to be granted under the Plan for
favorable federal income tax treatment (including deferral of taxation upon
exercise) as may be afforded incentive stock options under Section 422 of the
Code, to the extent necessary to ensure that Stock Rights granted or to be
granted under the Plan are in accordance with Rule 16b-3 under the Exchange Act,
and to the extent necessary to qualify the shares issuable upon exercise of any
outstanding Stock Rights granted, or Stock Rights to be granted, under the Plan
for listing on any national securities exchange or quotation in any national
automated quotation system of securities dealers. No modification or amendment
of the Plan shall adversely affect his or her rights under a Stock Right
previously granted to a Participant without such Participant's consent.

      In its discretion, the Committee may amend any term or condition of any
outstanding Stock Right, provided, (i) such term or condition as amended is
permitted by the Plan, (ii) if the amendment is adverse to the Participant, such
amendment shall be made only with the consent of the Participant, (iii) any such
amendment of any ISO shall be made only after the Committee determines whether
such amendment would constitute a "modification" of any Stock Right which is an
ISO (as that term is defined in Section 424(h) of the Code) or would cause any
adverse tax consequences for the holder of such ISO, and (iv) with respect to
any Stock Right held by any Participant who is subject to the provisions of
Section 16(a) of the Exchange Act, any such amendment shall be made only after
the Committee determines whether such amendment would constitute the grant of a
new Stock Right.

25.   EMPLOYMENT OR OTHER RELATIONSHIP

      Nothing in this Plan or any Stock Agreement shall be deemed to prevent the
Company or an Affiliate from terminating the employment, consultancy or director
status of a Participant, nor to prevent a Participant from terminating his or
her own employment, consultancy or director status or to give any Participant a
right to be retained in employment or other service by the Company or any
Affiliate for any period of time.


                                      -11-
   12
26.   GOVERNING LAW

      This Plan shall be construed and enforced in accordance with the law of
The Commonwealth of Massachusetts.


                                      -12-

EX-10.14

   1
                                  EXHIBIT 10.14



                            Second Amendment to Lease


Date:                     As of February 12, 1997

Lease:                    A certain lease dated October 1, 1992 between the
                          Landlord, as landlord, and the Tenant, as tenant, as
                          to the Premises, as amended by First Amendment to
                          Lease dated as of March 1, 1995 (the "First
                          Amendment")

Landlord:                 C. Vincent Vappi

Tenant:                   Vertex Pharmaceuticals Incorporated

Premises:                 As defined in the Lease, the 618 Putnam
                          Premises, 40 Allston Premises, 228 Sidney Premises,
                          and 240 Sidney Premises (including Phase II of
                          the Sidney Premises), as amended herein



                                 R E C I T A L S



            A.    Landlord and Tenant have continuing obligations under the
                  Lease.

            B.    Landlord and Tenant desire to extend the term and modify
                  certain terms of the Lease as set forth herein.



      NOW, THEREFORE, For good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Landlord and Tenant agree as
follows:

1. Paragraph I of the Lease and paragraph 1 of the First Amendment are amended
   to provide that the defined term, "240 Sidney Premises" includes all space in
   the building located at 240 Sidney Street, Cambridge, Massachusetts. The
   total rentable square feet of the Premises upon and after the effective date
   of this Amendment is 35,000.

2. Paragraph II of the Lease is amended to provide that the Lease, as previously
   extended, shall expire at 11:59 P.M. on December 31, 2003. As used in the
   Lease as hereby amended, the word "term" shall mean the Original Term and the
   Extended Term, as extended and amended previously and herein.

3. Paragraph 3 of the First Amendment is deleted in its entirety.


                                  Page 1 of 2
   2
4. Paragraph III of the Lease is amended to provide that:

      Commencing January 1, 1997 through December 31, 2001, the Base Rent shall
      be $10.37 per rentable square foot of the Premises, or $363,000.00
      annually (pro rata reduced for any portion of a Year) payable in monthly
      installments of $30,250.00;

      Commencing January 1, 2002 through December 31, 2003, the Base Rent shall
      be $11.93 per rentable square foot of the Premises, or $417,450.00
      annually (pro rata reduced for any portion of a Year) payable in monthly
      installments of $34,787.50.

5. In all other respects, the Lease remains in full force and effect and
   unmodified hereby.

6. Notwithstanding anything to the contrary contained herein, this Second
   Amendment is subject to and conditional upon the Landlord's obtaining a loan
   secured by a mortgage on the Premises by April 15, 1997. In the event that
   such a mortgage loan is not concluded within such thirty-day period, this
   Second Amendment shall be null and void and of no effect.

      Signed under seal as of the date first written above.


                              Landlord:



                              /s/ C. Vincent Vappi
                              ---------------------------------
                              C. Vincent Vappi



                              Tenant:

                              VERTEX PHARMACEUTICALS INCORPORATED



                              By: /s/ Richard H. Aldrich
                                  -------------------------------------------


                                  Page 2 of 2

EX-10.16

   1
                                                                  EXHIBIT 10.16

           FIRST AMENDMENT, DATED 1 DECEMBER 1996, TO LEASE AGREEMENT

  BETWEEN FORT WASHINGTON REALTY TRUST AND VERTEX PHARMACEUTICALS INCORPORATED

                               DATED 1 MARCH 1993

Fort Washington Realty Trust and Vertex Pharmaceuticals Incorporated hereby
agree to amend the current lease on 625 Putnam Avenue, Cambridge, dated 1 March
1993, as follows:

page 1, Section 1.1; page 2, Section 2; and page 2 & 3, Section 3.1; Extension
of original term:
Term:  1 February 1997 through 31 December 1998
Rent:  15,750 sq ft at $15.24/sq ft/yr=$240,000/yr=$20,000/month

page 36, Section 11.10: Option to extend beyond first extension:
Tenant's option to Extend: 1 January 1999 through 31 December 2000, at a rent
of 15,750 sq ft at $18.00/sq ft/yr=$283,500/yr=$23,625/month

Triple-net of all taxes, insurance, utilities, and operating expenses.

All other provisions of said lease shall remain unchanged

Signatories certify that they are empowered to commit their respective
organization in matters pertaining to this agreement, executed in December 1996



LESSOR:                                          LESSEE:



/s/  HENRY H. KOLM 

/s/  ELIZABETH C. KOLM                  /s/  RICHARD H. ALDRICH
- ------------------------------          -----------------------------------
Fort Washington Realty Trust            Vertex Pharmaceuticals Incorporated
By:  Henry H. Kolm, Trustee             By:   Richard H. Aldrich
     Elizabeth C. Kolm, Trustee               Senior VP, Chief Business Officer
Date:  18 Jan 1996                      Date:   16 Dec 1996

EX-23

   1
COOPERS                                         COOPERS & LYBRAND L.L.P.
&LYBRAND



                                                              EXHIBIT 23.1


                      CONSENT OF INDEPENDENT ACCOUNTANTS


We consent to the incorporation by reference in the Registration Statement of
Vertex Pharmaceuticals Incorporated on Form S-8 (File Nos. 33-48030, 33-48348,
33-65742, 33-93224 and 33-12325) of our report dated February 18, 1997 on our
audits of the consolidated financial statements of Vertex Pharmaceuticals
Incorporated and Subsidiaries as of December 31, 1996 and 1995, and for each of
the three years in the period ended December 31, 1996 which report is
included in this Form 10-K.


                                               /s/ Coopers & Lybrand L.L.P.
                                               COOPERS & LYBRAND L.L.P.


Boston, Massachusetts
March 27, 1997

EX-27

 

<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
       
                             
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1996
<PERIOD-END>                               DEC-31-1996
<EXCHANGE-RATE>                                      1
<CASH>                                          34,851
<SECURITIES>                                    95,508
<RECEIVABLES>                                        0
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                               132,150
<PP&E>                                          28,700
<DEPRECIATION>                                  20,037
<TOTAL-ASSETS>                                 143,499
<CURRENT-LIABILITIES>                            7,056
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                           211
<OTHER-SE>                                     130,615
<TOTAL-LIABILITY-AND-EQUITY>                   143,499
<SALES>                                              0
<TOTAL-REVENUES>                                18,598
<CGS>                                                0
<TOTAL-COSTS>                                   58,141
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                 462
<INCOME-PRETAX>                               (40,005)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                                  0
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (40,005)
<EPS-PRIMARY>                                   (2.13)
<EPS-DILUTED>                                        0