| VERTEX PHARMACEUTICALS INC / MA Item 1A Risk Factors 30 ITEM 1A RISK FACTORS WE EXPECT TO INCUR FUTURE LOSSES AND WE MAY NEVER BECOME PROFITABLE We have incurred significant operating losses each year since our inception and expect to incur a significant operating loss in 2006 |
| We believe that operating losses will continue beyond 2006, even if we receive significant future payments under our existing and future collaborative agreements, because we are planning to make significant investments in research and development, and because we will incur significant selling, general and administrative expenses in the course of researching, developing and commercializing our product candidates |
| We expect that losses will fluctuate from quarter to quarter and year to year, and that such fluctuations may be substantial |
| We cannot predict when we will become profitable, if at all |
| MANY OF OUR DRUG CANDIDATES ARE STILL IN THE EARLY STAGES OF DEVELOPMENT AND ALL OF OUR DRUG CANDIDATES REMAIN SUBJECT TO CLINICAL TESTING AND REGULATORY APPROVAL IF WE ARE UNABLE TO SUCCESSFULLY DEVELOP AND TEST OUR DRUG CANDIDATES, WE WILL NOT BE SUCCESSFUL The success of our business depends primarily upon our ability to develop and commercialize our drug candidates successfully |
| Our drug candidates are in various stages of development |
| Our drug candidates must satisfy rigorous standards of safety and efficacy before they can be approved by the FDA or other regulatory authorities for sale |
| To satisfy these standards, we must engage in expensive and lengthy testing of our drug candidates |
| Despite our efforts, our drug candidates may not: • offer therapeutic or other improvement over existing comparable drugs; • be proven safe and effective in clinical trials; • meet applicable regulatory standards; • be capable of being produced in commercial quantities at acceptable costs; or • if approved for commercial sale, be successfully commercialized |
| Positive results in preclinical studies of a drug candidate may not be predictive of similar results in humans during clinical trials, and promising results from early clinical trials of a drug candidate may not be replicated in later clinical trials |
| Findings in nonclinical studies conducted concurrently with clinical trials could result in abrupt changes in our development activities, including the possible cessation of development activities associated with a drug candidate |
| Furthermore, results from our clinical trials may not meet the level of statistical significance required by the FDA or other regulatory authorities for approval of a drug candidate |
| A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late stage clinical trials even after achieving promising results in early stage development |
| Accordingly, the results from the completed preclinical studies and clinical trials and ongoing clinical trials for our drug candidates may not be predictive of the results we may obtain in later stage trials, and are not predictive of the likelihood of approval of a drug candidate for commercial sale |
| IF WE ARE UNABLE TO OBTAIN US AND/OR FOREIGN REGULATORY APPROVAL, WE WILL BE UNABLE TO COMMERCIALIZE OUR DRUG CANDIDATES Our drug candidates are subject to extensive governmental regulations relating to their development, clinical trials, manufacturing and commercialization |
| Rigorous preclinical testing and clinical trials and an extensive regulatory approval process are required in the United States and in most other countries prior to the commercial sale of our drug candidates |
| Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays |
| It is possible that none of the drug candidates we are developing will be approved for marketing |
| We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA The time required to complete clinical trials and for the FDA and other countries &apos regulatory review processes is uncertain and typically takes many 30 _________________________________________________________________ years |
| Our analysis of data obtained from preclinical and clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval |
| We may also encounter unanticipated delays or increased costs due to government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review |
| Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability to successfully commercialize any drug candidate |
| Furthermore, any regulatory approval to market a drug product may be subject to unexpected limitations on the indicated uses for which we may market the drug product |
| These limitations may limit the size of the market for the drug product |
| We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and marketing authorization, pricing and third-party reimbursement |
| The foreign regulatory approval process includes all of the risks associated with the FDA approval process described above, as well as risks attributable to the satisfaction of foreign requirements |
| Approval by the FDA does not ensure approval by regulatory authorities outside the United States |
| Foreign jurisdictions may have different approval procedures than those required by the FDA and may impose additional testing requirements for our drug candidates |
| IF CLINICAL TRIALS FOR OUR DRUG CANDIDATES ARE PROLONGED OR DELAYED, WE MAY BE UNABLE TO COMMERCIALIZE OUR DRUG CANDIDATES ON A TIMELY BASIS, WHICH WOULD REQUIRE US TO INCUR ADDITIONAL COSTS AND WOULD DELAY OUR RECEIPT OF ANY PRODUCT REVENUE We cannot predict whether or not we will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend clinical trials, or delay the analysis of data from our completed or ongoing clinical trials |
| Any of the following could delay the clinical development of our drug candidates: • ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials; • delays in receiving or the inability to obtain required approvals from IRBs or other reviewing entities at clinical sites selected for participation in our clinical trials; • delays in enrolling volunteers and patients into clinical trials; • a lower than anticipated retention rate of volunteers and patients in clinical trials; • the need to repeat clinical trials as a result of inconclusive results or unforeseen complications in testing; • inadequate supply or deficient quality of drug candidate materials or other materials necessary for the conduct of our clinical trials; • unfavorable FDA inspection and review of a clinical trial site or records of any clinical or preclinical investigation; • serious and unexpected drug-related side effects experienced by participants in our clinical trials; or • the placement by the FDA of a clinical hold on a trial |
| Our ability to enroll patients in our clinical trials in sufficient numbers and on a timely basis will be subject to a number of factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease and the eligibility criteria for the clinical trial |
| In addition, subjects may drop out of our clinical trials, and thereby possibly impair the validity or statistical significance of the trials |
| Delays in patient enrollment or unforeseen drop out rates may result in increased costs and longer development times |
| While all or a portion of these additional costs may be covered by payments under our collaborative agreements, we bear all of the costs for our development candidates for which we have no financial support from a collaborator |
| 31 _________________________________________________________________ We, the FDA or other applicable regulatory authorities may suspend clinical trials of a drug candidate at any time if we or they believe the subjects or patients participating in such clinical trials are being exposed to unacceptable health risks or for other reasons |
| We cannot predict whether any of our drug candidates will encounter problems during clinical trials which will cause us or regulatory authorities to delay or suspend these trials, or which will delay the analysis of data from these trials |
| In addition, it is impossible to predict whether legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes, if any, may be |
| If we experience any such problems, we may not have the financial resources to continue development of the drug candidate that is affected or the development of any of our other drug candidates |
| IF OUR PROCESSES AND SYSTEMS ARE NOT COMPLIANT WITH REGULATORY REQUIREMENTS, WE COULD BE SUBJECT TO DELAYS IN FILING NEW DRUG APPLICATIONS OR RESTRICTIONS ON MARKETING OF PRODUCTS AFTER THEY HAVE BEEN APPROVED We currently are developing drug product candidates for regulatory approval for the first time since the Companyapstas inception, and are in the process of implementing regulated processes and systems required to obtain and maintain regulatory approval for our product candidates |
| Certain of these processes and systems for conducting clinical trials and manufacturing material must be compliant with regulatory requirements before we can apply for regulatory approval for our drug product candidates |
| These processes and systems will be subject to continual review and periodic inspection by the FDA and other regulatory bodies |
| If we are unable to achieve compliance in a timely fashion, we may experience delays in filing for regulatory approval for our drug product candidates |
| In addition, any later discovery of previously unknown problems or safety issues with approved products or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of products from the market, the imposition of civil or criminal penalties or a refusal by the FDA and/or other regulatory bodies to approve pending applications for marketing approval of new drugs or supplements to approved applications, any of which could have a material adverse effect on our business |
| In addition, we are a party to collaboration agreements that transfer responsibility for complying with specified regulatory requirements, such as filing and maintenance of marketing authorizations and safety reporting, to our collaborator |
| If our collaborators do not fulfill these regulatory obligations, any products for which we or they obtain approval may be withdrawn from the market, which would have a material adverse effect on our business |
| EVEN IF WE OBTAIN REGULATORY APPROVALS, OUR DRUG CANDIDATES WILL BE SUBJECT TO ONGOING REGULATORY REVIEW IF WE FAIL TO COMPLY WITH CONTINUING US AND APPLICABLE FOREIGN REGULATIONS, WE COULD LOSE THOSE APPROVALS, AND OUR BUSINESS WOULD BE SERIOUSLY HARMED Even if we receive regulatory approval of any drug candidates that we are developing, we will be subject to continuing regulatory review, including the review of clinical results that are reported after our drug candidates become commercially available, approved drugs |
| Since drugs are more widely used by patients once approval has been obtained, side effects and other problems may be observed after approval that were not seen or anticipated during pre-approval clinical trials |
| In addition, the manufacturers and the manufacturing facilities we engage to make any of our drug candidates will also be subject to periodic review and inspection by the FDA The subsequent discovery of previously unknown problems with the drug, manufacturers or manufacturing facilities may result in restrictions on the drug, manufacturers or facilities, including withdrawal of the drug from the market or our inability to use the facilities to make our drug |
| If we fail to comply with applicable continuing regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and criminal prosecutions |
| 32 _________________________________________________________________ OUR DRUG DEVELOPMENT EFFORTS ARE DATA-DRIVEN AND THEREFORE POTENTIALLY SUBJECT TO ABRUPT CHANGES IN EXPECTED OUTCOMES Small molecule drug discovery and development involve, initially, the identification of chemical compounds which may have promise as treatments for specific diseases |
| Once identified as drug candidates, compounds are subjected to years of testing in a laboratory setting, in animals and in people |
| Our ultimate objective is to determine whether the compounds have physical characteristics, both intrinsically and in animal and human systems and including a toxicological profile, that are compatible with clinical and commercial success in treatment of the disease being targeted |
| Throughout this process, experiments are conducted and data are gathered that could reinforce a decision to move to the next step in the evaluation process for a particular drug candidate, could result in uncertainty over the proper course to pursue, or could result in the termination of further drug development efforts with respect to the compound being evaluated |
| We monitor the results of our discovery research and our nonclinical studies and clinical trials and regularly evaluate and re-evaluate our portfolio investments with the objective of balancing risk and potential return in view of new data and scientific, business and commercial insights |
| This process can result in relatively abrupt changes in focus and priority as new information comes to light and we gain additional insights into ongoing programs and potential new programs |
| WE DEPEND ON THIRD PARTY MANUFACTURERS AND SUPPLIERS, AND AS A RESULT WE MAY BE SUBJECT TO MANUFACTURING AND SUPPLY DISRUPTIONS OUTSIDE OF OUR CONTROL We expect that we will need to significantly augment our manufacturing, supply chain and quality assurance resources for our later-stage drug product candidates |
| We have no experience in manufacturing pharmaceutical products and in conducting manufacturing testing programs required to obtain FDA and other regulatory approvals, and there can be no assurance that we will develop those capabilities successfully |
| If we are unable to establish these capabilities, we may be unable to achieve our development and commercialization goals |
| We are currently relying on networks of third party manufacturers and suppliers worldwide to synthesize, tablet, and package our drug candidates for clinical trials and we expect that we will continue to do so to meet our commercial supply needs for these products, if they are approved for sale |
| As a result of our reliance on these third party manufacturers and suppliers, some of whom currently are our sole source for clinical trial material, we may be subject to significant supply disruptions outside of our control |
| These supply disruptions may result from a number of factors including shortages in product raw materials, labor or technical difficulties, regulatory inspections or restrictions, and shipping and customs delays |
| We plan to identify and enter into commercial relationships with multiple suppliers of the materials and manufacturing services necessary for the synthesis, tableting and packaging of our drug candidates and, if approved for sale, our drugs |
| We expect that this approach will reduce our risk of supply chain disruptions by reducing our reliance on any one manufacturer or supplier, but we will remain vulnerable to disruptions arising from performance failure by a vendor in our manufacturing supply chain, particularly if we are unable to secure second sources for necessary products and services |
| Any supply disruptions could impact the timing of our clinical trials and the commercial launch of any approved pharmaceutical products |
| Furthermore, we may be required to modify our production methods to permit us to economically manufacture our products for commercial launch and sale |
| Upon approval of a pharmaceutical product for sale, if any, we similarly may be at risk of supply chain disruption for our commercial drug supply |
| These modifications may require us to reevaluate our resources and the resources of our third party manufacturers and suppliers, which could result in abrupt changes in our production methods and supplies |
| The production of our drug candidates is based in part on technology that we believe to be proprietary |
| We have licensed this technology to enable our third party manufacturers and suppliers to manufacture drug candidates for us |
| However, in the course of their services, a contract manufacturer may develop process technology related to the manufacture of our drug candidates that the manufacturer owns, either independently or jointly with us |
| This would increase our reliance on that manufacturer or require us to obtain a license from that manufacturer in order to have our products manufactured by other suppliers utilizing the same process |
| 33 _________________________________________________________________ WE RELY ON THIRD PARTIES TO CONDUCT OUR CLINICAL TRIALS, AND THOSE THIRD PARTIES MAY NOT PERFORM SATISFACTORILY, INCLUDING FAILING TO MEET ESTABLISHED DEADLINES FOR THE COMPLETION OF SUCH TRIALS We do not have the ability to independently conduct clinical trials for our drug candidates, and we rely on third parties such as contract research organizations, medical institutions and clinical investigators to enroll qualified patients and conduct our clinical trials |
| Our reliance on these third parties for clinical development activities reduces our control over these activities |
| Accordingly, these third-party contractors may not complete activities on schedule, or may not conduct our clinical trials in accordance with regulatory requirements or our trial design |
| To date, we believe our contract research organizations and other similar entities with which we are working generally have performed well |
| However, if these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be required to replace them |
| Although we believe that there are a number of other third-party contractors we could engage to continue these activities, it may result in a delay of the affected trial |
| Accordingly, our efforts to obtain regulatory approvals for and commercialize our drug candidates may be delayed |
| OUR SALES AND MARKETING EXPERIENCE IS LIMITED We have limited experience in marketing and selling pharmaceutical products |
| We must either develop a marketing and sales force or enter into arrangements with third parties to market and sell any of our product candidates that are approved by regulatory authorities |
| We do not know whether we will be able to enter into marketing and sales agreements with others on acceptable terms, if at all |
| We may not be able to successfully develop our own sales and marketing force for drug candidates for which we have retained marketing or co-promotion rights |
| As we develop our own marketing and sales capability, we may be competing with other companies that currently have experienced and well-funded marketing and sales operations |
| We have granted exclusive marketing rights for Lexiva/Telzir, brecanavir (VX-385) and VX-409 to GlaxoSmithKline worldwide (except for brecanavir in the Far East where we have retained rights), and for VX-680 and VX-667 to Merck |
| Avalon Pharmaceuticals has exclusive, worldwide marketing rights to VX-944 |
| Mitsubishi has exclusive marketing rights to VX-950 in Japan and certain Far East countries |
| Even though we retain some co-promotion rights in some collaborations, to the extent that our collaborators have commercial rights to our products, any revenues we receive from those products will depend primarily on the sales and marketing efforts of others |
| WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE We expect to incur substantial research and development and related supporting expenses as we design and develop existing and future compounds, undertake clinical trials of drug candidates resulting from such compounds, and build our manufacturing, regulatory, development and commercial capabilities |
| We also expect 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 |
| We may need to make significant capital investment in building our manufacturing capacity and creating pre-launch inventory for one or more of our potential products |
| We anticipate that we will finance these substantial cash needs with: • cash received from our existing collaborative agreements; • cash received from new collaborative agreements; • Lexiva/Telzir royalty revenue; • existing cash reserves, together with interest earned on those reserves; and • future product sales to the extent that we market products directly |
| 34 _________________________________________________________________ We expect that funds from these sources will be sufficient to fund our planned activities for at least the next eighteen months from the date of this filing |
| If not, it will be necessary to raise additional funds through public offerings or private placements of equity or debt securities or other methods of financing |
| Even if our financial resources are sufficient to meet our short or intermediate term needs, we may still decide, as we have in the past, to raise additional funds when we believe financial market conditions are favorable |
| Any equity financings could result in dilution to our then-existing security holders |
| Any debt financing, if available at all, may be on terms that, among other things, restrict our ability to pay dividends and interest (although we do not intend to pay dividends for the foreseeable future) |
| The required interest payments associated with any significant additional debt financing could materially adversely affect our ability to service our convertible subordinated notes and convertible senior subordinated notes |
| The terms of any additional debt financing may also, under certain circumstances, restrict or prohibit us from making interest payments on our convertible subordinated notes and convertible senior subordinated notes |
| If adequate funds are not available, we may be required to curtail significantly or discontinue one or more of our research, drug discovery or development programs (including clinical trials), or attempt to obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain of our technologies or products in research or development |
| Additional financing may not be available on acceptable terms, if at all |
| IF WE ARE UNABLE TO ATTRACT AND RETAIN COLLABORATORS FOR RESEARCH SUPPORT AND THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS, WE MAY NOT BE ABLE TO FUND OUR RESEARCH, DEVELOPMENT AND COMMERCIALIZATION ACTIVITIES Our research, development and commercialization collaborators have agreed to fund portions of our research and development programs and/or to conduct the development and commercialization of specified product candidates and, if they are approved, products |
| In exchange, we have given them technology, product and marketing rights relating to those products |
| Some of our corporate collaborators have rights to control the planning and execution of product development and clinical programs |
| Our collaborators may exercise their control rights in ways that may negatively affect the timing and success of those programs |
| Our collaborations are subject to termination rights by the collaborators |
| If any of our collaborators were to terminate its relationship with us, or fail to meet its contractual obligations, that action could have a material adverse effect on our ability to undertake research, to fund related and other programs and to develop, manufacture and market any products that may have resulted from the collaboration |
| We expect to seek additional collaborative arrangements, which may not be available to us, to provide research support and to develop and commercialize our products in the future |
| For example, a significant portion of our overall research effort is conducted under our research collaborations with Novartis and Merck, both of which are scheduled to conclude in the first half of 2006 |
| If we are unable to enter into collaborative arrangements that would extend or replace these research collaborations, or to find other means of financing the effort currently devoted to these research programs, our ability to conduct our research, development and commercial activities could be adversely affected to a material degree |
| Similarly we may choose to enter into collaborative arrangements to advance the development of some of our preclinical and clinical development stage compounds |
| Even if we are able to establish acceptable collaborative arrangements in the future, they may not be successful |
| IF OUR COMPETITORS BRING SUPERIOR PRODUCTS TO MARKET OR BRING THEIR PRODUCTS TO MARKET BEFORE WE DO, WE MAY BE UNABLE TO FIND A MARKET FOR OUR PRODUCTS Our products in development may not be able to compete effectively with products that are currently on the market or new products that may be developed by others |
| There are many other companies developing products for the same indications that we are pursuing in development |
| In order to compete successfully in these areas, we must demonstrate improved safety, efficacy and ease of 35 _________________________________________________________________ manufacturing and gain market acceptance over competing products that may receive regulatory approval before or after our products, and over those that currently are marketed |
| Many of our competitors, including major pharmaceutical companies such as GlaxoSmithKline, Merck, Roche, Amgen, Boerhinger Ingelheim, Novartis, Johnson & Johnson and Schering-Plough possess substantially greater financial, technical and human resources than we possess |
| In addition, many of our competitors have significantly greater experience than we have in conducting preclinical and nonclinical testing and human clinical trials of new pharmaceutical products, scaling up manufacturing operations and obtaining regulatory approvals of products and manufacturing facilities |
| Accordingly, our competitors may succeed in obtaining regulatory approval for products more rapidly than we do |
| If we obtain regulatory approval and launch commercial sales of our products, we also will compete with respect to manufacturing efficiency and sales and marketing capabilities, areas in which we currently have limited experience |
| IF WE FAIL TO EXPAND OUR HUMAN RESOURCES AND MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY SUFFER We expect that if our clinical candidates continue to progress in development, we continue to build our commercial organization and our drug discovery efforts continue to generate drug candidates, we will require significant additional investment in personnel, management systems and resources |
| Our ability to commercialize our products, achieve our research and development objectives, and satisfy our commitments under our collaboration agreements depends on our ability to respond effectively to these demands and expand our internal organization to accommodate additional anticipated growth |
| If we are unable to manage our growth effectively, there could be a material adverse effect on our business |
| IF WE LOSE OUR TECHNOLOGICAL ADVANTAGES, WE MAY NOT BE ABLE TO COMPETE IN THE MARKETPLACE We believe that our integrated drug discovery capability gives us a technological advantage over our competitors |
| However, the pharmaceutical research field is characterized by rapid technological progress and intense competition |
| As a result, we may not realize the expected benefits from these technologies |
| For example, a large pharmaceutical company, with significantly more resources than we have, could pursue a systematic approach to the discovery of drugs based on gene families, using proprietary drug targets, compound libraries, novel chemical approaches, structural protein analysis and information technologies |
| Such a company might identify broadly applicable compound classes faster and more effectively than we do |
| Further, we believe that interest in the application of structure-based drug design, parallel drug design and related approaches has accelerated as the strategies have become more widely understood |
| Businesses, academic institutions, governmental agencies and other public and private research organizations are conducting research to develop technologies that may compete with those we use |
| It is possible that our competitors could acquire or develop technologies that would render our technology obsolete or noncompetitive |
| For example, a competitor could develop information technologies that accelerate the atomic-level analysis of potential compounds that bind to the active site of a drug target, and predict the absorption, toxicity, and relative ease-of-synthesis of candidate compounds |
| If we were unable to access the same technologies at an acceptable price, our business could be adversely affected |
| THE LOSS OF THE SERVICES OF KEY EMPLOYEES OR THE FAILURE TO HIRE QUALIFIED EMPLOYEES WOULD NEGATIVELY IMPACT OUR BUSINESS AND FUTURE GROWTH Because our product discovery and development activities are highly technical in nature, we require the services of highly qualified and trained scientists who have the skills necessary to conduct these activities |
| Our future success will depend in large part on the continued services of our key scientific and management personnel |
| We have entered into employment agreements with some individuals and provide compensation-related benefits to all of our key employees that vest over time and therefore induce them to remain with us |
| However, the employment agreements can be terminated by the employee on relatively short notice |
| The value to employees of stock-related benefits that vest 36 _________________________________________________________________ over time—such as options and restricted stock—will be significantly affected by movements in our stock price that we cannot control, and may at any point in time be insufficient to counteract more lucrative offers from other companies |
| We face intense competition for our scientific personnel from our competitors, our collaborators and other companies throughout our industry |
| Moreover, the growth of local biotechnology companies and the expansion of major pharmaceutical companies into the Boston area has increased competition for the available pool of skilled employees, especially in technical fields, and the high cost of living in the Boston and San Diego areas makes it difficult to attract employees from other parts of the country |
| A failure to retain, as well as hire, train and effectively integrate into our organization a sufficient number of qualified scientists and professionals would negatively impact our business and our ability to grow our business |
| In addition, the level of funding under certain of our collaborative agreements depends on the number of our scientists performing research under those agreements |
| If we cannot hire and retain the required personnel, funding received under the agreements may be reduced |
| IF OUR PATENTS DO NOT PROTECT OUR PRODUCTS, OR OUR PRODUCTS INFRINGE THIRD-PARTY PATENTS, WE COULD BE SUBJECT TO LITIGATION AND SUBSTANTIAL LIABILITIES We have numerous patent applications pending in the United States, as well as foreign counterparts in other countries |
| Our success will depend, in significant part, on our ability to obtain and maintain United States and foreign patent protection for our products, their uses and our processes, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties |
| We do not know whether any patents will issue from any of our patent applications or, even if patents issue or have issued, that the issued claims will provide us 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 claims in the pharmaceutical 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 |
| If we are not able to obtain adequate patent protection, our ability to prevent competitors from making, using and selling similar products will be limited |
| Furthermore, our activities may infringe the claims of patents held by third parties |
| Defense and prosecution of infringement or other intellectual property claims, as well as participation in other inter-party proceedings, can be expensive and time-consuming, regardless of whether or not the outcome is favorable to us |
| If the outcome of any such litigation or proceeding were adverse, we 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 affected products, any of which outcomes could have a material adverse effect on our business |
| WE DO NOT KNOW WHETHER LEXIVA/TELZIR WILL CONTINUE TO BE COMPETITIVE IN THE MARKET FOR HIV PIs OR IF BRECANAVIR, IF APPROVED, WILL BE SUCCESSFUL IN THE MARKET We currently receive royalties from sales of Lexiva/Telzir under our collaboration with GlaxoSmithKline and will receive product royalty payments on sales of brecanavir, if any, if brecanavir is approved for sale |
| Lexiva/Telzirapstas share of the worldwide protease inhibitor market may decrease due to competitive forces and market dynamics |
| Other HIV PIs and a number of other products, including Viread® (tenofovir dispoproxil fumerate), Sustiva® (efavirenz) and Ziagen® (abacavir) are on the market for the treatment of HIV infection and AIDS Other drugs are still in development by our competitors, including Bristol-Myers Squibb, Boehringer Ingelheim and Johnson & Johnson, which may have better efficacy, fewer side effects, easier administration and/or lower costs than Lexiva/Telzir or brecanavir |
| Moreover, the growth in the worldwide market for HIV PIs has, to a certain extent, occurred as a result of early and aggressive treatment of HIV infection with a protease inhibitor-based regimen |
| Changes in treatment strategy, in which treatment is initiated later in the course of infection, or in which treatment is more often initiated with a regimen that does not include a protease inhibitor, may result in reduced use of HIV PIs |
| As a result, the total market for HIV PIs may decline, 37 _________________________________________________________________ decreasing the sales potential of Lexiva/Telzir and/or brecanavir |
| Further, although we provide education efforts related to the promotion of Lexiva/Telzir in the United States and key markets in Europe, GlaxoSmithKline directs the majority of the marketing and sales efforts and the positioning of Lexiva/Telzir in the overall market, and we have little control over the direction or success of those efforts |
| GlaxoSmithKline has the right to terminate its agreement with us without cause upon twelve months &apos notice, and would have no obligation to pay further royalties to us upon any such termination |
| IF PHYSICIANS, PATIENTS AND THIRD-PARTY PAYORS DO NOT ACCEPT OUR FUTURE DRUGS, WE MAY BE UNABLE TO GENERATE SIGNIFICANT REVENUE, IF ANY Even if our drug candidates obtain regulatory approval, they may not gain market acceptance among physicians, patients and health care payors |
| Physicians may elect not to recommend our drugs for a variety of reasons including: • the timing of the market introduction of competitive drugs; • lower demonstrated clinical safety and efficacy compared to other drugs; • lack of cost-effectiveness; • lack of availability of reimbursement from third-party payors; • convenience and ease of administration; • prevalence and severity of adverse side effects; • other potential advantages of alternative treatment methods; and • ineffective marketing and distribution support |
| If our approved drugs fail to achieve market acceptance, we would not be able to generate significant revenue |
| IF THE GOVERNMENT AND OTHER THIRD-PARTY PAYORS FAIL TO PROVIDE COVERAGE AND ADEQUATE PAYMENT RATES FOR OUR FUTURE DRUGS, OUR REVENUE AND PROSPECTS FOR PROFITABILITY WILL BE HARMED In both domestic and foreign markets, our sales of any future drugs will depend in part upon the availability of reimbursement from third-party payors |
| Such third-party payors include government health programs such as Medicare, managed care providers, private health insurers and other organizations |
| These third-party payors are increasingly attempting to contain healthcare costs by demanding price discounts or rebates and limiting both the types and variety of drugs that they will cover and the amounts that they will pay for these drugs |
| We might need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of any future drugs to such payors &apos satisfaction |
| Such studies might require us to commit a significant amount of management time and financial and other resources |
| Our future drugs might not ultimately be considered cost-effective |
| Adequate third-party reimbursement might not be available to enable us to maintain price levels sufficient to realize an appropriate return on investment in product development |
| Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on payments allowed for lower-cost products that are already reimbursed, may be incorporated into existing payments for other products or services, and may reflect budgetary constraints and/or imperfections in Medicare or Medicaid data used to calculate these rates |
| Net prices for drugs may be reduced by mandatory discounts or rebates required by government health care programs |
| In addition, legislation has been introduced in Congress that, if enacted, would permit more widespread importation of drugs from foreign countries into the United States, which may include importation from countries where the drugs are sold at lower prices than in the United States |
| Such legislation, or similar regulatory changes or relaxation of laws that restrict imports of drugs from other countries, could reduce the net price we receive for our marketed drugs |
| 38 _________________________________________________________________ RECENT FEDERAL LEGISLATION WILL INCREASE THE PRESSURE TO REDUCE PRICES OF PHARMACEUTICAL PRODUCTS PAID FOR BY MEDICARE, WHICH COULD ADVERSELY AFFECT OUR REVENUES, IF ANY The Medicare Prescription Drug Improvement and Modernization Act of 2003, or MMA, changed the way Medicare will cover and pay for pharmaceutical products |
| The legislation expanded Medicare coverage for drug purchases by the elderly and eventually will introduce a new reimbursement methodology based on average sales prices for drugs |
| In addition, this legislation provides authority for limiting the number of drugs that will be covered in any therapeutic class |
| As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs |
| These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business |
| While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors |
| OUR BUSINESS HAS A SUBSTANTIAL RISK OF PRODUCT LIABILITY CLAIMS IF WE ARE UNABLE TO OBTAIN APPROPRIATE LEVELS OF INSURANCE, A PRODUCT LIABILITY CLAIM COULD ADVERSELY AFFECT OUR BUSINESS Our business exposes us to significant potential product liability risks that are inherent in the development, manufacturing and sales and marketing of human therapeutic products |
| We currently have clinical trial insurance and will seek to obtain product liability insurance prior to the sales and marketing of any of our drug candidates |
| However, our insurance may not provide adequate coverage against potential liabilities |
| Furthermore, clinical trial and product liability insurance is becoming increasingly expensive |
| As a result, we may be unable to maintain current amounts of insurance coverage or obtain additional or sufficient insurance at a reasonable cost to protect against losses that could have a material adverse effect on us |
| If a claim is brought against us, we might be required to pay legal and other expenses to defend the claim, as well as uncovered damages awards resulting from a claim brought successfully against us |
| Furthermore, whether or not we are ultimately successful in defending any such claims, we might be required to direct significant financial and managerial resources to such defense, and adverse publicity is likely to result |
| IF WE DO NOT COMPLY WITH LAWS REGULATING THE PROTECTION OF THE ENVIRONMENT AND HEALTH AND HUMAN SAFETY, OUR BUSINESS COULD BE ADVERSELY AFFECTED Our research and development efforts involve the controlled use of hazardous materials, chemicals and various radioactive compounds |
| Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated |
| If an accident occurs, we could be held liable for resulting damages, which could be substantial |
| We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials |
| Although we maintain workers &apos compensation insurance to cover us for costs we may incur due to injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities |
| Due to the small amount of hazardous materials that we generate, we have determined that the cost to secure insurance coverage for environmental liability and toxic tort claims far exceeds the benefits |
| Accordingly, we do not maintain any insurance to cover pollution conditions or other extraordinary or unanticipated events relating to our use and disposal of hazardous materials |
| Additional federal, state and local laws and regulations affecting our operations may be adopted in the future |
| We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations |
| 39 _________________________________________________________________ WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT MAY FRUSTRATE ANY ATTEMPT TO REMOVE OR REPLACE OUR CURRENT MANAGEMENT Our corporate charter and by-law provisions and stockholder rights plan may discourage certain types of transactions involving an actual or potential change of control of Vertex that might be beneficial to us or our security holders |
| Our charter provides for staggered terms for the members of the Board of Directors |
| Our 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 80prca stockholder vote |
| 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 15prca or more of the outstanding common stock |
| We may issue shares of any class or series of preferred stock in the future without stockholder approval and upon such terms as our 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 |
| As a result, stockholders or other parties may find it more difficult to remove or replace our current management |
| OUR STOCK PRICE MAY FLUCTUATE BASED ON FACTORS BEYOND OUR CONTROL Market prices for securities of companies such as Vertex are highly volatile |
| Within the twelve months ended December 31, 2005, our common stock traded between dlra8dtta61 and dlra29dtta24 per share |
| The market for our stock, like that of other companies in the biotechnology field, has from time to time experienced significant price and volume fluctuations that are unrelated to our operating performance |
| The future market price of our securities could be significantly and adversely affected by factors such as: • announcements of results of clinical trials or nonclinical studies; • announcements of financial results and other operating performance measures, or capital structuring activities; • technological innovations or the introduction of new products by our competitors; • government regulatory action; • public concern as to the safety of products developed by others; • developments in patent or other intellectual property rights or announcements relating to these matters; • developments in domestic and international governmental policy or regulation, for example relating to intellectual property rights; and • developments relating specifically to other companies and market conditions for pharmaceutical and biotechnology stocks in general |
| OUR OUTSTANDING INDEBTEDNESS MAY MAKE IT MORE DIFFICULT TO OBTAIN ADDITIONAL FINANCING OR REDUCE OUR FLEXIBILITY TO ACT IN OUR BEST INTERESTS As of December 31, 2005, we had approximately dlra42dtta1 million in aggregate principal amount of 5prca Convertible Subordinated Notes due in September 2007 ( "e 2007 Notes "e ) and approximately dlra118dtta0 million in aggregate principal amount of 5dtta75prca Convertible Senior Subordinated Notes due in February 2011 ( "e 2011 Notes "e ) outstanding |
| The high level of our indebtedness will affect us by: • exposing us to fixed rates of interest, which may be in excess of prevailing market rates; • making it more difficult to obtain additional financing for working capital, capital expenditures, debt service requirements or other purposes; 40 _________________________________________________________________ • constraining our ability to react quickly in an unfavorable economic climate or to changes in our business or the pharmaceutical industry; and • requiring the dedication of a substantial portion of our expected cash flow to service of our indebtedness, thereby reducing the amount of expected cash flow available for other purposes |
| Under the lease, we are required to complete certain build-outs and improvements of the facility |
| We currently expect to occupy approximately 120cmam000 square feet of the facility |
| We have sublease arrangements in place for the remaining rentable square footage of the facility |
| In determining our obligations under the lease for the portion of the facility that we do not expect to occupy, we have made certain assumptions relating to the costs that will be incurred to satisfy our build-out commitments under the lease, operating costs, the time necessary to sublease the space after the expiration of the initial subleases, projected future sublease rental rates and the anticipated durations of future subleases |
| Our estimates have changed in the past, and may change in the future, resulting in additional adjustments to the estimate of liability, and the effect of any such adjustments could be material |
| GOVERNMENT INVESTIGATIONS OR LITIGATION AGAINST OUR COLLABORATORS COULD IMPACT OUR BUSINESS The federal government, certain state governments and private payors are investigating and have begun to file actions against numerous pharmaceutical and biotechnology companies alleging that the reporting of prices for pharmaceutical products has resulted in a false and overstated Average Wholesale Price, or AWP, which in turn is alleged to have improperly inflated the reimbursement paid by Medicare beneficiaries, insurers, state Medicaid programs, medical plans and others to health care providers who prescribed and administered those products |
| Some payors are also alleging that pharmaceutical and biotechnology companies are not reporting their "e best price "e to the states under the Medicaid program |
| In addition, recent government litigation against pharmaceutical companies has focused on allegations of off-label promotion in connection with the filing of false claims for government reimbursement |
| In any AWP cases or other cases brought by the government where our collaborators or licensees are named as defendants with respect to any products licensed from us, the outcome of the case could have a material adverse effect on our financial results |
| SALES OF ADDITIONAL SHARES OF OUR COMMON STOCK COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE Sales of substantial amounts of our common stock in the open market, or the availability of such shares for sale, could adversely affect the price of our common stock |
| In addition, the issuance of common stock upon exercise of any outstanding option or the conversion of any of our outstanding convertible debt would be dilutive, and may cause the market price for a share of our common stock to decline |
| As of December 31, 2005, we had 108cmam153cmam000 shares of common stock issued and outstanding |
| We also had outstanding options to purchase approximately 14cmam669cmam000 shares of common stock with exercise prices as set forth in Note N, "e Common and Preferred Stock, "e to our consolidated financial statements included in this Annual Report on Form 10-K, and with a weighted average exercise price of dlra22dtta84 per share |
| Our outstanding notes were convertible into approximately 8cmam354cmam000 shares of common stock with a weighted average conversion price of dlra19dtta16 per share |
| Outstanding options and convertible notes may be exercised or converted, as the case may be, if the market price of our common stock exceeds the applicable exercise or conversion price |