DEF 14A 1 a2191910zdef14a.htm DEF 14A
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

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

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Definitive Proxy Statement

 

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Soliciting Material Pursuant to §240.14a-12

Vertex Pharmaceuticals Incorporated

(Name of Registrant as Specified In Its Charter)

 

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GRAPHIC

April 7, 2009

Dear Fellow Stockholder:

        You are cordially invited to attend the 2009 annual meeting of stockholders of Vertex Pharmaceuticals Incorporated to be held on Thursday, May 14, 2009, at 9:30 a.m. at our headquarters at 130 Waverly Street, Cambridge, Massachusetts.

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

    elect two directors to the class of directors whose term will expire in 2012;

    approve amendments to our Amended and Restated 2006 Stock and Option Plan that increase the number of shares of common stock authorized for issuance under the plan by 7,700,000 shares from 13,902,380 shares to 21,602,380 shares and increase the maximum number of shares a participant may receive in a calendar year under the plan from 600,000 to 700,000; and

    ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2009.

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

        Thank you for giving these materials your careful consideration.

    Sincerely,

 

 

GRAPHIC

 

 

JOSHUA BOGER
Chief Executive Officer

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



NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

May 14, 2009

        Notice hereby is given that the 2009 annual meeting of stockholders of Vertex Pharmaceuticals Incorporated will be held on Thursday, May 14, 2009, at 9:30 a.m. at our headquarters, located at 130 Waverly Street, Cambridge, Massachusetts, to:

    elect two directors to the class of directors whose term will expire in 2012;

    approve amendments to our Amended and Restated 2006 Stock and Option Plan that increase the number of shares of common stock authorized for issuance under the plan by 7,700,000 shares from 13,902,380 shares to 21,602,380 shares and increase the number of shares a participant may receive in a calendar year under the plan from 600,000 to 700,000;

    ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2009; and

    consider and act upon such other business as may properly come before the annual meeting.

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

        Holders of record of our common stock at the close of business on March 17, 2009, the record date for the annual meeting, are entitled to vote at the annual meeting and at any postponements or adjournments of the annual meeting. All stockholders are invited to attend the annual meeting in person.

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

    BY ORDER OF THE BOARD OF DIRECTORS

 

 

GRAPHIC

 

 

KENNETH S. BOGER
Secretary
April 7, 2009

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



PROXY STATEMENT

2009 ANNUAL MEETING OF STOCKHOLDERS

To Be Held on May 14, 2009

        This proxy statement, with the enclosed proxy card, is being furnished to stockholders of Vertex Pharmaceuticals Incorporated in connection with the solicitation by our board of directors of proxies to be voted at our 2009 annual meeting of stockholders and at any postponements or adjournments thereof. The annual meeting will be held on Thursday, May 14, 2009, at 9:30 a.m. at our headquarters, located at 130 Waverly Street, Cambridge, Massachusetts.

        This proxy statement and the enclosed proxy card are first being mailed or otherwise furnished to our stockholders on or about April 9, 2009. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and materials regarding our company are being mailed to the stockholders with this proxy statement, but are not part of the proxy statement.


VOTING PROCEDURES

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

        Who Can Vote?    In order to vote, you must have been a stockholder of record at the close of business on the record date, which is March 17, 2009. Stockholders whose shares are owned of record by brokers and other nominees should follow the voting instructions provided by the institution that holds their shares. As of the record date, there were 172,967,071 shares of our common stock issued, outstanding and entitled to vote. Each share of common stock is entitled to one vote on each matter to be voted upon.

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

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

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

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

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

    What Vote is Required to Approve Each Proposal and How are Votes Counted?

    Proposal 1: Election of Directors       The nominees for director who receive the most votes, also known as a "plurality" of the votes, will be elected. Abstentions are not counted for purposes of electing directors. You may vote either FOR or WITHHOLD your vote from any one or more of the nominees. Votes that are withheld will not be included in the vote tally for the election of directors. Brokerage firms and other nominees have authority to vote shares of their customers that are held by the broker or a nominee in "street name" for the election of directors. If a broker or other nominee does not exercise this authority, the failure to vote, or a "broker non-vote," will have no effect on the results of the election of directors.    
    Proposal 2: Amendments to Our Amended and Restated 2006 Stock and Option Plan       The affirmative vote of a majority of the shares of common stock cast by the stockholders present in person or represented by proxy at the annual meeting is required to approve the amendments to our Amended and Restated 2006 Stock and Option Plan. Abstentions will have no effect on the results of these votes. For this proposal, brokerage firms do not have authority to vote shares of their customers that are held in "street name." Therefore, any shares not voted by a customer will be treated as broker non-votes, and broker non-votes will have no effect on the outcome of this proposal.    
    Proposal 3: Ratification of Independent Registered Public Accounting Firm       The affirmative vote of a majority of the shares of common stock cast by the stockholders present in person or represented by proxy at the annual meeting is required to approve the ratification of our independent registered public accounting firm. Abstentions will have no effect on the results of these votes. For this proposal, brokerage firms have authority to vote shares of their customers that are held in "street name." If a broker does not exercise this authority, the resulting broker non-votes will have no effect on the outcome of this proposal.    

IMPORTANT NOTICE REGARDING AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 14, 2009

This proxy statement and our Annual Report on Form 10-K for the year ended December 31, 2008 are available to holders of record of our common stock at www.envisionreports.com/vrtx and to beneficial holders of our common stock at www.edocumentview.com/vrtx.

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PROPOSAL 1:
ELECTION OF DIRECTORS

        Our board of directors is divided into three classes, the Class I Directors, Class II Directors and Class III Directors, with one class elected each year. Members of each class hold office for a three-year term. Our board currently consists of nine members and there is one vacant board seat. Our by-laws provide that our board shall consist of at least three and not more than eleven members, as may be fixed from time to time by our board. The terms of the Class II Directors will expire at the 2009 annual meeting. Roger W. Brimblecombe and Bruce I. Sachs are current Class II Directors and have been nominated by our board for re-election at the 2009 annual meeting for a three-year term that will expire at the 2012 annual meeting. Eric K. Brandt, a current Class II Director, is not standing for re-election. The terms of the Class III Directors and Class I Directors will expire at the 2010 and 2011 annual meetings, respectively.

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

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

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


Nominees

Class II Directors—Present Terms Expiring In 2009 And Proposed Terms To Expire In 2012

Roger W. Brimblecombe, Ph.D., D.Sc.
Director since 1993
Age: 79
Committee Memberships:
Management Development and
    Compensation Committee—
    Chair
Science and Technology Committee

  Dr. Brimblecombe has been a member of the Board of Vertex Pharmaceuticals (Europe) Ltd. since 2005. He served as Chairman of Vanguard Medica plc from 1991 to 2000, of Core Group plc from 1997 to 1999, of Oxford Asymmetry International plc from 1997 to 2000 and pSivida Ltd. from 2002 to 2007. From 1979 to 1990, he held various Vice Presidential posts in SmithKline & French Laboratories' research and development organization, including Vice President R&D for Europe and Japan. He is currently a Partner in MVM Life Science Partners LLP and an Independent Director of the 2gether National Health Service Mental Health Trust in the U.K. He holds Ph.D. and D.Sc. degrees in pharmacology from the University of Bristol, England.

Bruce I. Sachs
Director since 1998
Age: 49
Committee Memberships:
Audit and Finance Committee
Management Development and
    Compensation Committee

 

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

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Continuing Members of Our Board of Directors

Class III Directors—Terms Expiring In 2010

Joshua S. Boger, Ph.D.
Director since 1989
Age: 58

  Dr. Joshua Boger is the founder of Vertex. He has been our Chief Executive Officer since 1992, and is expected to terminate his employment with us in May 2009. He was our Chairman from 1997 until May 2006 and our President from our inception in 1989 until December 2000, and again from May 2005 through February 2009. He was our Chief Scientific Officer from 1989 until May 1992. Prior to founding Vertex in 1989, Dr. Boger held the position of Senior Director of Basic Chemistry at Merck Sharp & Dohme Research Laboratories in Rahway, New Jersey, where he headed both the Department of Medicinal Chemistry of Immunology & Inflammation and the Department of Biophysical Chemistry. Dr. Boger is the current chairman of the Biotechnology Industry Organization (BIO). 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. Dr. Boger is the brother of Mr. Kenneth Boger, our Senior Vice President and General Counsel.

Charles A. Sanders, M.D.
Director since 1996
Age: 77
Committee Memberships:
Corporate Governance and
    Nominating Committee—Chair

 

Dr. Sanders served as our lead outside director from 2003 until 2006 and has served as the Chairman of our board since May 2006. He will become our lead independent director in May 2009, when Mr. Emmens is expected to become the Chairman. Dr. Sanders retired in 1994 as Chief Executive Officer and in 1995 as Chairman of Glaxo Inc. From 1990 to 1995, he served as a member of the board of Glaxo plc. From 1981 to 1989, Dr. Sanders held a number of positions at Squibb Corporation, including that of Vice Chairman. Dr. Sanders has served in the past on the boards of Merrill Lynch, Reynolds Metals Co., Morton International Inc. and Fisher Scientific International. He is currently a director of Biodel Inc., Cephalon, Inc., and Icagen, Inc. Dr. Sanders had his undergraduate education at the University of Texas, and earned an M.D. from the University of Texas Southwestern Medical School.

Elaine S. Ullian
Director since 1997
Age: 61
Committee Memberships:
Management Development and
    Compensation Committee

 

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

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Continuing Members of Our Board of Directors

Class I Directors—Terms Expiring In 2011

Stuart J. M. Collinson, Ph.D.
Director since 2001
Age: 49
Committee Memberships:

Audit and Finance Committee
Science and Technology Committee

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

Eugene H. Cordes, Ph.D.
Director since 2005
Age: 72
Committee Memberships:

Science and Technology
    Committee—Chair
Corporate Governance and
    Nominating Committee

 

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

Matthew W. Emmens
Director since 2004
Age: 57

 

Mr. Emmens became our President in February 2009 and is also expected to become our Chairman and Chief Executive Officer on May 23, 2009. Mr. Emmens is the Chairman of the Board of Shire plc. and has been a member of Shire's board since March 2003. From March 2003 to June 2008, Mr. Emmens was also the Chief Executive Officer of Shire plc. Before joining Shire in 2003, Mr. Emmens served as President of Merck KGaA's global prescription pharmaceuticals business in Darmstadt, Germany. In 1999, he joined Merck KGaA and established EMD Pharmaceuticals, its United States prescription pharmaceutical business. Mr. Emmens held the position of President and Chief Executive Officer at EMD Pharmaceuticals from 1999 to 2001. Prior to this, Mr. Emmens held various positions, including Chief Executive Officer, at Astra Merck,  Inc. as well as several positions at Merck & Co., Inc. Mr. Emmens received a B.S. degree in business management from Farleigh Dickinson University.

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Information Regarding Our Board of Directors and its Committees

Corporate Governance Principles and Our Board of Directors

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

Our Board

        Our board of directors met 9 times during 2008. Each of our director nominees and continuing directors attended 75% or more of the board meetings during 2008. Each member of our board is encouraged to attend each annual meeting of our stockholders. All of our directors attended our annual meeting of stockholders held in 2008 except Ms. Ullian. Our board has determined that the following members of and nominees for the board qualify as "independent" under the definition adopted by The NASDAQ Stock Market LLC: Mr. Brandt, Dr. Brimblecombe, Dr. Collinson, Dr. Cordes, Mr. Sachs, Dr. Sanders and Ms. Ullian.

Board Committees

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

Corporate Governance and Nominating Committee

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

    assists our board of directors in developing and implementing our corporate governance principles;

    determines the size and composition of our board and its committees;

    monitors a process to assess the effectiveness of our board;

    identifies qualified individuals to become members of our board; and

    recommends nominations to the full board.

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In addition, in his role as chairman of our board Dr. Sanders has served, and in his position as lead independent director he is expected to serve, as the presiding director of executive sessions of our independent directors, which generally are held following each of our board meetings.

        In 2008, the corporate governance and nominating committee met three times, and all of the members attended at least 75% of the meetings that occurred while the member was on the corporate governance and nominating committee, except that Mr. Brandt did not attend one meeting of the corporate governance and nominating committee in 2008.

        When assessing potential nominees for election to our board, the corporate governance and nominating committee considers a variety of factors, such as the candidates' education, experience and knowledge of our industry and experience in other industries that are relevant to us, understanding of our technology and the science associated with drug discovery and development, prior service as a director of a public company and relevant commercial experience. The corporate governance and nominating committee may consider candidates recommended by stockholders, as well as recommendations from other sources, such as other directors or officers, third-party search firms or other appropriate sources. Generally, if a stockholder wishes to propose a candidate for consideration as a nominee by the corporate governance and nominating committee, the stockholder should submit any pertinent information regarding the candidate, including biographical information and a statement by the proposed candidate that he or she is willing to serve if nominated and elected, by mail to our corporate secretary at our offices at 130 Waverly Street, Cambridge, Massachusetts 02139. If a stockholder wishes to nominate a candidate to be considered for election as a director at the 2010 annual meeting of stockholders using the procedures set forth in our by-laws, the stockholder must follow the procedures described in "Stockholder Proposals for the 2010 Annual Meeting and Nominations for Director" on page 70 of this proxy statement. In general, persons recommended to the corporate governance and nominating committee by stockholders will be considered on the same basis as candidates from other sources.

Audit and Finance Committee

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

    assist our board in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and reporting practices; and

    review and make recommendations to our board concerning our financial structure and financing strategy.

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

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        In 2008, the audit and finance committee met ten times, and each member of the audit and finance committee attended at least 75% of the meetings that occurred while the member was on the audit and finance committee. The report of the audit and finance committee appears at page 18 of this proxy statement.

MDCC

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

    recommends to our full board the amount, character and method of payment of compensation of all of our executive officers and certain other key employees;

    plans for the succession of our executives; and

    administers our stock and option plans and employee stock purchase plan.

        See Executive Compensation—Compensation Discussion and Analysis below for a discussion of the MDCC's role in determining executive and director compensation.

        In 2008, the MDCC met five times, and each member of the MDCC attended at least 75% of its meetings. The report of the MDCC appears at page 37 of this proxy statement.

Science and Technology Committee

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

    reviews and assesses our current and planned research and development programs and technology initiatives from a scientific perspective;

    assesses the capabilities of our key scientific personnel and the depth and breadth of our scientific resources;

    provides strategic advice to our board regarding emerging science and technology issues and trends; and

    periodically reviews our patent portfolio and strategy.

        In 2008, the science and technology committee met five times, and each member of the science and technology committee attended at least 75% of its meetings.

Board Recommendation

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

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PROPOSAL 2:
AMENDMENTS TO AMENDED AND RESTATED 2006 STOCK AND OPTION PLAN

        In 2006, our board of directors adopted and our stockholders approved our 2006 Stock and Option Plan, or 2006 Plan, which was amended and restated in 2008 and further amended in February 2009. The number of shares of our common stock available for awards under the 2006 Plan is 13,902,380 shares. In February 2009, our board increased the maximum number of shares a participant may receive in a calendar year under the 2006 Plan from 600,000 to 700,000. In March 2009, our board approved an amendment to the 2006 Plan increasing the number of shares authorized for issuance under the 2006 Plan by 7,700,000 shares to 21,602,380 shares, subject to stockholder approval.

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

        We are submitting the amendments to increase the number of shares authorized for issuance under the 2006 Plan by 7,700,000 shares and to increase the maximum number of shares a participant may receive in a calendar year under the 2006 Plan from 600,000 to 700,000 to our stockholders for approval at the 2009 annual meeting. The rules of The NASDAQ Stock Market LLC require approval of the amendment to the 2006 Plan to increase the number of shares available for issuance thereunder. In addition, the amendments to the 2006 Plan are being submitted to our stockholders to ensure (i) favorable federal income tax treatment under Section 422 of the Internal Revenue Code of 1986, as amended, or the Code, for any grants of incentive stock options and (ii) continued eligibility under Rule 162(m) of the Code to receive a federal income tax deduction with respect to compensation earned upon exercise of options under our 2006 Plan.

        Our stock and option plans consist of our 1991 Stock Option Plan, 1994 Stock and Option Plan, 1996 Stock and Option Plan and 2006 Plan. As of March 17, 2009, there were 1,351,410 shares remaining available for award under our 2006 Plan. No additional awards may be granted under the other plans. We believe that we need the additional 7,700,000 shares in order to support our growth and to continue to attract qualified employees and induce them to work for our benefit through our equity compensation program.

        As of March 17, 2009, options to purchase an aggregate of 10,295,385 shares having a weighted-average exercise price of $30.58 and a weighted-average term before expiration of 8.83 years were outstanding under our 2006 Plan and options to purchase an aggregate of 8,348,486 shares having a weighted-average exercise price of $28.88 and a weighted-average term before expiration of 3.98 years were outstanding under our other stock and option plans. Also on March 17, 2009, there were outstanding 1,810,758 unvested shares of restricted stock granted under the 2006 Plan and an additional 462,814 unvested shares of restricted stock granted under our other stock and option plans.

        On April 3, 2009, the last sales price for our common stock on the Nasdaq Global Select Market was $27.33 per share.

        The principal features of the 2006 Plan are set forth below. A copy of the Amended and Restated 2006 Plan, including Amendment No. 1, which became effective on February 5, 2009, and Amendment

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No. 2 which would become effective upon stockholder approval of this proposal, is attached to this proxy statement as Appendix A.

Summary Description of the 2006 Plan

    Administration by the MDCC and Eligibility for Participation

        The 2006 Plan is administered by our board of directors or any committee to which it delegates all or a part of its administrative responsibilities under the 2006 Plan. Our board of directors has delegated the administration of the 2006 Plan to the MDCC. Subject to the provisions of the 2006 Plan, the MDCC has the authority to determine the persons to whom awards under the 2006 Plan will be granted, the number of shares to be covered by each award, the exercise price per share and the manner of exercise, and the terms and conditions upon which awards are granted, to accelerate the vesting or extend the date of exercise of any installment of any award, and to interpret the provisions of the 2006 Plan. Awards may be granted under the 2006 Plan to our employees, including officers and directors who are employees, and to our consultants, advisors and non-employee directors. As of February 28, 2009, we and our subsidiaries had 1,352 employees eligible to participate in the 2006 Plan.

    Description of Awards

        The 2006 Plan provides for the award of stock options, stock grants, and other stock-based awards. The 2006 Plan also provides that on or after May 15, 2008 only 20% of shares available—including shares that become available through the cancellation of outstanding options or through the repurchase of restricted stock at cost—may be granted as any type of award other than a stock option award.

    Stock Options

        Stock options granted under the 2006 Plan may be awarded as either incentive stock options within the meaning of Section 422 of the Code, referred to as ISOs, or as non-qualified options. Stock options provide award recipients with the right, subject to the terms and conditions that are specified in connection with the option grant, to purchase a specified number of shares of our common stock at a specified exercise price. Only our employees are eligible to receive ISOs. The maximum value of shares of common stock—determined at the time of grant—that may be subject to ISOs that become exercisable by an employee in any one year is limited to $100,000. Stock options granted under the 2006 Plan may not be granted with an exercise price that is less than the fair market value of our common stock on the date of grant. ISOs may not be granted with an exercise price that is less than 110% of fair market value in the case of employees or officers holding 10% or more of our voting stock. ISOs granted under the 2006 Plan must expire not more than ten years from the date of grant, and not more than five years from the date of grant in the case of ISOs granted to an employee or officer holding 10% or more of our voting stock. No participant may be granted options and stock-based awards in any calendar year for more than 700,000 shares, subject to adjustment for stock splits and similar recapitalizations.

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

        The 2006 Plan provides specifically for option grants to non-employee directors under our director compensation program. On the date of initial election to our board of directors, each newly elected non-employee director will automatically be granted a non-qualified stock option to purchase a specified

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number of shares of common stock determined from time to time by our board of directors at an exercise price equal to 100% of the fair market value per share of our common stock on the date of grant, vesting in equal quarterly installments over a period of four years from the date of grant. Currently, a newly elected non-employee director receives an option to purchase 30,000 shares of our common stock. In addition, each non-employee director serving in office on June 1 of any year is granted a fully vested non-qualified stock option to purchase a specified number of shares determined from time to time by our board of directors. The chair of our board, if the chair is an independent director, or the lead independent director, if the chair is not an independent director, receives an additional grant on June 1, in each case at an exercise price equal to 100% of the fair market value per share of our common stock on the date of grant. Currently, the annual grant for each director is for 20,000 shares of common stock, and the additional grant to the chair or lead independent director is for 20,000 shares of common stock. These options are fully exercisable immediately and have a term of ten years.

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

    Stock Grants

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

    Stock-Based Awards

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

    Adjustments in the Event of Stock Dividends, Stock Splits, Recapitalizations or Reorganizations

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

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    Effective Date, Amendment and Expiration

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

    Federal Income Tax Consequences

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

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

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

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

        Incentive Stock Options.    ISOs are intended to qualify for treatment under Section 422 of the Code. An ISO does not result in taxable income to the optionee or a deduction for us at the time it is granted or exercised, provided that the optionee does not dispose of the shares acquired pursuant to the option either within two years after the date of grant of the option or within one year after the shares are issued, referred to as the ISO holding period. However, the difference between the fair market value of the shares on the date of exercise and the option price will be an item of tax preference that is included in alternative minimum taxable income. Upon disposition of the shares after the expiration of the ISO holding period, the optionee will generally recognize long-term capital gain or loss based on the difference between the disposition proceeds and the option price paid for the shares. If the shares are disposed of prior to the expiration of the ISO holding period, the optionee generally will recognize taxable compensation, and we will have a corresponding deduction, in the year of the disposition, equal to the excess of the fair market value of the shares on the date of exercise of the option over the option price. Any additional gain realized on the disposition normally will constitute capital gain. If the amount realized upon such a disqualifying disposition is less than fair market value of the shares on the date of exercise, the amount of compensation income will be limited to the excess of the amount realized over the optionee's adjusted basis in the shares.

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

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

    New Plan Benefits

        Amounts of future grants under the 2006 Plan are not currently determinable because awards under the 2006 Plan will be granted at the sole discretion of the MDCC, or other delegated persons, and we cannot determine at this time either the persons who will receive awards under the 2006 Plan or the amount or types of any such awards.

Board Recommendation

        Our board of directors recommends a vote FOR the approval of the amendments to our Amended and Restated 2006 Stock and Option Plan to increase the number of shares of common stock authorized for issuance by 7,700,000 and increase the maximum number of shares a participant may receive in a calendar year under the 2006 Plan from 600,000 to 700,000. The affirmative vote by the holders of a majority of the votes cast in person or by proxy on this matter is required for the approval of this proposal.

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EQUITY COMPENSATION PLAN INFORMATION

        The following table provides aggregate information with respect to all of our equity compensation plans in effect as of December 31, 2008.

Plan Category
  Number of Securities
to be Issued Upon
Exercise of
Outstanding Options
  Weighted-Average
Exercise Price of
Outstanding Options
  Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(excluding securities
reflected in first column)
 

Equity Compensation Plans Approved by Stockholders (1)

    14,212,293   $ 30.76     6,440,422  

Equity Compensation Plans Not Approved by Stockholders (2)

    1,894,376   $ 12.13     0  
                 

Total (3)

    16,106,669   $ 28.57     6,440,422  
               

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

(2)
This category consists of certain options issued under our 1996 Stock and Option Plan for which we were not required to and did not obtain stockholder approval.

(3)
This table does not include options outstanding on December 31, 2008 to purchase an aggregate of 389,885 shares of our common stock at a weighted-average exercise price of $53.57 that were assumed by us in connection with our acquisition of Aurora Biosciences Corporation on July 18, 2001.

        Please refer to Note C, "Common and Preferred Stock," to the consolidated financial statements included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 17, 2009, for a description of the material features of the 1996 Stock and Option Plan.

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PROPOSAL 3:
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

        Our audit and finance committee is responsible for the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm. Our audit and finance committee appointed Ernst & Young LLP to perform the independent audit, review and attestation services with respect to our financial statements for the fiscal year ended December 31, 2008 and has appointed Ernst & Young LLP to perform these services for the fiscal year ending December 31, 2009.

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

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

Board Recommendation

        Our board of directors recommends that our stockholders vote FOR ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2009.


INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

    Audit services include audit work performed in the preparation of financial statements, as well as work that generally only our independent registered public accounting firm can reasonably be expected to provide, including comfort letters, statutory audits, consents and attestation services.

    Audit-related services are for assurance and related services that traditionally are performed by the independent registered public accounting firm, including due diligence related to mergers and acquisitions, employee benefit plan audits, special procedures required to meet certain regulatory requirements and consultation regarding financial accounting and/or reporting standards.

    Tax services include all services performed by the independent registered public accounting firm's tax personnel except those services specifically related to the audit of the financial statements, and include fees in the areas of tax compliance, tax planning and tax advice.

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    All other fees are those associated with services not captured in the other categories.

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

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

Independent Registered Public Accounting Firm Fees

        Aggregate fees billed to us for the fiscal years ended December 31, 2008 and 2007 by our independent registered public accounting firm Ernst & Young LLP were as follows:

 
  2008   2007  

Audit fees:

  $ 940,093   $ 778,095  

Audit-related fees:

    175,000     98,500  

Tax fees:

    95,810     111,310  

All other fees:

        1,500  
           
 

Total

  $ 1,210,903   $ 989,405  
           

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

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

        "Tax fees" consisted of fees related to tax compliance and tax advice.

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

        None of the services set forth above in the categories "audit-related fees" and "tax fees" were approved by our audit and finance committee pursuant to Rule 2-01(c)(7)(i)(C), which relates to the approval of a de minimis amount of non-audit services after the fact but before completion of the audit.

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AUDIT AND FINANCE COMMITTEE REPORT

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

        The Audit Committee assists the Company's Board of Directors in overseeing and monitoring the integrity of the Company's financial reporting process, compliance with legal and regulatory requirements related to financial reporting and the quality of internal and external audit processes. The committee's roles and responsibilities are set forth in a written charter, which is available on the Company's website www.vrtx.com under "Finances/Investor Info—Corporate Governance—Governance Documents." Among its duties, the Audit Committee is responsible for recommending to the Company's Board of Directors that the Company's financial statements be included in the Company's Annual Report on Form 10-K. As a basis for that recommendation, the Audit Committee engaged in the following activities. First, the Audit Committee discussed with Ernst & Young LLP ("Ernst & Young"), the Company's independent registered public accounting firm for 2008, those matters that Ernst & Young is required to communicate to and discuss with the Audit Committee under Statement on Auditing Standards No. 61 (Communication with Audit Committees), which included information regarding the scope and results of the audit. These communications and discussions are intended to assist the Audit Committee in overseeing the financial reporting and disclosure process. Second, the Audit Committee discussed with Ernst & Young the firm's independence, and received from Ernst & Young the written disclosures and the letter concerning independence as required by Public Company Accounting Oversight Board Ethics and Independence Rule 3526 (Communication with Audit Committees Concerning Independence). This discussion and disclosure informed the Audit Committee of Ernst & Young's relationships with the Company and was designed to assist the Audit Committee in considering Ernst & Young's independence. Finally, the Audit Committee reviewed and discussed, with Ernst & Young and with the Company's management, the Company's audited consolidated balance sheet at December 31, 2008, and the Company's consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for the year ended December 31, 2008, including the notes thereto.

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

        During 2008, management tested and evaluated the Company's system of internal control over financial reporting in response to the requirements set forth in Section 404 of the Sarbanes-Oxley Act of 2002 and related regulations. At the conclusion of the process, management provided the Audit Committee with a report on the effectiveness of the Company's internal control over financial reporting, which the Audit Committee reviewed. The Audit Committee also reviewed the report of management contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 filed

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with the Securities and Exchange Commission, as well as Ernst & Young's Reports of Independent Registered Public Accounting Firm included in the Company's Annual Report on Form 10-K. The latter reports relate to Ernst & Young's audit of (i) the consolidated financial statements and (ii) the effectiveness of internal control over financial reporting.

        Based on the discussions with Ernst & Young concerning the audit, the independence discussions, and the discussions with the Company's management and Ernst & Young concerning the financial statement review and discussions, and such other matters deemed relevant and appropriate by the Audit Committee, the Audit Committee recommended to the Company's Board of Directors that the consolidated financial statements be included in the Company's 2008 Annual Report on Form 10-K. This report is provided by the following independent directors, who comprise the Audit Committee:

Eric K. Brandt (Chair)
Stuart J. M. Collinson
Bruce I. Sachs

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EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Overview

        We are in the business of discovering, developing and commercializing small molecule drugs for the treatment of serious diseases. Our core purpose is to innovate to transform lives with new medicines, which we believe will create long-term value for our stockholders. We are in a period of rapid expansion because we are preparing for the possible launch and commercialization of telaprevir, our lead drug candidate for the treatment of hepatitis C viral infection. Our goal is to become a fully integrated biotechnology company with industry-leading capabilities in research, development and commercialization of innovative drugs.

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

Executive Summary

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

    reward desired performance and behaviors;

    be competitive in amount relative to compensation paid by the companies that compete with us for executive talent; and

    reflect a balance of elements so that a significant portion is bonus or equity-based and therefore "at-risk," to better align the executives' financial interests with the interests of our stockholders.

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

    base salary;

    annual cash bonus;

    stock option grants;

    restricted stock grants; and

    health and other benefits available to all our employees, including matching payments under our 401(k) plan and payment of life insurance premiums.

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

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

        Compensation Decision-Making Process:    The MDCC oversees the design, development and implementation of the compensation program for all of our executive officers. Compensation decisions generally are made on an annual basis. The board of directors sets performance goals and salaries early each year, usually at its first meeting in the year, and assigns performance ratings and awards bonuses and equity grants shortly after completion of the year, in each case at a regularly-scheduled meeting. The MDCC consults with members of our human resources department, particularly our vice president of compensation and benefits, and engages independent consultants to advise it on specific matters when it deems it appropriate. The MDCC reviews and may adjust compensation elements or amounts throughout the year. In 2008, the MDCC engaged Hewitt Associates to conduct a review of available compensation data from comparator group companies to consider whether or not adjustments to the salaries, target levels of cash and equity compensation, or performance-based adjustment factors used in our compensation program was warranted. In early 2009, the MDCC also engaged Hewitt to advise generally with respect to an employment arrangement with Matthew W. Emmens. Mr. Emmens began employment with us as our president in February 2009, and will become our president, chairman and chief executive officer on May 23, 2009, when the employment of our current chief executive officer, Dr. Joshua Boger, terminates. This engagement included advice with respect to CEO compensation generally, as well as proposed revisions to the composition of our comparator company group, as discussed more fully under the heading Compensation Decision-Making Process—Analysis of Compensation Practices of Comparator Companies.

        The materials that management provides to the MDCC often include recommendations with respect to compensation levels and performance ratings, which the MDCC considers but does not view as determinative. Final compensation decisions are approved by our full board of directors, after discussion of the MDCC's recommendations. Dr. Boger, our chief executive officer, discusses his performance with the MDCC, but does not participate in board decisions regarding his own compensation. Mr. Emmens, who has been a member of our board since 2004, did not participate in board discussions or decisions regarding his employment agreement or 2009 compensation.

        2008 Compensation of Named Executive Officers Compared to 2007:    We did not make any significant changes to the elements of our compensation program during 2008. Our company performance rating for 2008 was "Leading," and the executive bonus pool factor was 150% of target levels, compared to a company performance rating for 2007 of "Strong," with the executive bonus pool factor of 86% of target levels. This resulted in significantly higher annual bonus awards to the named executive officers for 2008

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performance as compared to 2007 performance. In general, 2008 individual ratings for our named executive officers were higher than for 2007, which also resulted in higher average equity grant amounts for 2008 performance than 2007 performance. The salaries of our executive officers, which are adjusted only for market-based factors, were increased by 3% in the first quarter of 2008, which was comparable to our 2007 increase. Additionally, in connection with the MDCC's annual review of comparator group data that took place in July 2008, Mr. Smith's base salary was increased by 6% to $450,000 and Dr. Boger's base salary was increased by 14% to $725,000, in both cases effective retroactively to February 2008. Compensation paid to the named executive officers for 2006 through 2008 and information regarding cash bonuses and equity awards based on our performance and the executives' performances in 2006 through 2008 are detailed below under the heading Compensation and Equity Tables—Summary Compensation Table.

Actions Taken in Connection with CEO Transition

        In February 2009, Matthew W. Emmens joined us as our president. He will become our president, chairman and chief executive officer on May 23, 2009. Dr. Boger's employment will terminate on May 23, 2009, but he will continue to serve on our board of directors. In connection with this transition the MDCC, and in some instances, the board, excluding Dr. Boger and Mr. Emmens, took a number of actions, including entering into an employment agreement with Mr. Emmens and a transition agreement with Dr. Boger. The board recruited Mr. Emmens to serve as our chief executive officer when he became available, because he has extensive experience leading companies through commercialization of breakthrough products, including past service as chief executive officer of both Astra Merck, Inc. and Shire plc.

        The MDCC determined that it would be necessary to enter into an employment agreement with Mr. Emmens in order to attract him to Vertex, and sought assistance in structuring and negotiating the agreement both from outside compensation consultants and outside attorneys. In general, the terms of Mr. Emmens' employment agreement provide for compensation elements consistent with the executive compensation program we have used in recent years, although in amounts generally at the higher end of the range for most elements, consistent with Mr. Emmens' expertise and experience. To assist in making judgments in this regard, the MDCC engaged Hewitt Associates to conduct a review of CEO compensation, including data pertinent to changes to our comparator company group, which were adopted in January 2009 and are discussed more fully below under the heading Compensation Decision-Making Process—Analysis of Compensation Practices of Comparator Companies. The terms of Mr. Emmens' employment agreement are discussed below in the Detailed Analysis and Discussion.

        In connection with its decision to hire Mr. Emmens, our board of directors also decided to enter into a transition agreement with Dr. Boger. The timing of our CEO transition resulted from Mr. Emmens' availability upon completion of his service as chief executive officer of Shire plc, and did not reflect a judgment by our board that Dr. Boger's performance in 2008 was anything other than leading and exemplary, which was reflected in our board's decision to award Dr. Boger the highest rating possible under the performance management program for 2008 performance. We agreed with Dr. Boger that he would remain employed as our chief executive officer until May 2009 to better facilitate the leadership transition, and that Dr. Boger would receive employment termination benefits in the amounts that would have been payable under his employment contract, plus an extension of his change of control benefits should we experience a change of control any time before the end of 2010. Our board determined that the terms of the transition agreement were appropriate to acknowledge Dr. Boger's leadership since he founded Vertex in 1989, and the potential of our clinical drug candidates now in late-stage development.

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The terms of the transition agreement with Dr. Boger are discussed more fully below under the headings Summary of Termination and Change of Control Benefits, and Employment Contracts and Change of Control Arrangements.

Detailed Analysis and Discussion

Elements of Compensation

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

Base Salary

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

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

        In each year from 2007 to 2009, the MDCC increased the named executives' base salaries early in the year by 3%, with the intention of a further review later in each year when relevant executive compensation data from comparator companies for the prior year became available. In July 2008, the MDCC determined in the course of this further review that Mr. Smith's base salary should be increased to $450,000 per year, and Dr. Boger's base salary should be increased to $725,000 per year, in both cases retroactively to February 2008, when pay raises were awarded. In making these determinations, the MDCC was provided and considered comparator group proxy data, industry survey data, the levels of named executives' salaries relative to one another, and management's recommendation, as prepared by our vice president of compensation and benefits. In January 2009, the MDCC reviewed the base salary for our chief executive officer. The MDCC agreed that Dr. Boger's base salary, for the period from February 2009 until

23



termination of his employment in May 2009, would be set at the midpoint of the range for CEOs in our comparator company group, which was $950,151. Recognizing that a higher base salary would be required to attract Mr. Emmens to join Vertex, the MDCC agreed to a base salary of $1,100,000 in Mr. Emmens' employment agreement, putting Mr. Emmens' total cash compensation near the top of the range for comparator company CEOs.

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

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

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

Company Rating
  Level of Company Performance

Leading

  Exceptional performance across our business, including successful execution of our business plan, achievement of a very high proportion of our original goals, significant additional accomplishments exceeding our original goals, and the absence of significant business setbacks.

Strong

  A high level of performance, in which a substantial majority of performance goals were met, and accomplishment of our business plan for the year.

Building

  Failure to successfully implement the approved goals or to meet a substantial portion of the annual performance goals for any reason, including a failure of management to execute our business plan, or due to events outside our control that nonetheless had a meaningful negative impact on our performance.

Not Building

  Unacceptable and disappointing performance. Significant improvement required and expected.

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

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strength of their leadership with respect to, and demonstration of, values-based behavior. This evaluation results in ratings of "not demonstrating," "living the values" or "exemplary demonstration." The "results" and "values" components of the individual rating combine for an overall individual rating of "leading/exemplary," "leading," "strong," "building" or "not building" as set forth in the following table.

 
  Results Evaluation
Values Evaluation
  Not Building   Building   Strong   Leading

Exemplary Demonstration

  Not Possible   Strong   Leading   Leading/Exemplary

Living the Values

  Not Building   Building   Strong   Leading

Not Demonstrating

  Not Building   Not Building   Building   Not Possible

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

    Annual Cash Bonus

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

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

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

        The individual incentive targets assigned to each level were determined in 2005 using available information about comparator group companies at that time. In 2007 and 2008, the MDCC engaged Hewitt Associates to conduct a review of available data about comparator company compensation. As a result of its analysis of these data, the MDCC concluded that the aggregate cash compensation—base salary plus target bonus—using the incentive targets set forth in the table below was in the appropriate

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range for 2007 and 2008. Accordingly, the MDCC made no change to the executive bonus targets for 2007 and 2008 from those in effect for 2006. The 2008 target bonus percentages were:

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

Chief Executive Officer

    60 %

Executive Vice President

    40 %

Senior Vice President and Member of Executive Team

    35 %

        In early 2009, in conjunction with planning for our leadership transition, our board decided to increase the individual incentive target for the CEO to 115% of base salary, beginning in 2009. In making this determination, the MDCC reviewed comparator company data and concluded that the aggregate cash compensation proposed for Mr. Emmens—base salary plus target bonus—was on the upper end of but within the appropriate range, and that this was desirable and necessary to recruit Mr. Emmens. At the same time, the MDCC reviewed Dr. Boger's individual incentive target for 2009, during his expected service period ending May 23. The board determined that it would be appropriate to set Dr. Boger's incentive target to the midpoint of the range for comparator company CEOs, which is 100% of his base salary. Accordingly, for 2009, the target bonuses are:

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

Mr. Emmens

    115 %

Dr. Boger

    100 %

Executive Vice President

    40 %

Senior Vice President and Member of Executive Team

    35 %

        We expect that the MDCC will review available data about comparator company compensation during 2009 once it becomes available, and that this analysis could lead to recommended further adjustments to the 2009 individual incentive targets.

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

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

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

Company Rating
  Company Performance
Factor

Not Building

  0%-25%

Building

  0%-80%

Strong

  80%-120%

Leading

  120%-150%

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

Individual Rating
  Individual Performance Factor

Not Building

  0%

Building

  50%-80%

Strong

  80%-120%

Leading

  120%-150%

    Annual Equity Awards

        Stock awards made under our 2006 Plan are granted to all eligible employees, including the named executive officers, for the purpose of creating a link between compensation and stockholder return, and to enable the named executive officers and employees the opportunity to develop and maintain a significant stock ownership position in our company that will vest over time and act as an incentive for the employee to remain employed by us. The number of shares awarded increases with increased responsibility and with higher year-end individual performance ratings.

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

        All restricted stock awards made under our annual program to our named executive officers are issued at par value, or $0.01, and vest on the fourth anniversary of the grant date, subject to accelerated vesting for certain performance-based factors. Shares that are vested may be sold by the holder without transfer restrictions, but unvested shares may not be sold. For all annual restricted stock grants made to executive officers prior to 2009, half of the shares vest if the market price of our stock achieves and maintains a pre-determined level, and the other half of the shares vest if our common stock price outperforms the Amex Biotechnology Index, or BTK Index, for two consecutive years. We consider the price target to be confidential information, and chose it with the objective of triggering accelerated vesting only upon

27



significant above-market performance of our stock. For all of these restricted stock awards, the price that would result in an acceleration of vesting was at least 50% greater than the fair market value of our common stock on the date of grant. For example, on March 17, 2004, when our stock price was $9.69, the stock price target was set at $20.00 per share and on February 3, 2005, when our stock price was $10.41, the stock price target was also set at $20.00 per share. 50% of each of these grants vested on November 9, 2005, because the market price of our common stock achieved and maintained this stock price target.

        In February 2009, the MDCC recommended to our board that we change the performance-based acceleration factors to better reflect advancement toward possible regulatory approval and commercial launch of our first drug product, telaprevir. Accordingly, for the restricted stock grant made to executive officers in February 2009, on account of 2008 performance, the shares vest on the fourth anniversary of the grant date, subject to accelerated vesting of half of the shares upon acceptance by the United States Food and Drug Administration, or FDA, of a New Drug Application, or NDA, for telaprevir, and of the other half upon FDA approval of the NDA.

        Restricted stock grants serve principally as a retention tool, because they have value that is not limited, as is the case with stock options, to any increase over the prevailing stock price on the date of grant. Restricted stock grants also are linked to performance, however, in the sense that they are more valuable if the stock price increases, and because they vest sooner if the performance-based accelerators are achieved. Additional information regarding our equity grant practices is set forth under the heading Compensation Decision-Making Process—Equity Grant Practices.

        Beginning in 2005, extending through 2008 performance, the named executive officers were eligible for equity grants in the amounts set forth in the following table:

 
  Rating  
 
  Building   Strong   Leading   Leading and
Exemplary
 
 
  Restricted
Stock
  Stock
Options
  Restricted
Stock
  Stock
Options
  Restricted
Stock
  Stock
Options
  Restricted
Stock
  Stock
Options
 

Chief Executive Officer

    22,027     165,200     31,467     236,000     39,334     295,000     47,201     354,000  

Executive Vice President

    6,767     50,750     9,667     72,500     12,084     90,625     14,501     108,750  

Senior Vice President and Member of Executive Team

    5,693     42,700     8,133     61,000     10,166     76,250     12,200     91,500  

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

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    2008 Compensation Decisions for Performance-Based Elements.

        Company Rating—Our board of directors evaluated overall 2008 performance against four high-level goals:

    meet or exceed timelines in clinical, regulatory, quality, manufacturing, and commercial operations toward a successful launch of telaprevir;

    •continue to build our portfolio in addition to telaprevir toward enablement of future new product launches;

    •maintain financial strength by balancing our net investment (loss) with balance sheet strength and enabling future investment; and

    •enable long-term growth by prioritizing talent management, implementing mission-critical business processes, and maximizing external relationships.

        Our board determined that our company performance rating for 2008 was "Leading," and set the company performance factor for the executive bonus pool at 150%, which is the highest possible performance factor under our program. This rating was based on our having achieved or exceeded all of the pre-determined goals, particularly in our telaprevir and cystic fibrosis, or CF, development programs. In reaching this determination, the board considered the following:

    Telaprevir—We advanced the development of telaprevir by: obtaining agreement with the FDA on a registration program for treatment-naïve and treatment-experienced patients with genotype 1 HCV, initiating the three large clinical trials of telaprevir required under the registration program, and completing enrollment of two of these clinical trials in 2008 and the third in the first quarter of 2009; advancing our quality control capabilities and validating certain of our clinical and manufacturing processes; and enhancing our telaprevir inventory in preparation for the potential launch of telaprevir.

    Portfolio—We exceeded our goals with respect to advancement of the other drug candidates in our portfolio. In particular, we completed a Phase 2a clinical trial of VX-770 in patients with CF. Based on the promising data from this clinical trial we expect to initiate a registration program for VX-770 in the first half of 2009. We also continued development of VX-809, our second CF drug candidate, our additional HCV protease inhibitors and VX-509, our janus kinase 3 inhibitor.

    Financial—In 2008, we met our financial objectives by finishing the year with $832 million in cash, cash equivalents and marketable securities; controlling expenses resulting in an annual net loss that balanced costs with the continued development of telaprevir and investment in our other programs; and completing several significant financing activities in a challenging environment, including the monetization of our HIV royalty stream for a one-time cash payment of $160 million, and equity and debt financings that resulted in an aggregate of $626 million in gross proceeds in 2008.

    Infrastructure—We met our infrastructure goals by expanding our capabilities in clinical development, regulatory affairs, quality control and commercial operations, securing additional real estate, building HCV awareness and making significant progress in preparing for the commercial supply and marketing of telaprevir.

Although the directors discuss and analyze our performance as a group, each director makes his or her own judgment about which factors are important, and how to weight those factors in reaching a conclusion. We consider aspects of our annual corporate goals to be confidential information and closely guard this information, because we believe that our competitors could use it to modify their strategies to compete

29



more effectively with us. As a result, the preceding discussion more specifically describes our financial goals and our goals relating to drug candidates in clinical trials, including telaprevir, than our goals relating to pre-clinical drug candidates and business development activities.

        Our corporate goals for every year are intended to be ambitious. Due to the high risks associated with developing and commercializing pharmaceutical products, we elect to diversify our research and development activities across a relatively broad array of disease indications and drug targets. While we expect that not all of our programs will be successful, we establish our annual goals as if they will be. Accordingly, our company performance ratings have varied widely in the last several years, reflecting successes and setbacks in our business. For example, during the period between 2005 and 2007, our company performance ratings were:

    A "Strong" company rating, with an 86% performance rating for our executive officers, for 2007, because our board felt that our positive achievements in advancing the telaprevir clinical development program and our portfolio of other drug candidates, and expanding our drug development, supply chain management and commercialization organizations were tempered in part by some delays in our telaprevir clinical development program as well as a decline in our stock price at the end of 2007 that affected our access to capital in 2007.

    A "Leading" company rating, with a 140% company performance factor for our executive officers, for 2006, because our board believed that we achieved a very high proportion of our annual goals for 2006 across all significant aspects of our business. In 2006, we advanced our telaprevir clinical development program and secured a key collaborative relationship with Janssen Pharmaceutica for development and potential commercialization of telaprevir. We also achieved key development milestones for earlier stage compounds, and accomplished certain financial objectives, including the completion of a $330 million common stock offering and reduction of our outstanding convertible indebtedness to approximately $100 million.

    A rating of "Distinguished" for 2005, which was the highest possible rating under a previous rating system that included seven possible company ratings. According to our board's assessment, we made progress in every significant aspect of our business in 2005. We advanced our development stage products, including telaprevir, and supported our key collaborative relationships. We also entered into new collaborative relationships, and advanced a number of compounds, including a cystic fibrosis potentiator compound, from the discovery phase to pre-clinical development.

        Individual Ratings for Named Executive Officers—The MDCC individual rating recommendations for all of the named executives except for Mr. Kenneth Boger were based principally upon factors known to MDCC members from their interactions with the named executive officers during the year, including each officer's role in the accomplishment of corporate goals, and the recommendation our chief executive officer, Dr. Joshua Boger, made on the basis of Dr. Boger's independent assessment of each named executive officer's performance in 2008.

        Dr. Boger discussed his own performance in 2008 with the MDCC. Dr. Boger noted that Vertex's performance rating was the highest possible under our system, due to our exceptional performance across all aspects of the business. The MDCC and board of directors determined that Dr. Boger's rating similarly should be at the highest possible level, and rated Dr. Boger's 2008 performance as "Leading." For values-based behavior, the MDCC believes that Dr. Boger is an exceptional leader who exhibits exemplary values-based behavior, and accordingly, assigned Dr. Boger a values-based rating of "exemplary demonstration."

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        Dr. Boger advised the MDCC about both results-based and values-based ratings for each of Mr. Smith, Mr. Graves and Dr. Mueller. With respect to results, Dr. Boger related each executive's performance to overall company results. For example, Dr. Boger recommended that Dr. Mueller receive a rating of "leading," because in addition to consistent and excellent research productivity, Dr. Mueller oversaw a year of extraordinary success for the pharmaceutical operations and the chemistry, manufacturing and controls programs, particularly for the telaprevir Phase 3 clinical trial and launch preparation. Similarly, Dr. Boger's recommendation for Mr. Graves' performance rating was "leading," based in part on his leadership in successfully monetizing our Lexiva royalty for $160 million, and progress in the building and execution of our commercial launch strategy and infrastructure. Mr. Smith's organization, which includes finance and accounting, properties, operations, information systems and strategic communications, also performed at a high level in supporting achievement of the corporate objectives detailed above, particularly in accessing over $600 million through debt and equity offerings, earning Mr. Smith a results-based rating of "leading." With respect to values-based evaluation, Dr. Boger recommended that each of Mr. Smith, Mr. Graves and Dr. Mueller be rated "living the values" because they demonstrated strong values-based behavior. The MDCC's ultimate assignment of results-based ratings and values-based ratings to Mr. Smith, Mr. Graves and Dr. Mueller relied largely on Dr. Boger's recommendations, taking into account each committee member's own observations of the executives' performance.

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

        Based on the foregoing, the MDCC recommended and the board of directors assigned the following performance ratings on account of 2008 performance to the named executive officers.

 
  Results—Based
Evaluation
  Values—Based
Evaluation
  2008 Overall
Performance
Rating
  Individual
Performance
Factor
 

Joshua S. Boger

  Leading   Exemplary Demonstration   Leading/Exemplary     150 %

Ian F. Smith

  Leading   Living the Values   Leading     145 %

Kurt C. Graves

  Leading   Living the Values   Leading     135 %

Peter Mueller

  Leading   Living the Values   Leading     140 %

Kenneth S. Boger

  Leading   Living the Values   Leading     150 %

        Annual Cash Bonus and Equity Awards—The annual cash bonuses and annual equity awards for 2006, 2007 and 2008 resulting from the company and individual performance ratings are set forth in the tables under the headings Compensation and Equity Tables—Summary Compensation Table—Non-Equity Incentive Plan Compensation—Cash Bonus and Compensation and Equity Tables—Summary Compensation Table—Stock Awards and Options Awards.

Benefits

        Our executives are eligible to participate in all benefits programs on the terms made generally available to our employees, including medical insurance, dental insurance, payment of life insurance

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premiums, disability coverage, and participation in our employee stock purchase plan. Our retirement benefits are limited to a defined contribution—a 401(k)—plan, in which our named executive officers are eligible to participate, subject to all applicable limitations under the plan. We make matching contributions to the 401(k) plan, which are made in the form of fully vested unitized interests in a Vertex common stock fund, and are subject to certain limitations. The formula for determining the amount of our matching contributions is the same for our named executive officers as for our other employees, but the actual contributions made to the accounts of our named executive officers are at the top end of the formula range, due generally to the executives' higher salaries and corresponding higher cash contribution levels. We do not provide any other retirement benefits to the named executive officers.

Other-Than-Annual Compensation Arrangements

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

        Supplemental Grants of Equity Compensation.    On an occasional basis, the MDCC has recommended that our board of directors make an additional, off-cycle equity award to an executive officer or group of officers in order to achieve one or more of the objectives of our executive compensation program. Our board has made three such awards, beginning in 2004, to some or all of the named executive officers. In May 2004, our board made a retention grant of restricted stock to all of our senior executives, in order to retain our executive leadership at a time when we had suffered a number of setbacks, particularly with respect to specific late-stage drug candidates being developed by collaborators. The shares subject to these grants vest in two installments, with 50% vested on the third anniversary of the grant, and 50% vesting on the fifth anniversary of the grant, which will be in May 2009. In February 2006, our board awarded Dr. Boger an additional option grant for 298,500 shares, to bring the total grant on that date, including grants on account of 2005 performance, to 600,000 shares. Similarly, in January 2007, our board awarded 20,000 shares of restricted stock to each of our executive vice presidents at that time—including Mr. Smith and Dr. Mueller—as an additional incentive to remain with us over the next several years. Supplemental grants generally are made on an ad hoc basis, when warranted in the judgment of the MDCC and our board. We cannot predict if the board will make additional supplemental grants in the future, or characterize the likely size and/or terms of any such grants.

Post-Termination Compensation and Benefits

        We have entered into agreements and maintain plans that will require us to provide to our named executive officers under specified circumstances cash compensation, benefits and/or acceleration of the vesting of equity awards in the event of termination of employment. The terms of these agreements vary from executive to executive with respect to the amount of severance payments, provisions for accelerated equity award vesting, continuation of benefits and other terms. The agreements include an employment agreement with Mr. Emmens and a transition agreement with Dr. Boger, both of which we entered into in February 2009.

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        Prior to 2008, we had entered into agreements with executives primarily at the time they were recruited. The employment agreements had certain general topics in common, but each employment agreement was separately negotiated, taking into account both our interests and the executive's interests under the circumstances at the time of negotiation. A number of factors influenced the outcome of these negotiations with each potential executive. For example, executive candidates differ significantly from each other in terms of their seniority, experience, talents, motivations, areas of expertise and other individual circumstances. In addition, the executives we are recruiting typically have existing job interests, and we take those interests into account in the negotiations. For example, when we recruit individuals from lucrative private practices, we find that they are unlikely to join us without assurances of enough pay and severance benefits to compensate them for leaving their practices. Executives who join us from other companies may sacrifice potential bonuses and/or equity payouts, and may seek assurances of compensation elements of similar value. More experienced individuals may seek higher compensation than individuals who are still establishing their careers. We also are mindful that candidates compare their proposed compensation levels with those of their potential peers on the executive team. In October 2007, the MDCC considered new guidelines in order to provide a more consistent approach to our post-termination compensation and benefits to the executive team members other than our chief executive officer. These new guidelines were recommended to and adopted by our full board in February 2008.

        In connection with establishing these new guidelines, the MDCC also decided that each of the existing members of the current executive team, including our named executive officers, should receive post-termination compensation and benefits that are no less favorable than those set forth in the new policy. As a result of this determination, in February 2008 we amended and/or entered into new arrangements with two of our named executive officers: Peter Mueller and Kenneth S. Boger.

        A further discussion of the terms and projected payments under each of our agreements with our named executive officers, including Dr. Boger's transition agreement, is set forth under the heading Employment Contracts and Change of Control Arrangements. Mr. Emmens, who is not considered a named executive officer for the purposes of this proxy statement, is also entitled to receive post-termination and compensation benefits under his employment agreement. If Mr. Emmens is terminated by us without cause or he terminates his employment for good reason, he would be entitled to receive, among other benefits, 18 months of severance pay and vesting of 18 months of options and restricted stock awards as set forth in his employment agreement. If Mr. Emmens' employment is terminated by us without cause or he terminates his employment for good reason within two years after a change of control of Vertex, he would instead receive two years of severance pay and full acceleration of his outstanding options and restricted stock awards. Mr. Emmens' employment agreement, dated February 5, 2009, was filed as Exhibit 10.1 to our Current Report on Form 8-K, which was filed with the Securities and Exchange Commission on February 10, 2009.

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

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

    Compensation Decision-Making Process

Role of MDCC and Chief Executive Officer in Setting Executive Compensation

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

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

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

Role of Compensation Consultant

        Neither the company nor the MDCC has a standing contractual arrangement with any compensation consultant who has a role in determining or recommending the amount or form of executive or director compensation. Occasionally, the MDCC has engaged Hewitt Associates to provide information about competitors' compensation practices. In 2008 and early 2009, the MDCC engaged Hewitt on two occasions. In advance of its July 2008 meeting, the MDCC instructed Hewitt to conduct an analysis of all elements of compensation paid to our five most highly compensated executives compared to similar elements paid to similarly-situated executives at companies in our comparator group and to provide a written report and presentation of findings at the July 2008 MDCC meeting. This information was used as described under the headings Executive Summary—Compensation Decision-Making Process, Detailed Analysis and Discussion—Elements of Compensation—Performance-Based Elements of Compensation—Annual Cash Bonus and Equity Awards—Annual Cash Bonus and Compensation Decision-Making Process—Analysis of Compensation Practices of Comparator Companies. The MDCC also invited a representative of Hewitt to attend several meetings in January 2009 and February 2009, in connection with negotiating the employment agreement with Mr. Emmens and the transition agreement with Dr. Boger. At those meetings, the Hewitt representative provided information about (i) possible additions to, and subtractions from, our comparator company group and (ii) CEO compensation data from companies selected by the MDCC for the comparator group.

34


Analysis of Compensation Practices of Comparator Companies

        In order to make judgments about elements of executive compensation on a competitive basis, we consider information about the compensation practices of a representative group of companies with whom we compete for executive talent. We select the companies for this comparator group on the basis of industry, annual operating expenses and market capitalization. We review and revise the list of companies on a regular basis. From mid-2007 through the end of 2008, there were ten companies in our comparator group, set forth below.

        The MDCC's practice in recent years has been to evaluate the composition of the comparator company group on an annual basis, usually mid-year after the prior year's compensation data have become available. In July 2008, the MDCC reviewed the composition of the comparator group and determined that no changes were required at that time. In early 2009, MDCC decided to make a number of changes to the comparator company group. These changes were designed to account for developments affecting a number of the comparator companies, particularly as a result of market dynamics in the last four months of 2008, and to recognize the potential for commercialization of our drug candidates in late-stage development and with reference in particular to our first drug candidate, telaprevir. As a result of this analysis, and on the basis of pre-established criteria for market capitalization and operating expenses, the MDCC selected the comparator companies set forth below, effective beginning in 2009.

Comparator Group Mid-2007 - 2008
  Comparator Group—2009
Amylin Pharmaceuticals, Inc.
Elan Pharmaceuticals
Endo Pharmaceuticals Holdings Inc.
Imclone Systems Incorporated
Medarex, Inc.
Millennium Pharmaceuticals, Inc.
OSI Pharmaceuticals, Inc.
PDL BioPharma, Inc.
Sepracor Inc.
Theravance, Inc.
  Abraxis Bioscience Inc.
Amylin Pharmaceuticals, Inc.
Celgene Corporation
Cephalon, Inc.
Elan Corporation plc
Endo Pharmaceuticals Holdings Inc.
Sepracor Inc.
Shire plc
Warner Chilcott Ltd.

        The MDCC does not strictly benchmark executive compensation awards against comparator company compensation. We do look at comparator company information to confirm that our compensation practices and the result of applying our policies and programs in general results in compensation levels that are competitive with those of the comparator companies. In addition, the MDCC reviews broader industry-specific executive compensation surveys published by Organization Resources Counselors, Inc. and by Towers Perrin.

Interdependence of Elements and Tally Sheets

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

        Any time the MDCC evaluates an amount to award or pay for a specific compensation element, we provide a tally sheet that sets forth all elements of the executive's compensation, including salary, cash bonus, value of equity compensation, the dollar value to the executive and cost to us of all personal benefits, the actual projected payout obligations under potential severance and change of control

35



scenarios, and showing the impact of the proposed award or payment on each compensation element and on the executive's aggregate compensation. The purpose of the tally sheets is to assist the MDCC in establishing and administering an overall executive compensation program that is fair and reasonable both to our executives and to our stockholders. The tally sheets contain categories of information similar to those provided under the caption Compensation and Equity Tables. However, because the tally sheets are used by the MDCC in connection with forward-looking compensation decisions, we often provide different values in the tally sheets than are reported in these tables. In particular, the tally sheets use more current market prices and use different assumptions regarding the timing and circumstances of any event that could result in a severance payment. For example, tally sheets prepared in 2008 incorporated assumptions that any employment termination in connection with a change of control of the company would take place at least three months in the future and that a buyer would pay a premium over the market price of the company's common stock. The MDCC also reviewed tally sheets in February 2009, when reviewing proposed compensation terms for Mr. Emmens' employment contract and Dr. Boger's transition agreement. The purpose of this information was to permit the MDCC to anticipate the potential payouts under various severance and change of control provisions in the contracts, should they be triggered during the year. The review of tally sheets does not result in specific awards. Rather, the tally sheets provide background information for the MDCC to use in considering one or more components of compensation. Each committee member uses the tally sheets as he or she determines when making compensation decisions. The MDCC also uses the tally sheets, together with other resources, to make a determination each year that the aggregate compensation for each named executive is reasonable and not excessive.

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

Tax Considerations

        We would like our compensation program to be reasonably cost and tax effective. To the extent consistent with our other goals, we try to preserve corporate tax deductions, while maintaining the flexibility to approve compensation arrangements that we believe to be in the best interests of the company and our stockholders. The approach may not always result in full tax deductibility. For example, Mr. Emmens' employment agreement provides for the award of an aggregate of 683,129 restricted shares and options under our 2006 Stock and Option Plan. These awards may not quality for full tax deductibility, because the number awarded exceeded the guideline approved by our stockholders for aggregate grants to an individual participant in a calendar year. The adverse tax impact to us currently is minimal, because at this time we do not have net income subject to federal income tax.

Equity Grant Practices

        The exercise price for each stock option awarded to our current executive officers under our equity compensation program is the average of the high and low price for our common stock on the date of grant.

36



As discussed above, our board generally grants employee options two times per year, on the date of its mid-summer meeting, usually in July, and on the date of its first meeting of each new year, usually in late January or early February. Board and committee meetings generally are scheduled at least a year in advance, and scheduling decisions are made without regard to anticipated earnings or other major announcements by the company.

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

Report of Management Development and Compensation Committee on Executive Compensation

        The Management Development and Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed that analysis with management. Based on its review and its discussions with management, the Management Development and Compensation Committee recommended to Vertex's Board of Directors that the Compensation Discussion and Analysis be included in Vertex's proxy statement for its 2009 annual meeting of stockholders and incorporated by reference into Vertex's Annual Report on Form 10-K for the year ended December 31, 2008. This report is provided by the following directors who comprise the Management Development and Compensation Committee:

Roger W. Brimblecombe (Chair)

Bruce I. Sachs

Elaine S. Ullian

37


COMPENSATION AND EQUITY TABLES

Summary Compensation Table

        The following table provides summary information concerning compensation earned during the fiscal years ended December 31, 2008, 2007 and 2006 by our chief executive officer, chief financial officer and our three other most highly compensated executive officers, who we refer to collectively as our named executive officers.

 
 
  Name and Principal Position
   
  Year
   
  Salary
   
  Bonus
   
  Stock
Awards

   
  Option
Awards

   
  Non-Equity
Incentive Plan
Compensation

   
  All Other
Compensation

   
  Total
   

 

  Joshua S. Boger, Ph.D.         2008       $ 708,539       $       $ 959,862       $ 5,888,434       $ 978,750       $ 11,835       $ 8,547,420    

 

 

    Chief Executive Officer

        2007       $ 616,615       $       $ 1,943,077       $ 5,320,328       $ 318,888       $ 12,852       $ 8,211,760    

 

            2006       $ 593,921       $       $ 579,222       $ 4,032,839       $ 705,600       $ 11,376       $ 5,922,958    

 

 

Ian F. Smith

        2008       $ 444,234       $       $ 590,411       $ 1,265,870       $ 391,500       $ 11,804       $ 2,703,819    

 

 

    Executive Vice President and

        2007       $ 411,595       $       $ 745,138       $ 1,140,638       $ 141,907       $ 12,543       $ 2,451,821    

 

 

    Chief Financial Officer

        2006       $ 395,830       $       $ 209,889       $ 983,692       $ 313,995       $ 11,291       $ 1,914,697    

 

 

Kurt C. Graves

        2008       $ 455,712       $       $ 453,051       $ 783,026       $ 369,968       $ 11,700       $ 2,073,457    

 

 

    Executive Vice President,
Chief Commercial Officer
and Head, Strategic
Development

        2007       $ 197,308       $ 250,000       $ 177,221       $ 168,558       $ 104,490       $ 388,313       $ 1,285,890    

 

 

Peter Mueller, Ph.D.

        2008       $ 456,664       $       $ 618,252       $ 1,642,061       $ 385,324       $ 11,563       $ 3,113,864    

 

 

    Executive Vice President,

        2007       $ 444,361       $       $ 747,601       $ 1,444,272       $ 229,804       $ 12,712       $ 2,878,750    

 

 

    Drug Innovation and
Realization, and Chief
Scientific Officer

        2006       $ 429,452       $       $ 212,297       $ 990,435       $ 338,991       $ 11,343       $ 1,982,518    

 

 

Kenneth S. Boger, M.B.A., J.D.

        2008       $ 398,408       $       $ 335,789       $ 1,132,915       $ 315,158       $ 11,543       $ 2,193,813    

 

 

    Senior Vice President and

        2007       $ 387,675       $       $ 580,922       $ 1,013,210       $ 116,952       $ 12,415       $ 2,111,174    

 

 

    General Counsel

        2006       $ 374,668       $       $ 209,889       $ 843,491       $ 258,778       $ 11,277       $ 1,698,103    

    Base Salary

        The base salaries that became effective for our named executive officers in 2006, 2007, 2008 and 2009 are set forth in the table below.

 
   
   
 
   
   
  2006 Salary
Level

   
  2007 Salary
Level

   
  2008 Salary
Level

   
  2009 Salary
Level

   

 

  Joshua S. Boger       $ 600,000       $ 618,000       $ 725,000       $ 950,151    

 

 

Ian F. Smith

      $ 400,504       $ 412,519       $ 450,000       $ 463,500    

 

 

Kurt C. Graves

        n/a       $ 450,000       $ 456,750       $ 470,453    

 

 

Peter Mueller

      $ 432,387       $ 445,359       $ 458,719       $ 472,481    

 

 

Kenneth S. Boger

      $ 377,228       $ 388,545       $ 400,201       $ 412,207    

    Stock Awards and Options Awards

        The amounts set forth under the captions "Stock Awards" and "Option Awards" in the table above represent the stock-based compensation expense recognized during the applicable fiscal year for financial statement reporting purposes in accordance with Statement of Financial Accounting Standard No. 123(R),

38


"Share-Based Payment," relating to outstanding equity awards, disregarding the estimate of forfeitures for service-based vesting conditions. Our methodology, including underlying estimates and assumptions for calculating these values, is set forth in Note D to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on February 17, 2009.

        The total equity awards made to each of the named executives on account of 2008 performance are as follows:

 
   
   
 
   
   
  Individual
Performance
Rating

   
  Stock Options
Awarded in
July 2008

   
  Stock Options
Awarded in
February 2009

   
  Total Stock
Options
Awarded for
2008
Performance

   
  Restricted
Stock
Awarded in
February 2009
for 2008
Performance

   

 

  Joshua S. Boger         Leading/Exemplary         118,000         236,000         354,000         47,201    

 

 

Ian F. Smith

        Leading         36,250         54,375         90,625         12,084    

 

 

Kurt C. Graves

        Leading         36,250         54,375         90,625         12,084    

 

 

Peter Mueller

        Leading         36,250         54,375         90,625         12,084    

 

 

Kenneth S. Boger

        Leading         30,500         45,750         76,250         10,166    

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

 
   
   
 
   
   
  Individual
Performance
Rating

   
  Stock Options
Awarded in
July 2007

   
  Stock Options
Awarded in
February 2008

   
  Total Stock
Options
Awarded for
2007
Performance

   
  Restricted
Stock
Awarded in
February 2008
for 2007
Performance

   

 

  Joshua S. Boger         Strong         118,000         118,000         236,000         31,467    

 

 

Ian F. Smith

        Strong         36,250         36,250         72,500         9,667    

 

 

Kurt C. Graves

        Leading         n/a         90,625         90,625         12,084    

 

 

Peter Mueller

        Leading/Exemplary         36,250         72,500         108,750         14,501    

 

 

Kenneth S. Boger

        Strong         30,500         30,500         61,000         8,133    

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

 
   
   
 
   
   
  Individual
Performance
Rating

   
  Stock Options
Awarded in
July 2006

   
  Stock Options
Awarded in
January 2007

   
  Total Stock
Options
Awarded for
2006
Performance

   
  Restricted
Stock
Awarded in
January 2007
for 2006
Performance

   

 

  Joshua S. Boger         Leading         118,000         177,000         295,000         39,334    

 

 

Ian F. Smith

        Leading         36,250         54,375         90,625         12,084    

 

 

Peter Mueller

        Leading         36,250         54,375         90,625         12,084    

 

 

Kenneth S. Boger

        Leading         30,500         45,750         76,250         10,166    

39


    Non-Equity Incentive Plan Compensation—Cash Bonus

        The amounts set forth under the caption "Non-Equity Incentive Plan Compensation" represent cash bonuses for 2008, 2007 and 2006 performance, each of which was paid in the first quarter of the next year.

        The cash bonus awards to the named executive officers for 2008 performance were determined as follows:

 
   
   
 
   
   
  2008 Base
Salary
Level

   
  Individual
Incentive
Target

   
  2008
Target
Bonus

   
  Company
Performance
Factor

   
  Individual
Performance
Factor

   
  2008 Bonus
   

 

  Joshua S. Boger       $ 725,000         60 %     $ 435,000         150 %       150 %     $ 978,750    

 

 

Ian F. Smith

      $ 450,000         40 %     $ 180,000         150 %       145 %     $ 391,500    

 

 

Kurt C. Graves

      $ 456,750         40 %     $ 182,700         150 %       135 %     $ 369,968    

 

 

Peter Mueller

      $ 458,719         40 %     $ 183,488         150 %       140 %     $ 385,324    

 

 

Kenneth S. Boger

      $ 400,201         35 %     $ 140,070         150 %       150 %     $ 315,158    

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

 
   
   
 
   
   
  2007 Base
Salary
Level

   
  Individual
Incentive
Target

   
  2007
Target
Bonus

   
  Company
Performance
Factor

   
  Individual
Performance
Factor

   
  2007 Bonus
   

 

  Joshua S. Boger       $ 618,000         60 %     $ 370,800         86 %       100 %     $ 318,888    

 

 

Ian F. Smith

      $ 412,519         40 %     $ 165,008         86 %       100 %     $ 141,907    

 

 

Kurt C. Graves

      $ 450,000         40 %     $ 180,000         86 %       150 %     $ 104,490 (1)  

 

 

Peter Mueller

      $ 445,359         40 %     $ 178,144         86 %       150 %     $ 229,804    

 

 

Kenneth S. Boger

      $ 388,545         35 %     $ 135,991         86 %       100 %     $ 116,952    
(1)
Mr. Graves' 2007 performance-based annual cash bonus was prorated because he was an employee for only a portion of 2007.

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

 
   
   
 
   
   
  2006 Base
Salary
Level

   
  Individual
Incentive
Target

   
  2006
Target
Bonus

   
  Company
Performance
Factor

   
  Individual
Performance
Factor

   
  2006 Bonus
   

 

  Joshua S. Boger       $ 600,000         60 %     $ 360,000         140 %       140 %     $ 705,600    

 

 

Ian F. Smith

      $ 400,504         40 %     $ 160,202         140 %       140 %     $ 313,995    

 

 

Peter Mueller

      $ 432,387         40 %     $ 172,955         140 %       140 %     $ 338,991    

 

 

Kenneth S. Boger

      $ 377,228         35 %     $ 132,030         140 %       140 %     $ 258,778    

40


    All Other Compensation

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

 
   
   
 
   
   
  Year
   
  401(k) Match
   
  Life Insurance
Premiums

   
  Relocation
Expenses

   
  Total
   

 

  Joshua S. Boger         2008       $ 10,350       $ 1,485       $       $ 11,835    

 

            2007       $ 10,125       $ 2,727       $       $ 12,852    

 

            2006       $ 9,900       $ 1,476       $       $ 11,376    

 

 

Ian F. Smith

        2008       $ 10,350       $ 1,454       $       $ 11,804    

 

            2007       $ 10,125       $ 2,418       $       $ 12,543    

 

            2006       $ 9,900       $ 1,391       $       $ 11,291    

 

 

Kurt C. Graves

        2008       $ 10,350       $ 1,350       $       $ 11,700    

 

            2007       $       $ 720       $ 387,593       $ 388,313    

 

 

Peter Mueller

        2008       $ 10,350       $ 1,213       $       $ 11,563    

 

            2007       $ 10,125       $ 2,587       $       $ 12,712    

 

            2006       $ 9,900       $ 1,443       $       $ 11,343    

 

 

Kenneth S. Boger

        2008       $ 10,350       $ 1,193       $       $ 11,543    

 

            2007       $ 10,125       $ 2,290       $       $ 12,415    

 

            2006       $ 9,900       $ 1,377       $       $ 11,277    

41


Grants of Plan-Based Awards

        The following table provides information with respect to grants of awards to each of our named executive officers during 2008:

 
   
   
   
   
 
   
      
   
  Estimated Possible Payouts
Under Non-Equity
Incentive Plan Awards

   
      
   
      
   
      
   
      
   
      
   







   
 






  Grant
Date

 







  Threshold

 







  Target

 







  Maximum

 







  Estimated
Future
Payouts
Under
Equity
Incentive
Plan
Awards
(shares)

 







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

 







  Exercise or
Base Price
of Option
Awards
(per share)

 







  Closing Price of Stock on Grant Date (per share)
 







 
Grant Date Fair Value of Stock and Option Awards

 







 

 

Joshua S. Boger

                $ 0       $ 435,000       $ 978,750                                                      

 

            2/7/08                                       31,467                                     $ 595,356    

 

            2/7/08                                                 118,000       $ 18.93       $ 19.01       $ 2,000,843    

 

            7/24/08                                                 118,000       $ 32.16       $ 31.51       $ 2,009,162    

 

 

Ian F. Smith

                $ 0       $ 180,000       $ 405,000                                                      

 

            2/7/08                                       9,667                                     $ 182,900    

 

            2/7/08                                                 36,250       $ 18.93       $ 19.01       $ 614,666    

 

            7/24/08                                                 36,250       $ 32.16       $ 31.51       $ 617,222    

 

 

Kurt C. Graves

                $ 0       $ 182,700       $ 411,075                                                      

 

            2/7/08                                       12,084                                     $ 228,629    

 

            2/7/08                                                 90,625       $ 18.93       $ 19.01       $ 1,536,665    

 

            7/24/08                                                 36,250       $ 32.16       $ 31.51       $ 617,222    

 

 

Peter Mueller

                $ 0       $ 183,488       $ 412,847                                                      

 

            2/7/08                                       14,501                                     $ 274,359    

 

            2/7/08                                                 72,500       $ 18.93       $ 19.01       $ 1,229,332    

 

            7/24/08                                                 36,250       $ 32.16       $ 31.51       $ 617,222    

 

 

Kenneth S. Boger

                $ 0       $ 140,070       $ 315,158                                                      

 

            2/7/08                                       8,133                                     $ 153,876    

 

            2/7/08                                                 30,500       $ 18.93       $ 19.01       $ 517,167    

 

            7/24/08                                                 30,500       $ 32.16       $ 31.51       $ 519,317    

        The amounts in the "Estimated Possible Payouts Under Non-Equity Incentive Plan Awards" column represent the minimum, target and maximum amounts that our named executive officers were eligible for pursuant to our 2008 annual cash bonus program. Actual amounts paid to each of the named executive officers under this plan are set forth in the Summary Compensation Table above.

        The amounts in the "Estimated Future Payouts Under Equity Incentive Plan Awards" column represent the number of shares granted to the named executive officer in early 2008, on account of 2007 performance. Each of these grants is characterized as Performance-Accelerated Restricted Stock, which is subject to time-based vesting on the fourth anniversary of grant, with half of the shares subject to acceleration of vesting if the market price of our common stock achieves and maintains a pre-determined value that is more than 150% of the fair market value of our common stock on the grant date and the other half of the shares subject to acceleration of vesting if our common stock outperforms the BTK Index for two consecutive years.

        In accordance with our stock and option plans, the exercise prices for the stock options granted to our named executive officers during 2008 were equal to the average of the high and the low prices of our common stock on the grant date. As a result, in 2008 the exercise prices of options granted to our named

42



executive officers were lower than the grant date closing price of our common stock for our February 7, 2008 grants and higher than the grant date closing price of our common stock for our July 24, 2008 grants. In the future, we expect that options will continue to be granted with exercise prices equal to the average of the high and low prices of our common stock on the grant date, and that as a result the exercise prices are likely be different from the closing price of our common stock on the grant date. Each stock option set forth in the table above is subject to vesting in 16 quarterly installments during the first four years of its ten-year term.

43


Outstanding Equity Awards at Fiscal Year-End

        The following tables provide information with respect to outstanding equity awards held by each of our named executive officers on December 31, 2008, based on the closing price of $30.38 per share of our common stock on December 31, 2008.

                                                                   
 
   
   
   
   
   
   
   
 
   
  Option Awards
   
  Stock Awards
   
 
   
   
  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(shares)

   
  Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(shares)

   
  Option
Exercise
Price
(per share)

   
  Option
Expiration
Date (1)

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

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

   

 

 

Joshua S. Boger

        Restricted Stock                                        

 

                                                    52,500 (2)     $ 1,594,950    

 

                                                    8,312 (3)     $ 252,519    

 

                                                    47,201 (4)     $ 1,433,966    

 

                                                    39,334 (5)     $ 1,194,967    

 

                                                    31,467 (6)     $ 955,967    

 

            Stock Options                                        

 

            42,000         0       $ 9.07         12/10/2013                        

 

            67,676         4,512       $ 10.41         2/2/2015                        

 

            52,500         0       $ 11.27         10/6/2014                        

 

            166,374         0       $ 13.11         12/1/2009                        

 

            134,951         0       $ 15.60         1/17/2013                        

 

            27,314         0       $ 15.87         7/21/2012                        

 

            42,656         9,844       $ 17.16         7/19/2015                        

 

            22,125         95,875       $ 18.93         2/6/2018                        

 

            125,000         0       $ 24.66         12/10/2011                        

 

            36,875         81,125       $ 28.84         7/11/2017                        

 

            7,375         110,625       $ 32.16         7/23/2018                        

 

            66,375         51,625       $ 35.35         7/19/2016                        

 

            412,500         187,500       $ 35.64         2/1/2016                        

 

            77,437         99,563       $ 36.30         1/23/2017                        

 

            175,000         0       $ 70.75         12/5/2010                        

 

 

Ian F. Smith

        Restricted Stock                                        

 

                                                    32,500 (2)     $ 987,350    

 

                                                    2,850 (3)     $ 86,583    

 

                                                    12,200 (4)     $ 370,636    

 

                                                    12,084 (5)     $ 367,112    

 

                                                    9,667 (6)     $ 293,683    

 

                                                    15,000 (7)     $ 455,700    

 

            Stock Options                                        

 

            20,503         1,547       $ 10.41         2/2/2015                        

 

            18,000         0       $ 11.27         10/6/2014                        

 

            7,349         0       $ 15.60         1/17/2013                        

 

            4,500         3,375       $ 17.16         7/19/2015                        

 

            6,798         29,452       $ 18.93         2/6/2018                        

 

            11,328         24,922       $ 28.84         7/11/2017                        

 

            2,265         33,985       $ 32.16         7/23/2018                        

 

            20,391         15,859       $ 35.35         7/19/2016                        

 

            50,531         22,969       $ 35.64         2/1/2016                        

 

            23,789         30,586       $ 36.30         1/23/2017                        

44


 

                                                                   
 
   
   
   
   
   
   
   
 
   
  Option Awards
   
  Stock Awards
   
 
   
   
  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(shares)

   
  Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(shares)

   
  Option
Exercise
Price
(per share)

   
  Option
Expiration
Date (1)

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

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

   

 

 

Kurt C. Graves

        Restricted Stock                                        

 

                                                    22,500 (8)     $ 683,550    

 

                                                    10,500 (9)     $ 318,990    

 

                                                    12,084 (6)     $ 367,112    

 

            Stock Options                                        

 

            16,993         73,632       $ 18.93         2/6/2018                        

 

            31,250         68,750       $ 28.85         7/16/2017                        

 

            2,265         33,985       $ 32.16         7/23/2018                        

 

 

Peter Mueller

        Restricted Stock                                        

 

                                                    32,500 (2)     $ 987,350    

 

                                                    3,600 (3)     $ 109,368    

 

                                                    12,200 (4)     $ 370,636    

 

                                                    12,084 (5)     $ 367,112    

 

                                                    14,501 (6)     $ 440,540    

 

                                                    15,000 (7)     $ 455,700    

 

            Stock Options                                        

 

            2,400         0       $ 9.07         12/10/2013                        

 

            14,400         0       $ 9.69         3/16/2014                        

 

            33,750         2,250       $ 10.41         2/2/2015                        

 

            18,000         0       $ 11.27         10/6/2014                        

 

            150,000         0       $ 16.32         7/14/2013                        

 

            14,625         3,375       $ 17.16         7/19/2015                        

 

            13,594         58,906       $ 18.93         2/6/2018                        

 

            11,328         24,922       $ 28.84         7/11/2017                        

 

            2,265         33,985       $ 32.16         7/23/2018                        

 

            20,391         15,859       $ 35.35         7/19/2016                        

 

            50,531         22,969       $ 35.64         2/1/2016                        

 

            23,789         30,586       $ 36.30         1/23/2017                        

45


                                                                   
 
   
   
   
   
   
   
   
 
   
  Option Awards
   
  Stock Awards
   
 
   
   
  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(shares)

   
  Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(shares)

   
  Option
Exercise
Price
(per share)

   
  Option
Expiration
Date (1)

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

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

   

 

 

Kenneth S. Boger

        Restricted Stock                                        

 

                                                    32,500 (2)     $ 987,350