Pedro In October, 2003, Vertex Vertex Pharmaceuticals was in a tight spot.

It was losing money and was just four years away from the maturation of convertible debt that amounted to about half of its cash and short-term investments. But Vertex had a bold plan to reverse its fortunes. By bringing one or more of its drugs to market without the aid of another firm, Vertex could avoid sharing revenues. Vertex had four candidates, but could not afford to fund more than two. In order to select the right drug or drugs, Vertex must weigh each against four criteria: 1. The probability of the drug receiving FDA approval and thus reaching market 2. The size and timing of the cash flows from drug development and sales 3. The capacity of the drug to excite and motivate the scientists working at Vertex 4. Vertex's capacity to support the effort, both financially and organizationally Vertex must also decide what to do with the drugs it does not choose to bring to market. My recommendation is that they commit to bring VX-148 to market, plan to bring VX-950 to market, and license VX-705 and VX-765 as they have in the past. Bringing VX-148 to market is an obvious choice. The drug is already though Phase 1 and has a good chance of reaching FDA approval. While the peak earnings are the lowest of the four, so, too, are the remaining development costs. Its cash flows turn positive soonest, to the tune of about $851 million in 2007, just when Vertex will need an infusion to help offset its debt obligations. Larger positive cash flows in the following two years will more than cover the costs of VX-950's Phase III trials. Additionally, the relatively modest sales expected from the drug will allow Vertex to carefully develop the new capacities it will need, with the possible exception of sales, since the drug will face established competitors. Unfortunately, 148 is seen as a me-too drug, and is not the type of medicine that motivates Vertex scientists or

1 Based on a 90% margin on 35% of peak sales of $600 for the first year of a next generation drug, less SG&A expenses of $30 million (assuming one quarter to ramp up the SG&A infrastructure and two quarters using it)

Pedro leadership Vertex must consider creative options to keep the 148 team motivated, such as letting them participate in the bonus pool of both drugs. VX-950 has about the same chance of approval as 148. Its positive cash flows are the furthest out, but so, too, are the bulk of its development costs starting in the expected first full year of 148 sales. Additionally, 950 complements 148 as it is exactly the type of drug that Vertex prides itself on developing, as it addresses a significant unmet medical need and offers staff a challenge. Since it will likely enter Phase III just before 148 is likely to reach approval, there is the option to make a licensing deal and attempt to return a biotech business model if the attempts to bring a product to market fail. However, if all goes well, Vertex will have several years of sales and marketing experience before 950 reaches the market, although as 950 treats a different therapeutic area than 148 and may need its own sales force. In a perfect world, Vertex would be developing VX-765. The drug is exciting for the scientists, has the best chance of FDA approval, and has predicted peak sales of a billion dollars. Sadly, it is the priciest to develop, with the Phase III costs starting in 2007.2 Delaying Phase III until 148 sales become more mature is an option, but drug development is very time-sensitive and a delay could be disastrous. Licensing 765 is made even more attractive by the fact that Vertex partnered on a similar drug with Aventis, who may have an interest here. VX-705 has the lowest chance of FDA approval and is the second-costliest drug to develop. Its Phase III is also scheduled to start in 2007, making it as poorly-timed as 765. Also like 765, there is an existing licensing deal, but only covering the Far East. Vertex could seek to expand this deal, license 705 on its own or arrange to license the 765 and 705 together as an anti-inflammation bundle.

2 This ignores the statement on page 10 of the case that asserts Phase II started in 1999, in favor of the schedule in Exhibit 7.