10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number:  0-21379

CUBIST PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	22-3192085
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

65 Hayden Avenue, Lexington, MA 02421
(Address of Principal Executive Offices and Zip Code)

(781) 860-8660
(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

Number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on July 23, 2010: 58,986,463.

Cubist Pharmaceuticals, Inc.
Form 10-Q
For the Quarter Ended June 30, 2010

Table of Contents

Item		Page
PART I. Financial information		3
1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009	3
	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009	5
	Notes to the Condensed Consolidated Financial Statements	6
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
3.	Quantitative and Qualitative Disclosures About Market Risk	42
4.	Controls and Procedures	42
PART II. Other Information		43
1.	Legal Proceedings	43
1A.	Risk Factors	43
2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
3.	Defaults Upon Senior Securities	64
4.	Removed and Reserved	64
5.	Other Information	64
6.	Exhibits	64
	Signatures	65

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PART I. Financial Information

Item 1. Condensed Consolidated Financial Statements

CUBIST PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED

(in thousands, except share data)

	June 30,			December 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	156,551		$	157,316
Short-term investments	312,573			161,686
Accounts receivable, net	61,756			57,827
Inventory	27,005			25,497
Deferred tax assets, net	8,622			33,387
Prepaid expenses and other current assets	33,027			14,316
Total current assets	599,534			450,029
Property and equipment, net	71,932			68,382
In-process research and development	194,000			194,000
Goodwill	63,020			63,020
Other intangible assets, net	15,314			16,783
Long-term investments	93,700			177,161
Other assets	10,235			8,300
Total assets	$	1,047,735		$	977,675
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	20,741		$	18,660
Accrued liabilities	80,011			85,471
Short-term deferred revenue	2,220			2,078
Short-term contingent consideration	—			20,000
Total current liabilities	102,972			126,209
Long-term deferred revenue, net of short-term portion	18,615			18,813
Deferred tax liabilities, net	28,548			31,205
Contingent consideration, net of short-term portion	84,295			81,600
Long-term debt, net	252,406			245,386
Other long-term liabilities	3,719			3,819
Total liabilities	490,555			507,032
Commitments and contingencies (Notes C, H, M, N)
Stockholders’ equity:
Preferred stock, non-cumulative; convertible, $.001 par value; authorized 5,000,000 shares; no shares issued and outstanding	—			—
Common stock, $.001 par value; authorized 150,000,000 shares; 58,854,222 and 57,978,174 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively	59			58
Additional paid-in capital	740,512			702,248
Accumulated other comprehensive income	7,043			7,318
Accumulated deficit	(190,434		)	(238,981		)
Total stockholders’ equity	557,180			470,643
Total liabilities and stockholders’ equity	$	1,047,735		$	977,675

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

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CUBIST PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED

(in thousands, except share and per share data)

	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Revenues:
U.S. product revenues, net	$	154,991		$	126,101		$	290,258		$	238,520
International product revenues	6,612			2,743			12,974			4,949
Service revenues	6,500			1,500			8,500			7,550
Other revenues	435			435			870			870
Total revenues, net	168,538			130,779			312,602			251,889
Costs and expenses:
Cost of product revenues	36,419			28,184			68,178			52,558
Research and development	40,147			32,371			79,029			82,913
Contingent consideration	1,187			—			2,695			—
Sales and marketing	23,024			21,657			42,879			41,137
General and administrative	14,025			12,662			28,753			23,589
Total costs and expenses	114,802			94,874			221,534			200,197
Operating income	53,736			35,905			91,068			51,692
Other income (expense):
Interest income	1,317			920			2,587			1,994
Interest expense	(5,459		)	(5,175		)	(10,845		)	(10,283		)
Other income (expense)	(1,250		)	(35		)	(2,443		)	(33		)
Total other income (expense), net	(5,392		)	(4,290		)	(10,701		)	(8,322		)
Income before income taxes	48,344			31,615			80,367			43,370
Provision for income taxes	20,229			7,839			31,820			11,818
Net income	$	28,115		$	23,776		$	48,547		$	31,552
Basic net income per common share	$	0.48		$	0.41		$	0.83		$	0.55
Diluted net income per common share	$	0.45		$	0.40		$	0.80		$	0.54
Shares used in calculating:
Basic net income per common share	58,670,728			57,642,460			58,404,418			57,586,980
Diluted net income per common share	69,302,106			68,221,269			69,075,371			58,465,385

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

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CUBIST PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED

(in thousands)

	Six Months Ended June 30,
	2010			2009
Cash flows from operating activities:
Net income	$	48,547		$	31,552
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,577			5,734
Amortization and accretion of investments	2,892			—
Amortization of debt discount and debt issuance costs	7,470			6,908
Deferred income taxes	22,108			10,052
Foreign exchange loss	2,862			—
Stock-based compensation	7,911			6,485
Contingent consideration	2,695			—
Charge for company 401(k) common stock match	1,932			1,864
Changes in assets and liabilities:
Accounts receivable	(3,929		)	(5,891		)
Inventory	(1,571		)	(4,432		)
Prepaid expenses and other current assets	(18,711		)	5,881
Other assets	(2,385		)	46
Accounts payable and accrued liabilities	(4,713		)	(3,831		)
Deferred revenue and other long-term liabilities	(156		)	2,406
Total adjustments	21,982			25,222
Net cash provided by operating activities	70,529			56,774
Cash flows from investing activities:
Purchases of property and equipment	(6,450		)	(6,268		)
Purchases of investments	(252,545		)	(52,000		)
Proceeds from investments	179,585			—
Net cash used in investing activities	(79,410		)	(58,268		)
Cash flows from financing activities:
Payment of contingent consideration	(20,000		)	—
Issuance of common stock, net	9,708			1,758
Excess tax benefit on stock-based awards	18,903			—
Net cash provided by financing activities	8,611			1,758
Net (decrease) increase in cash and cash equivalents	(270		)	264
Effect of changes in foreign exchange rates on cash balances	(495		)	—
Cash and cash equivalents at beginning of period	157,316			409,023
Cash and cash equivalents at end of period	$	156,551		$	409,287
Supplemental disclosures of cash flow information:
Non-cash investing and financing activities:
Purchases of property and equipment included in accounts payable and accrued expenses	$	1,208		$	811

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

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CUBIST PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

A.BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Cubist Pharmaceuticals, Inc. (“Cubist” or the “Company”) in accordance with accounting principles generally accepted in the United States of America, or GAAP, and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted. The condensed consolidated financial statements, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2009, which are contained in Cubist’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 26, 2010.

B.ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements include the accounts of Cubist and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company’s results of operations for the three and six months ended June 30, 2010, include the results of Calixa Therapeutics Inc., or Calixa, which Cubist acquired on December 16, 2009.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions are employed in estimates used in determining values of: inventories; investments; impairment of long-lived assets, including goodwill, in-process research and development, or IPR&D, and other intangible assets; accrued clinical research costs; contingent consideration; income taxes; stock-based compensation; product rebate and return accruals; as well as in estimates used in accounting for contingencies and revenue recognition. Actual results could differ from estimated amounts.

Fair Value Measurements

The carrying amounts of Cubist’s cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair value due to the short-term nature of these amounts. Investments are considered available-for-sale as of June 30, 2010 and December 31, 2009, and are carried at fair value.

In connection with its acquisition of Calixa in December 2009, the Company recorded contingent consideration relating to potential amounts payable to Calixa’s former shareholders upon the achievement of certain development, regulatory and sales milestones. This contingent consideration is recognized at its estimated fair value of $84.3 million and $101.6 million as of June 30, 2010 and December 31, 2009, respectively, and was determined based on a probability-weighted income approach. During the three months ended June 30, 2010, Cubist completed the Phase 2 clinical trial of CXA-101 for complicated urinary tract infections, or cUTI, and all study objectives were met, resulting in the Company making a $20.0 million milestone payment to Calixa’s former shareholders.  The change in the fair value of contingent consideration for the three and six months ended June 30, 2010, relates to the time value of money, and is recognized within the condensed consolidated statements of income.  The contingent consideration liability balance at June 30, 2010, also reflects the $20.0 million milestone payment, which was made

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in June 2010. There were no significant changes in probabilities during the three and six months ended June 30, 2010.

In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts. Accordingly, the estimates of fair value presented herein may not be indicative of the amounts that could be realized in a current market exchange. See Note E., “Fair Value Measurements,” for additional information.

Cash and Cash Equivalents

Cash and cash equivalents consist of short-term, interest-bearing instruments with original maturities of 90 days or less at the date of purchase.

Investments

Investments with original maturities of greater than 90 days and remaining maturities of less than one year are classified as short-term investments. Investments with remaining maturities of greater than one year are classified as long-term investments. Short-term investments include bank deposits, corporate notes, U.S. treasury securities and U.S. government agency securities. Long-term investments include corporate notes, U.S. treasury securities and U.S. government agency securities, as well as auction rate securities, which are private placement, synthetic collateralized debt obligations that mature in 2017. The auction rate securities have an original cost of $58.1 million and an estimated fair value of $26.2 million and $25.9 million as of June 30, 2010 and December 31, 2009, respectively. Given the repeated failure of auctions for the auction rate securities, these investments are not considered liquid and have been classified as long-term investments as of June 30, 2010 and December 31, 2009.

In April 2009, Cubist adopted accounting guidance which established a new method of recognizing and reporting other-than-temporary impairments for debt securities. Under this guidance, if the fair value of a debt security is less than its amortized cost basis at the measurement date and the entity intends to sell the debt security or it is more-likely-than-not that it will be required to sell the security before the recovery of its amortized cost basis, the entire impairment is considered other-than-temporary and is recognized in other income (expense). Otherwise, the impairment is separated into an amount relating to the credit loss and an amount relating to all other factors, or non-credit loss. The other-than-temporary impairment relating to the credit loss is recognized in other income (expense), representing the difference between amortized cost and the present value of cash flows expected to be collected. Any non-credit loss is recognized, in certain circumstances, within equity as a separate component of accumulated other comprehensive income (loss). In estimating credit losses, the Company estimates the present value of expected cash flows for each auction rate security compared to the security’s amortized cost basis for the respective period. This process involves significant judgments and estimates specifically around projected default rates, recovery rates, interest rates and the timing of expected cash flows. In addition, the Company considers other available evidence, including trends in credit ratings and changes in financial market conditions. Significant increases in the present value of the cash flows expected to be collected are accreted to interest income using the effective interest method over the remaining maturities of the securities.

Unrealized gains and losses are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity, except in certain circumstances such as unrealized credit losses related to an other-than-temporary impairment. Realized gains and losses, dividends, interest income, and declines in value judged to be other-than-temporary credit losses are included in other income (expense). Amortization of any premium or discount arising at purchase is included in interest income. See Note D., “Investments,” for additional information.

Concentration of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, investments and accounts receivable. The Company’s cash and cash equivalents are held primarily with four financial institutions in the U.S. Investments are restricted, in accordance with the Company’s investment policy, to a concentration limit per institution.

7

Cubist’s account receivables at June 30, 2010 and December 31, 2009, primarily represent amounts due to the Company from wholesalers, including Cardinal Health, Inc., Amerisource Bergen Drug Corporation and McKesson Corporation, as well as from Cubist’s international partners for CUBICIN® (daptomycin for injection). Cubist performs ongoing credit evaluations of its key wholesalers, distributors and other customers and generally does not require collateral. For the three and six months ended June 30, 2010 and 2009, Cubist did not have any significant write-offs of accounts receivable and its days sales outstanding has not significantly changed since December 31, 2009.

	Percentage of total accounts receivable balance as of
	June 30,	December 31,
	2010	2009
Amerisource Bergen Drug Corporation	27%	29%
Cardinal Health, Inc.	24%	21%
McKesson Corporation	19%	17%

	Percentage of totalrevenues forthe three months endedJune 30,		Percentage of totalrevenues forthe six months endedJune 30,
	2010	2009	2010	2009
Amerisource Bergen Drug Corporation	25%	32%	26%	30%
Cardinal Health, Inc.	21%	28%	22%	28%
McKesson Corporation	17%	17%	17%	18%

Acquired In-process Research and Development

In accordance with the accounting guidance for business combinations, IPR&D acquired in a business combination is capitalized on the Company’s condensed consolidated balance sheet at its acquisition-date fair value. Until the underlying project is completed, these assets are accounted for as indefinite-lived intangible assets. Once the project is completed, the carrying value of the IPR&D is amortized over the estimated useful life of the asset. If a project becomes impaired or is abandoned, the carrying value of the IPR&D is written down to its revised fair value with the related impairment charge recognized in the period in which the impairment occurs. IPR&D will be tested for impairment on an annual basis during Cubist’s fourth quarter, or earlier if an indicator of impairment is present, using a projected discounted cash flow model.

Goodwill and Other Intangible Assets

The difference between the purchase price and the fair value of assets acquired and liabilities assumed in a business combination is allocated to goodwill. Cubist evaluates goodwill for impairment on an annual basis during its fourth quarter, or more frequently if an indicator of impairment is present.

Cubist’s other intangible assets consist of acquired intellectual property, processes, patents and technology rights. These assets are amortized on a straight-line basis over their estimated useful life which range from four to 17 years. The fair values of patents obtained through an acquisition transaction are capitalized and amortized over the lesser of the patent’s remaining legal life or its useful life. Costs to obtain, maintain and defend the Company’s patents are expensed as incurred. The Company evaluates potential impairment of other intangible assets whenever events or circumstances indicate the carrying value may not be fully recoverable. The impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset group. If impairment is indicated, the asset is written down by the amount by which the carrying value of the asset exceeds the related fair value of the asset.

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Revenue Recognition

Cubist’s principal sources of revenue are sales of CUBICIN in the U.S., revenues derived from sales of CUBICIN by Cubist’s international distribution partners and license fees and milestone payments that are derived from collaboration, license and commercialization agreements with other biopharmaceutical companies. In all instances, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, collectibility of the resulting receivable is reasonably assured and the Company has no further performance obligations. From July 2008 through June 2010, Cubist generated service revenues from its agreement with AstraZeneca Pharmaceuticals LP, an indirect wholly-owned subsidiary of AstraZeneca PLC, or AstraZeneca, for the promotion and support in the U.S. for MERREM® I.V. (meropenem for injection). The agreement expired in accordance with its terms at the end of June 2010.

U.S. Product Revenues, net

All revenues from product sales are recorded net of applicable provisions for returns, chargebacks, rebates, wholesaler management fees, administrative fees and discounts in the same period the related sales are recorded.

Certain product sales qualify for rebates or discounts from standard list pricing due to government sponsored programs or other contractual agreements. Reserves for Medicaid rebate programs are included in accrued liabilities and were $4.5 million and $2.2 million at June 30, 2010 and December 31, 2009, respectively. The Company allows customers to return products within a specified period prior to and subsequent to the product’s expiration date. Reserves for product returns are based upon many factors, including industry data of product return rates, historical experience of actual returns, analysis of the level of inventory in the distribution channel, if any, and reorder rates of end users. Reserves for returns, discounts, chargebacks, and wholesaler management fees are offset against accounts receivable and were $5.8 million and $5.2 million at June 30, 2010 and December 31, 2009, respectively.

In the three months ended June 30, 2010 and 2009, provisions for sales returns, chargebacks, rebates, wholesaler management fees and discounts that were offset against product revenues totaled $17.2 million and $8.8 million, respectively. In the six months ended June 30, 2010 and 2009, provisions for sales returns, chargebacks, rebates, wholesaler management fees and discounts that were offset against product revenues totaled $28.8 million and $17.3 million, respectively.  The increase in the amount of the provisions that were offset against product revenues is due primarily to increases in Medicaid rebates, chargebacks and pricing discounts resulting from increased revenues from U.S. sales of CUBICIN, as well as an increase in Medicaid rebates due to the increase in the scope and amount of Medicaid rebates established by U.S. healthcare reform legislation that was enacted in March 2010.

International Product Revenues

Cubist sells its product to international distribution partners based upon a transfer price arrangement that is generally established annually. Once Cubist’s distribution partner sells the product to a third party, Cubist may be owed an additional payment or royalty based on a percentage of the net selling price to the third party, less the initial transfer price previously paid on such product. Under no circumstances would the subsequent adjustment result in a refund to the distribution partner of the initial transfer price.

Service Revenues

From July 2008 through June 2010, Cubist promoted and provided other support for MERREM I.V. in the U.S. under the Company’s Commercial Services Agreement with AstraZeneca. AstraZeneca provided marketing and commercial support for MERREM I.V. The Company recognized the revenues from this agreement as service revenues. The Company and AstraZeneca entered into an amendment to the agreement in December 2009 which established a six month performance period from January to June 2010 and a baseline sales amount for this period, with a six month baseline payment from AstraZeneca to Cubist of $9.0 million, paid in quarterly increments, to be adjusted up or down by a true-up payment or refund at the end of the six month period based on actual U.S. sales of MERREM I.V. exceeding or falling short of the established baseline sales amount. Cubist recognized revenues

9

related to this agreement over each performance period based on the minimum payment amount that it could have received under the agreement with AstraZeneca. Cubist assessed the amount of revenue it recognized at the end of each quarterly period to reflect its actual performance against the baseline sales amount that could not be subject to adjustment based on future quarter performance. The agreement with AstraZeneca, as amended, expired in accordance with its terms on June 30, 2010. As a result of the sales level achieved during the performance period, Cubist recognized $6.5 million and $8.5 million of service revenue during the three and six months ended June 30, 2010, respectively.

Service revenues were $1.5 million and $7.6 million for the three and six months ended June 30, 2009, respectively, and consisted of $1.5 million and $3.0 million, respectively, of revenue related to the estimated minimum annual payment amount that Cubist could have received under the agreement with AstraZeneca. The six month period ended June 30, 2009, also included a $4.6 million payment reflecting the percentage of gross profit that Cubist received during the first quarter of 2009 for sales exceeding the 2008 annual baseline sales amount.

Basic and Diluted Net Income Per Share

Basic net income per common share has been computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted net income per share has been computed by dividing diluted net income by the diluted number of shares outstanding during the period. Except where the result would be antidilutive to income from continuing operations, diluted net income per share has been computed assuming the conversion of convertible obligations and the elimination of the related interest expense and the exercise of stock options, as well as their related income tax effects.

The following table sets forth the computation of basic and diluted net income per common share (amounts in thousands, except share and per share amounts):

	Three months endedJune 30,				Six months endedJune 30,
	2010		2009		2010		2009
Net income, basic	$	28,115	$	23,776	$	48,547	$	31,552
Effect of dilutive securities:
Interest on 2.25% convertible subordinated notes, net of tax	987		1,109		1,993		—
Debt issuance costs, net of tax	132		148		265		—
Debt discount amortization, net of tax	2,075		2,144		4,146		—
Net income, diluted	$	31,309	$	27,177	$	54,951	$	31,552
Shares used in calculating basic net income per common share	58,670,728		57,642,460		58,404,418		57,586,980
Effect of dilutive securities:
Options to purchase shares of common stock and restricted stock units	881,948		829,379		921,523		878,405
Notes payable convertible into shares of common stock	9,749,430		9,749,430		9,749,430		—
Shares used in calculating diluted net income per common share	69,302,106		68,221,269		69,075,371		58,465,385
Net income per share, basic	$	0.48	$	0.41	$	0.83	$	0.55
Net income per share, diluted	$	0.45	$	0.40	$	0.80	$	0.54

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Potential common shares excluded from the calculation of diluted net income per share, as their inclusion would have been antidilutive, were:

	Three months endedJune 30,		Six months endedJune 30,
	2010	2009	2010	2009
Options to purchase shares of common stock and restricted stock units	4,803,331	5,951,917	3,848,509	5,080,824
Notes payable convertible into shares of common stock	—	—	—	9,749,430

Comprehensive Income

During the three and six months ended June 30, 2010 and 2009, comprehensive income included the Company’s net income as well as increases and decreases in unrealized gains and losses on the Company’s available-for-sale securities.

The following table summarizes the components of comprehensive income:

	Three months endedJune 30,					Six months endedJune 30,
	2010			2009		2010			2009
	(in thousands)					(in thousands)
Net income	$	28,115		$	23,776	$	48,547		$	31,552
(Increase) decrease in unrealized loss on auction rate securities	(1,688		)	6,245		(237		)	6,245
Other unrealized investment losses	(270		)	—		(38		)	—
Total comprehensive income	$	26,157		$	30,021	$	48,272		$	37,797

Stock-Based Compensation

The Company expenses the fair value of employee stock options and other forms of stock-based employee compensation, including restricted stock units, over the awards’ vesting periods. Compensation expense is measured using the fair value of the award at the grant date, net of estimated forfeitures, and is adjusted to reflect actual forfeitures and the outcomes of certain conditions. The fair value of each stock-based award is expensed under the straight-line method. See Note K., “Employee Stock Benefit Plans,” for additional information.

Subsequent Events

Cubist considers events or transactions that have occurred after the balance sheet date of June 30, 2010, but prior to the filing of the financial statements with the SEC on this Form 10-Q to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of the filing with the SEC of this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncements

In March 2010, the Financial Accounting Standards Board, or FASB, issued updated guidance to amend and clarify how entities should evaluate credit derivatives embedded in beneficial interests in securitized financial assets. The updated guidance eliminates the scope exception for bifurcation of embedded credit derivatives in interests in securitized financial assets, unless they are created solely by subordination of one financial instrument to another. The update allows entities to elect the fair value option for any beneficial interest in securitized financial assets upon adoption. This guidance is effective by the first day of the first fiscal quarter beginning after June 15,

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2010, and will impact prospective financial statements only. The Company adopted this guidance effective July 1, 2010, and expects to elect the fair value option as it relates to its investment in auction rate securities. As such, subsequent changes in the fair value of the Company’s auction rate securities will now be recognized within its statement of income.

In March 2010, the FASB reached a consensus to issue an amendment to the accounting for revenue arrangements under which a vendor satisfies its performance obligations to a customer over a period of time, when the deliverable or unit of accounting is not within the scope of other authoritative literature, and when the arrangement consideration is contingent upon the achievement of a milestone. The amendment defines a milestone and clarifies whether an entity may recognize consideration earned from the achievement of a milestone in the period in which the milestone is achieved. This amendment is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. The amendment may be applied retrospectively to all arrangements or prospectively for milestones achieved after the effective date. The Company has not adopted this guidance early and adoption of this amendment is not expected to have a material impact on Cubist’s results of operation or financial condition.

In January 2010, the FASB issued an amendment to the accounting for fair value measurements and disclosures. This amendment details additional disclosures on fair value measurements, requires a gross presentation of activities within a Level 3 roll-forward, and adds a new requirement to the disclosure of transfers in and out of Level 1 and Level 2 measurements. The new disclosures are required of all entities that are required to provide disclosures about recurring and nonrecurring fair value measurements. This amendment was effective as of January 1, 2010, with an exception for the gross presentation of Level 3 roll-forward information, which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years. The adoption of the remaining provisions of this amendment is not expected to have a material impact on the Company’s financial statement disclosures.

In October 2009, the FASB issued an amendment to the accounting for multiple-deliverable revenue arrangements. This amendment provides guidance on determining whether multiple deliverables exist, how the arrangements should be separated, and how the consideration paid should be allocated. As a result of this amendment, entities may be able to separate multiple-deliverable arrangements in more circumstances than under existing accounting guidance. This guidance amends the requirement to establish the fair value of undelivered products and services based on objective evidence and instead provides for separate revenue recognition based upon management’s best estimate of the selling price for an undelivered element when there is no other means to determine the fair value of that undelivered element. The existing guidance previously required that the fair value of the undelivered item reflect the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. If the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the elements were delivered or fair value was determined. This amendment will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption and retrospective application is also permitted. The Company has not adopted this guidance early and is currently evaluating the potential effect of the adoption of this amendment on its results of operation and financial condition.

C.BUSINESS COMBINATIONS

On December 16, 2009, Cubist acquired 100% of the outstanding stock of Calixa for an upfront payment of $100.0 million in cash and contingent consideration with an estimated acquisition-date fair value of $101.6 million, upon which Calixa became a wholly-owned subsidiary of Cubist. The results of Calixa are included in the Company’s results of operations as of the date of acquisition. The pro-forma effect of this acquisition from the beginning of 2009 is immaterial to the Company’s results of operations. Calixa was a privately-held development stage biopharmaceutical company based in San Diego, California, focused on the development of novel antibiotics that address multi-drug resistant Gram-negative pathogens. Calixa’s lead compound, CXA-201, is an intravenously administered combination of an anti-pseudomonal cephalosporin, CXA-101, which Calixa licensed rights to from Astellas Pharma Inc., and the beta-lactamase inhibitor tazobactam. As a result of the acquisition, Cubist obtained the rights to develop and commercialize CXA-201 and other products that incorporate CXA-101 in all territories of the world except select Asia-Pacific and Middle East territories. In June 2010, Cubist completed the Phase 2 clinical

12

trial of CXA-101 for cUTI and all study objectives were met, resulting in the Company making a $20.0 million milestone payment to Calixa’s former shareholders.

The business combination was accounted for under the acquisition method. Accordingly, the fair value of the purchase price was allocated to the fair value of tangible assets and identifiable intangible assets acquired and liabilities assumed.

The following table summarizes the acquisition-date fair value of total consideration at December 16, 2009, and the amounts allocated to purchase price:

	TotalAcquisition- DateFair Value		AmountAllocated to Purchase Price
	(in thousands)
Cash	$	100,012	$	97,258
Contingent consideration	101,600		98,840
Total consideration	$	201,612	$	196,098

The $5.5 million difference between the total fair value of consideration transferred and the purchase price primarily relates to stock-based compensation charges recognized in the postcombination period ended December 31, 2009.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition:

	December 16, 2009
	(in thousands)
Cash	$	5,079
Investments	2,657
IPR&D	194,000
Deferred tax assets	9,257
Goodwill	63,020
Other assets acquired	77
Total assets acquired	274,090
Deferred tax liabilities	(75,201		)
Other liabilities assumed	(2,791		)
Total liabilities assumed	(77,992		)
Total net assets acquired	$	196,098

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax basis of the acquired assets and liabilities. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the acquisition date.

Of the identifiable assets acquired, $194.0 million are IPR&D assets relating to CXA-201. The fair value of the acquired IPR&D was determined using an income method approach, including discounted cash flow models that are probability-adjusted for assumptions the Company believes a market participant would make relating to the development and potential commercialization of CXA-201 indications, which are currently expected to be certain forms of pneumonia, cUTI and complicated intra-abdominal infections, or cIAI. IPR&D assets relating to CXA-201

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had an estimated fair value of $174.0 million for the pneumonia indication and an estimated fair value of $20.0 million for the cUTI and cIAI indications.

The contingent consideration relates to potential amounts payable to Calixa’s former shareholders upon the achievement of certain development, regulatory and sales milestones for CXA-201 indications. The undiscounted amounts Cubist could pay range from $20.0 million to $310.0 million. This contingent consideration is recognized at its estimated fair value of $84.3 million and $101.6 million, as of June 30, 2010 and December 31, 2009, respectively, and was determined based on a probability-weighted income approach, less any payments made pursuant to the agreement. During the three months ended June 30, 2010, Cubist completed the Phase 2 clinical trial of CXA-101 for cUTI and all study objectives were met, resulting in the Company making a $20.0 million milestone payment to Calixa’s former shareholders. The change in the fair value of contingent consideration for the three and six months ended June 30, 2010, relates to the time value of money, and is recognized within the condensed consolidated statements of income. The contingent consideration liability balance at June 30, 2010, also reflects the $20.0 million milestone payment, which was made in June 2010. There were no significant changes in probabilities during the three and six months ended June 30, 2010. This fair value measurement is based on significant inputs not observable in the market and therefore represents a Level 3 measurement within the fair value hierarchy. See Note E., “Fair Value Measurements,” for additional information.

D.INVESTMENTS

The following table summarizes the amortized cost and estimated fair values of the Company’s available-for-sale investments:

	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(in thousands)
Balance at June 30, 2010:
Bank deposits	$	41,157	$	—	$	(4	)	$	41,153
U.S. treasury securities	106,004		152		—			106,156
Federal agencies	75,332		34		(4		)	75,362
Corporate notes	148,091		33		(489		)	147,635
Auction rate securities	18,844		7,331		—			26,175
Total	$	389,428	$	7,550	$	(497	)	$	396,481
Balance at December 31, 2009:
Bank deposits	$	45,511	$	56	$	(4	)	$	45,563
U.S. treasury securities	96,676		7		(106		)	96,577
Federal agencies	61,657		16		(43		)	61,630
Corporate notes	92,460		2		(179		)	92,283
Auction rate securities	18,290		7,568		—			25,858
Total	$	314,594	$	7,649	$	(332	)	$	321,911

The auction rate securities are private placement, synthetic collateralized debt obligations of $58.1 million in original cost. While the auction rate securities do not contractually mature until 2017, the interest rates on such securities reset at intervals of less than 35 days. Given the repeated failed auctions experienced since August 2007, the auction rate securities are classified as long-term investments as of June 30, 2010 and December 31, 2009, as they are not considered liquid.

On April 1, 2009, the Company adopted accounting guidance that established a new method of recognizing and reporting other-than-temporary impairments for debt securities. Upon adoption of this standard, the Company recorded a cumulative effect adjustment, resulting in a reclassification of $8.8 million of non-credit losses related to previously recognized other-than-temporary impairment charges from accumulated deficit to accumulated other comprehensive income (loss). The non-credit loss was calculated as the difference between the $49.2 million

14

impairment charge recognized in 2008 and the $40.4 million of estimated credit losses as of the adoption date. The determination of the bifurcation of impairment between credit and non-credit losses is highly judgmental, and changes in certain estimates and assumptions, including those set forth above, could affect the amount and timing of loss realization.

The following table is a roll-forward of other-than-temporary impairments within accumulated deficit as a result of the adoption of amendments to accounting guidance:

	(in thousands)
Credit losses remaining in accumulated deficit as of December 31, 2009:	$	39,810
Accretion of credit loss impairments previously recognized, due to an increase in cash flows expected to be collected	(554		)
Credit losses remaining in accumulated deficit as of June 30, 2010	$	39,256

See Note E., “Fair Value Measurements,” for additional information.

E.FAIR VALUE MEASUREMENTS

The accounting standard for fair value measurements defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and requires detailed disclosures about fair value measurements. Under this standard, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. This standard classifies these inputs into the following hierarchy:

Level 1 Inputs—Quoted prices for identical instruments in active markets.

Level 2 Inputs—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs—Instruments with primarily unobservable value drivers.

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The fair values of the Company’s financial assets and liabilities carried at fair value as of June 30, 2010 and December 31, 2009, are classified in the table below into one of the three categories described above:

	June 30, 2010
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Money market funds	$	35,774	$	—	$	—	$	35,774
Bank deposits	—		60,189		—		60,189
U.S. treasury securities	106,156		—		—		106,156
Federal agencies	75,362		—		—		75,362
Corporate notes	—		159,064		—		159,064
Auction rate securities	—		—		26,175		26,175
Total assets	$	217,292	$	219,253	$	26,175	$	462,720
Liabilities
Contingent consideration	$	—	$	—	$	84,295	$	84,295
Total liabilities	$	—	$	—	$	84,295	$	84,295

	December 31, 2009
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Money market funds	$	66,329	$	—	$	—	$	66,329
Bank deposits	—		45,563		—		45,563
U.S. treasury securities	96,577		—		—		96,577
Federal agencies	61,630		—		—		61,630
Corporate notes	—		92,283		—		92,283
Auction rate securities	—		—		25,858		25,858
Total assets	$	224,536	$	137,846	$	25,858	$	388,240
Liabilities
Contingent consideration	$	—	$	—	$	101,600	$	101,600
Total liabilities	$	—	$	—	$	101,600	$	101,600

Marketable Securities

The Company classifies its bank deposits and corporate notes as Level 2 under the fair value hierarchy. These assets have been valued by a third-party pricing service at each balance sheet date, using observable market inputs that may include trade information, broker or dealer quotes, bids, offers, or a combination of these data sources. The fair value hierarchy level is determined by asset class based on the lowest level of significant input. To conform prior year figures to current year presentation, $57.2 million of corporate notes have been reclassified from Level 1 to Level 2 as of December 31, 2009.

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Level 3 Roll-forward

The table below provides a reconciliation of fair value for which the Company used Level 3 inputs as of June 30, 2010 and December 31, 2009:

	Auction Rate Securities			Contingent Consideration
	(in thousands)
Balance at December 31, 2009	$	25,858		$	(101,600	)
Total realized and unrealized gains (losses):
Included in net income	554			—
Included in comprehensive income	(237		)	—
Contingent consideration expense	—			(2,695		)
Contingent consideration milestone payment	—			20,000
Balance at June 30, 2010	$	26,175		$	(84,295	)

Auction Rate Securities

Due to the fact that there is a limited market for the Company’s auction rate securities, the Company utilized other sources of information in order to develop its fair value estimates. Given the complex structure of the auction rate securities, the Company engaged Houlihan Smith & Company Inc., or Houlihan Smith, to assist it with its valuation. The Company used both the third-party valuation model from Houlihan Smith and market bids received from Deutsche Bank AG, or DB, and Morgan Stanley to estimate the fair value for these securities. The Company weighted the valuation model equally with the market bid sources when developing the final fair value, given the Company’s determination that both the valuation model and bids data points have equal relevance in estimating fair value.

The first data point used, Houlihan Smith’s valuation model and the resulting fair value assessment, incorporates the structure of each auction rate security, the 125-entity reference pool of credit default swaps, or CDS, spreads per reference entity, the collateral underlying the securities, the cash flow characteristics of the securities and the current trading environment of such securities. Houlihan Smith’s valuation model considers various components of risk, including market-based bond and CDS pricing and a corresponding assessment of default risk and recovery expectations. The valuation process results in an assessment of the fair value an investor would expect to pay for a similar risk profiled portfolio. The model incorporates market data and CDS prices as of June 30, 2010. The Houlihan Smith valuation model includes recovery rate assumptions as of June 30, 2010, between 20% and 30%. The CDS spreads on the underlying reference entities as of June 30, 2010, ranged from 25 to 1,918 basis points. Cubist’s validation of the fair value of Houlihan Smith’s valuation model included a review of various assumptions, including, but not limited to, bond default rates, bond recovery rates, credit ratings, cash flow streams and discount rates.

The second data point used to calculate fair value is actual market bids from DB and Morgan Stanley. The Company does not have access to details regarding any auction rate securities being traded at these prices but considers the market bids received from DB and Morgan Stanley as relevant data points, given their role as brokers trading these types of securities.

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Consistent with the Company’s investment policy guidelines, all five of the auction rate securities it holds had AAA credit ratings at the time of purchase. The current Standard & Poor’s credit ratings for these auction rate securities range from CCC to CCC-, and the Fitch Ratings for these auction rate securities now range from BB to B. There were no changes in rating agency ratings during the six months ended June 30, 2010. The underlying risk components of the auction rate securities include pools of CDS, collateral notes and exposure to the security issuer. There is no underlying exposure to any mortgage-backed securities. The credit ratings on the underlying reference entities range from AAA to CC. The riskiness of each underlying component of the auction rate securities was assessed and factored into the fair value of the securities as of June 30, 2010.

The fair value of the auction rate securities decreased by $1.4 million during the three months ended June 30, 2010, and increased by $0.3 million during the six months then ended. The change in fair value during the three months ended June 30, 2010, primarily relates to decreased market bids and increased risk spreads.  The change in fair value during the six months ended June 30, 2010, is primarily the result of higher market bids. The Company believes that the credit ratings for the auction rate securities reflect their long-term outlook and credit profile, whereas fair value is reflected by the factors described above. The change in the estimated fair value of the auction rate securities is included in other comprehensive income (loss) for the three and six months ended June 30, 2010.

Contingent Consideration

Contingent consideration relates to potential amounts payable by the Company to the former shareholders of Calixa upon the achievement of certain development, regulatory and sales milestones for CXA-101, and other products incorporating CXA-101, in connection with the Company’s acquisition of Calixa. As of June 30, 2010 and December 31, 2009, the fair value of the contingent consideration was estimated to be $84.3 million and $101.6 million, respectively, and was determined based on a probability-weighted income approach, less the $20.0 million milestone payment made as of June 30, 2010, which is described in Note C., “Business Combinations.” This valuation takes into account various assumptions, including the probabilities associated with successfully completing clinical trials and obtaining regulatory approval, the period in which these milestones are achieved, as well as a discount rate of 5.25%, which represents a pre-tax working capital rate. This valuation was developed using assumptions the Company believes would be made by a market participant. The Company will assess these estimates on an on-going basis as additional data impacting the assumptions is obtained. The change in the fair value of contingent consideration for the three and six months ended June 30, 2010, relates to the time value of money, and is recognized within the condensed consolidated statements of income. The contingent consideration liability balance at June 30, 2010, also reflects the $20.0 million milestone payment, which was made in June 2010. There were no significant changes in probabilities during the three and six months ended June 30, 2010.

F.PROPERTY AND EQUIPMENT

Property and equipment, net consisted of the following at:

	June 30,			December 31,
	2010			2009
	(in thousands)
Building	$	57,097		$	56,597
Leasehold improvements	15,833			14,626
Laboratory equipment	26,671			24,672
Furniture and fixtures	2,316			2,108
Computer equipment	17,874			16,998
Construction in progress	4,245			1,376
	124,036			116,377
Less accumulated depreciation	(52,104		)	(47,995		)
Property and equipment, net	$	71,932		$	68,382

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Depreciation expense was $2.1 million for each of the three months ended June 30, 2010 and 2009, respectively, and $4.1 million and $4.3 million for the six months ended June 30, 2010 and 2009, respectively.

G.GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill as of June 30, 2010, and changes during the six months then ended is as follows:

	(in thousands)
Balance at December 31, 2009	$	63,020
Additions	—
Balance at June 30, 2010	$	63,020

Goodwill has been assigned to the Company’s only reporting unit. See Note L., “Segment Information,” for additional information.

Other intangible assets, net consisted of the following at:

		June 30,			December 31,
		2010			2009
		(in thousands)
Patents		$	2,627		$	2,627
Manufacturing rights		2,500			2,500
Acquired technology rights		28,500			28,500
Intellectual property and processes and other intangible assets		5,388			5,388
		39,015			39,015
Less:	accumulated amortization — patents	(2,276		)	(2,245		)
	accumulated amortization — manufacturing rights	(2,292		)	(2,083		)
	accumulated amortization — acquired technology rights	(13,754		)	(12,525		)
	accumulated amortization — intellectual property	(5,379		)	(5,379		)
Intangible assets, net		$	15,314		$	16,783

Amortization expense was $0.7 million for each of the three months ended June 30, 2010 and 2009, and $1.5 million for each of the six months ended June 30, 2010 and 2009. The estimated aggregate amortization of intangible assets as of June 30, 2010, for each of the five succeeding years is as follows:

	(in thousands)
Remainder of 2010	$	1,469
2011	2,521
2012	2,521
2013	2,521
2014	2,521
2015 and thereafter	3,761
	$	15,314

H.DEBT

2.25% Notes

Cubist’s outstanding debt consists of $300.0 million aggregate principal amount of 2.25% convertible subordinated notes, or the 2.25% Notes. In June 2006, Cubist completed the public offering of $350.0 million aggregate principal amount of the 2.25% Notes. The 2.25% Notes are convertible at any time prior to maturity into

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common stock at an initial conversion rate of 32.4981 shares of common stock per $1,000 principal amount of convertible notes, subject to adjustment upon certain events, which equates to approximately $30.77 per share of common stock. Cubist may deliver cash or a combination of cash and common stock in lieu of shares of common stock at Cubist’s option. Interest is payable on each June 15 and December 15. The 2.25% Notes mature on June 15, 2013. Cubist retains the right to redeem all or a portion of the 2.25% Notes at 100% of the principal amount plus accrued and unpaid interest commencing in June 2011 if the closing price of Cubist’s common stock is greater than 150% of the applicable conversion price for a period of time as specified in the agreement governing the 2.25% Notes.

In February 2008, Cubist repurchased, in privately negotiated transactions, $50.0 million in original principal amount of the 2.25% Notes, reducing the outstanding amount of the 2.25% Notes from $350.0 million to $300.0 million, at an average price of approximately $93.69 per $100 of debt. These repurchases were funded out of the Company’s working capital and reduced Cubist’s fully-diluted shares of common stock outstanding by approximately 1,624,905 shares. As of June 30, 2010, the “if converted value” does not exceed the principal amount of the 2.25% Notes. The fair value of the 2.25% Notes was estimated to be $281.3 million as of June 30, 2010, and was determined using quoted market rates.

The Company accounts for the 2.25% Notes following the provisions of accounting guidance for debt with conversion and other options. Following this guidance, Cubist separately accounts for the liability and equity components of the 2.25% Notes ($236.4 million and $113.6 million, respectively, as of the date of issuance of the 2.25% Notes) in a manner that reflects the Company’s non-convertible debt borrowing rate of similar debt. The equity component of $113.6 million was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2.25% Notes and the fair value of the liability at the date of issuance. This debt discount is amortized to the condensed consolidated statement of income over the expected life of a similar liability without the equity component. The Company determined this expected life to be equal to the seven-year term of the 2.25% Notes, resulting in an amortization period ending June 15, 2013. The net equity component recorded as additional paid-in capital was $66.0 million as of the date of issuance, which is net of deferred taxes of $44.0 million and debt issuance costs reclassified to additional paid-in capital of $3.6 million.

The table below summarizes the carrying amounts of the liability component of the 2.25% Notes as of June 30, 2010, and December 31, 2009:

	June 30,			December 31,
	2010			2009
	(in thousands)
Total debt outstanding at the end of the period	$	300,000		$	300,000
Unamortized discount	(47,594		)	(54,614		)
Net carrying amount of the liability component	$	252,406		$	245,386

The net carrying value of the equity component of the 2.25% Notes as of June 30, 2010, and December 31, 2009, was $57.5 million.

The unamortized discount on the liability component is being amortized to interest expense using the effective interest method over the term of the note. The effective interest rate on the liability component is 8.37%. The deferred financing costs associated with the sale of the 2.25% Notes were $10.9 million. These costs were allocated between the liability and equity components as $7.3 million and $3.6 million as of the date of issuance, respectively. The costs associated with the liability component are included in other assets on the condensed consolidated balance sheet and are amortized to interest expense ratably over the life of the 2.25% Notes. The costs associated with the equity component are included in additional paid-in capital and are not amortized. The table below summarizes the interest expense the Company incurred for the three and six months ended June 30, 2010 and 2009:

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	Three months endedJune 30,				Six months endedJune 30,
	2010		2009		2010		2009
	(in thousands)				(in thousands)
Contractual interest coupon payment	$	1,687	$	1,688	$	3,375	$	3,375
Amortization of discount on debt	3,547		3,262		7,020		6,458
Amortization of the liability component of the debt issuance costs	225		225		450		450
Total interest expense	$	5,459	$	5,175	$	10,845	$	10,283

Credit Facility

In December 2008, Cubist entered into a $90.0 million revolving credit facility with RBS Citizens National Association, or RBS Citizens, for general corporate purposes. Under the revolving credit facility, Cubist may request to borrow at any time a minimum of $1.0 million up to the maximum of the available remaining credit. The facility will be secured by the pledge of a certificate of deposit issued by RBS Citizens and/or an RBS Citizens money market account equal to an aggregate of 102% of the outstanding principal amount of the loans, so long as such loans are outstanding. Interest expense on the borrowings can be based, at Cubist’s option, on LIBOR plus a margin or the Prime rate. Any borrowings under the facility are due on demand or upon termination of the revolving credit agreement. There were no outstanding borrowings under the credit facility as of June 30, 2010 or December 31, 2009.

I.ACCRUED LIABILITIES

Accrued liabilities consisted of the following at:

	June 30,		December 31,
	2010		2009
	(in thousands)
Accrued incentive compensation	$	3,066	$	4,823
Accrued bonus	5,281		8,913
Accrued benefit costs	6,091		4,047
Accrued clinical trials	4,347		7,858
Accrued manufacturing costs	2,210		1,853
Accrued royalty	42,788		44,390
Other accrued costs	16,228		13,587
Accrued liabilities	$	80,011	$	85,471

J.INVENTORY

Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first in, first out basis. The Company analyzes its inventory levels quarterly, and writes down to cost of product revenues inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, inventory in excess of expected sales requirements or inventory that fails to meet commercial sale specifications. Expired inventory is disposed of and the related costs are written off to cost of product revenues.

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Inventories consisted of the following at:

	June 30,		December 31,
	2010		2009
	(in thousands)
Raw materials	$	7,897	$	9,351
Work in process	10,291		7,818
Finished goods	8,817		8,328
Inventory	$	27,005	$	25,497

K.EMPLOYEE STOCK BENEFIT PLANS

Summary of Stock-Based Compensation Plans

Cubist has several stock-based compensation plans. Under the Cubist Amended and Restated 2000 Equity Incentive Plan, or the 2000 EIP, 13,535,764 shares of common stock initially were or have become available for grant to employees, officers or consultants in the form of stock options, restricted stock, restricted stock units and stock grants, prior to Cubist’s decision to stop issuing awards under the 2000 EIP beginning in June 2010. Options granted under the 2000 EIP have exercise prices no less than the fair market value on the grant date, vest ratably on a quarterly basis over a four-year period and expire ten years from the grant date. Restricted stock units granted under the 2000 EIP vest ratably on an annual basis over a four-year period. There are no shares available for future grant under this plan following Cubist’s decision to stop issuing awards under the 2000 EIP beginning in June 2010 upon the adoption of the Cubist 2010 Equity Incentive Plan, or the 2010 EIP.

Under the Cubist Amended and Restated 2002 Directors’ Equity Incentive Plan, 1,375,000 shares of common stock initially were or have become available for grant to members of the Company’s Board of Directors in the form of stock options, restricted stock, restricted stock units and stock grants. Options granted under this plan have exercise prices no less than the fair market value on the grant date, vest ratably over either a one-year or a three-year period and expire ten years from the grant date. At June 30, 2010, there were 379,370 shares available for grant under this plan.

Under the 2010 EIP, the Company has reserved 6,000,000 shares of common stock for grant to employees, officers or consultants in the form of stock options, restricted stock, restricted stock units, stock grants, incentive stock grants, performance units and stock appreciation rights, plus the number of shares of common stock subject to stock options and restricted stock units granted under the 2000 EIP and outstanding as of June 10, 2010, which become available for additional awards thereunder by reason of the forfeiture, cancellation, expiration or termination of those awards after June 10, 2010. Options granted under the 2010 EIP have exercise prices no less than the fair market value on the grant date, vest ratably on a quarterly basis over a four-year period and expire ten years from the grant date. Restricted stock units granted under the 2010 EIP vest ratably on an annual basis over a four-year period. At June 30, 2010, there were 5,986,300 shares remaining available for grant under the 2010 EIP.

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Summary of Stock-Based Compensation Expense

Stock-based compensation expense recorded in the condensed consolidated statement of income for the three and six months ended June 30, 2010 and 2009, is as follows:

	Three months endedJune 30,						Six months endedJune 30,
	2010			2009			2010			2009
	(in thousands)						(in thousands)
Stock-based compensation expense allocation:
Cost of product revenues	$	186		$	70		$	264		$	139
Research and development	1,386			1,049			2,474			2,012
Sales and marketing	1,009			1,061			1,992			1,987
General and administrative	1,555			1,295			3,181			2,347
Total stock-based compensation	4,136			3,475			7,911			6,485
Income tax effect	(1,716		)	(1,192		)	(3,236		)	(2,218		)
Stock-based compensation included in net income	$	2,420		$	2,283		$	4,675		$	4,267

Valuation Assumptions

The fair value of each stock-based award was estimated on the grant date using the Black-Scholes option-pricing model and expensed under the straight-line method. The following weighted-average assumptions were used:

	Three months endedJune 30,				Six months endedJune 30,
	2010		2009		2010		2009
Expected stock price volatility	50	%	49	%	50	%	49	%
Risk free interest rate	2.2	%	2.1	%	2.2	%	2.0	%
Expected annual dividend yield per share	—		—		—		—
Expected life of options	4.5 years		4.4 years		4.5 years		4.4 years

General Option Information

A summary of option activity for the six months ended June 30, 2010, is as follows:

	Number		Weighted Average Exercise Price
Outstanding at December 31, 2009	8,966,083		$	18.60
Granted	1,464,745		$	21.51
Exercised	(677,960	)	$	13.06
Canceled	(162,245	)	$	26.62
Outstanding at June 30, 2010	9,590,623		$	19.30
Vested and exercisable at June 30, 2010	6,058,908		$	18.94
Weighted average grant-date fair value of options granted during the period			$	9.17

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Restricted Stock Unit Information

A summary of restricted stock unit activity for the six months ended June 30, 2010, is as follows:

	Number of shares		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2009	199,489		$	16.76
Granted	272,049		$	21.28
Vested	(49,305	)	$	16.76
Forfeited	(3,278	)	$	17.91
Nonvested at June 30, 2010	418,955		$	19.69

The Company recognizes expense ratably over the restricted stock units’ vesting period of four years, net of estimated forfeitures.

L.SEGMENT INFORMATION

Cubist operates in one business segment, the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. The Company’s entire business is managed by a single management team, which reports to the Chief Executive Officer. Approximately 96% of the Company’s revenues are currently generated within the U.S.

M.INCOME TAXES

The following table summarizes the Company’s effective tax rates and income tax provisions for the three and six months ended June 30, 2010 and 2009:

	Three months ended						Six months ended
	June 30,						June 30,
	2010			2009			2010			2009
	(in thousands, except percentages)
Effective tax rate	41.6		%	24.7		%	39.5		%	27.2		%
Provision for income taxes	$	20,229		$	7,839		$	31,820		$	11,818

The effective tax rates of 41.6% and 39.5% for the three and six months ended June 30, 2010, respectively, differ from the U.S. federal statutory income tax rate of 35.0% primarily due to state income taxes net of state tax credits and the impact of contingent consideration expense. For the three and six months ended June 30, 2009, the Company’s effective income tax rates were 24.7% and 27.2%, respectively. These effective tax rates were significantly lower than the comparable periods in 2010 due to the $3.0 million net income tax benefit for discrete items attributable to the termination of the development of the Hepatitis C Virus compound acquired as a result of the Company’s acquisition of Illumigen Biosciences, Inc. recorded during 2009. In addition, the increase in the effective tax rates from 2009 to 2010 is partially related to the Company not recording a benefit for the 2010 federal research and development tax credit as it has not been extended by Congress and approved by the President.

At December 31, 2009, the Company had federal and state net operating loss, or NOL, carryforwards of $102.5 million and $49.8 million, respectively. Included in the NOLs are federal and state NOLs of $47.6 million and $9.8 million, respectively, attributable to excess tax benefits from stock-based awards. The tax benefits attributable to these NOLs are generally credited directly to additional paid-in capital when realized. Since the Company expects to realize the tax benefits attributable to these NOLs during 2010, it has credited the federal and state tax benefits of these NOLs in the amount of $18.9 million to additional paid-in capital during the six months ended June 30, 2010.

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N.LEGAL PROCEEDINGS

On February 9, 2009, Cubist received a Paragraph IV Certification Notice Letter from Teva Parenteral Medicines, Inc., or Teva, notifying Cubist that Teva had submitted an Abbreviated New Drug application, or ANDA, to the U.S. Food and Drug Administration, or FDA, for approval to market a generic version of CUBICIN. Teva’s notice letter advised that it is seeking FDA approval to market daptomycin for injection, the active ingredient in CUBICIN, prior to the expiration of U.S. Patent Nos. 6,468,967 and 6,852,689, which expire on September 24, 2019, and U.S. Patent No. RE39,071, which expires on June 15, 2016. Each of these patents is listed in the FDA’s list of “Approved Drug Products with Therapeutic Equivalence Evaluations,” also known as the Orange Book. The notice letter further stated that Teva is asserting that claims in the referenced patents are not infringed and/or are invalid. On March 23, 2009, Cubist filed a patent infringement lawsuit against Teva, Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries Ltd. in response to the ANDA filing. The complaint, which was filed in the U.S. District Court for the District of Delaware, alleges infringement of the referenced patents. Under current U.S. law, the filing of the lawsuit automatically prevents the FDA from approving the ANDA for 30 months from Cubist’s receipt of Teva’s Paragraph IV notification letter on February 9, 2009, unless the court enters judgment in favor of Teva in less than 30 months, or finds that a party has failed to cooperate reasonably to expedite the lawsuit. On June 7, 2010, the court issued a claim construction order. The court has set a date for trial beginning on April 25, 2011. The court has indicated that summary judgment motions will not be permitted in this lawsuit.

Cubist has retained the services of Wilmer Cutler Pickering Hale and Dorr LLP, or WilmerHale, to represent the Company in the ANDA litigation. Cubist entered into a fee arrangement with WilmerHale under which the Company will pay WilmerHale a fixed monthly fee over the course of the litigation and a potential additional payment that could be due to WilmerHale based on the ultimate outcome of the lawsuit. The Company is accruing amounts due to WilmerHale based on its best estimate of the fees that it expects to incur as the services are provided. Based on the nature of this fee arrangement, Cubist could incur legal fees in excess of amounts accrued as a result of future events.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This document contains and incorporates by reference ‘‘forward-looking statements.” In some cases, these statements can be identified by the use of forward-looking terminology such as ‘‘may,” ‘‘will,” ‘‘could,” ‘‘should,” ‘‘would,” ‘‘expect,” ‘‘anticipate,” “plan,” “forecast,” ‘‘continue” or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition, or state trends and known uncertainties or other forward-looking information. You are cautioned that forward-looking statements are inherently uncertain. Each forward-looking statement contained in this report is subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statement. We refer you to Item 1A. Risk Factors in Part II of this report, which we incorporate herein by reference, for identification of important factors with respect to these risks and uncertainties. We caution readers not to place considerable reliance on such statements. Our business is subject to substantial risks and uncertainties, including those identified in this report. The information contained in this Quarterly Report is provided by us as of the date of this Quarterly Report, and we do not undertake any obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise.

Forward-looking statements in this Quarterly Report include, without limitation, statements regarding:

·our expectations regarding our financial performance, including revenues, expenses, gross margins, capital expenditures and income taxes, including our full-year 2010 effective tax rate and tax benefits attributable to net operating losses, or NOLs;

·our expectations regarding the commercialization and manufacturing of CUBICIN® (daptomycin for injection), including our expectations with respect to the ability of our single source provider of CUBICIN active pharmaceutical ingredient, or API, to complete the expansion of its manufacturing facility to meet anticipated CUBICIN demand;

·our expectations regarding the strength of our intellectual property portfolio protecting CUBICIN and our patent infringement lawsuit against Teva Parenteral Medicines, Inc., or Teva, and its affiliates in connection with the February 9, 2009, notification to us by Teva that it had submitted an Abbreviated New Drug application, or ANDA, to the U.S. Food and Drug Administration, or FDA, seeking approval to market a generic version of CUBICIN before the expiration of certain of the patents covering CUBICIN;

·our expectations regarding our drug candidates, including the development, regulatory review and commercial potential of such drug candidates and the costs and expenses related thereto;

·our estimates relating to future milestone payments to the former shareholders of Calixa Therapeutics Inc., or Calixa, and our expectations regarding advancing the clinical programs of CXA-101 and CXA-201;

·the continuation or termination of our collaborations and our other significant agreements and our ability to establish and maintain successful manufacturing, supply, sales and marketing, distribution and development collaborations and other arrangements;

·our expected efforts to evaluate product candidates and build our pipeline;

·the liquidity and credit risk of securities, particularly auction rate securities, that we hold as investments;

·the impact of new accounting pronouncements;

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·our expectations regarding the impact of U.S. healthcare reform legislation, including the expected impact of Medicaid rebates;

·our future capital requirements and capital expenditures and our ability to finance our operations, debt obligations and capital requirements; and

·our expectations regarding the impact of ordinary course legal proceedings.

Many factors could cause our actual results to differ materially from these forward-looking statements. These factors include the following:

·the level of acceptance of CUBICIN by physicians, patients, third-party payors and the medical community;

·any changes in the current or anticipated market demand or medical need for CUBICIN, including as a result of the changes in the growth of the incidence of methicillin-resistant Staphylococcus aureus (S. aureus), or MRSA, skin and bloodstream infections or the economic downturn in the U.S. and around the world;

·any unexpected adverse events related to CUBICIN, particularly as CUBICIN is used in the treatment of a growing number of patients around the world;

·      the effectiveness of our sales force and our sales force’s ability to access targeted physicians;

·an adverse result in the litigation that we filed against Teva to defend and/or assert our patents in connection with Teva’s February 2009 notification to us that it had submitted an ANDA to the FDA seeking approval to market a generic version of CUBICIN and the expense and management time commitment associated with the litigation;

·whether or not other third parties may seek to market generic versions of CUBICIN or any other products that we commercialize in the future by filing ANDAs with the FDA and the results of any litigation that we file to defend and/or assert our patents against such third parties;

·competition in the markets in which we and our partners market CUBICIN, including marketing approvals for new products that will be competitive with CUBICIN;

·the effect that the results of ongoing or future clinical trials of CUBICIN may have on its acceptance in the medical community;

·the impact of the results of ongoing or future trials for drug candidates that we are currently developing or may develop in the future;

·whether the FDA accepts proposed clinical trial protocols in a timely manner for additional studies of CUBICIN and our drug candidates as well as our ability to conduct successful clinical trials in a timely manner and other risks that may cause our trials to be delayed or stopped;

·the impact of the results of ongoing or future trials for drug candidates that we are currently developing that are being or will be conducted by our collaborators and others for indications that we do not have rights to but which are of relevance to our developmental activities;

·whether our partners will receive, and the potential timing of, regulatory approvals or clearances to market CUBICIN in countries where it is not yet approved;

·the ability of our third-party manufacturers, including our single source provider of CUBICIN API, to manufacture, release and deliver sufficient quantities of CUBICIN in accordance with

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Good Manufacturing Practices and other requirements of the regulatory approvals for CUBICIN in order to meet market demand and to do so at an acceptable cost;

·the ability of our CUBICIN API manufacturer to complete the expansion of its manufacturing facility for CUBICIN API, including the receipt of any required regulatory approvals, on a timely basis in order to meet anticipated future demand for CUBICIN;

·our ability to discover, acquire or in-license drug candidates, the costs related thereto, and the high level of competition from other companies that are also seeking to discover, acquire or in-license the same or similar drug candidates;

·our ability to develop and achieve commercial success, and secure sufficient quantities of supply for such development and commercialization, for our existing and future drug candidates, particularly as we are managing multiple programs and opportunities and continue to seek to maximize the commercial success of CUBICIN;

·our ability to integrate successfully the operations of any business that we may acquire and the potential impact of any future acquisition on our financial results;

·unanticipated changes in our expectations for revenues, expenses or capital expenditures, and any changes in the key factors that go into the calculation of our 2010 effective tax rates;

·      the impact of recently enacted and any future healthcare reform legislation in the U.S.;

·legislative and policy changes in the U.S. and other jurisdictions where our products are sold that may affect the ease of getting a new product or a new indication approved;

·      changes in government reimbursement for our or our competitors’ products;

·our dependence upon collaborations and alliances, particularly our ability to work effectively with our partners and our partners’ ability to meet their obligations and perform effectively under our agreements;

·our ability to grow our employee base and infrastructure in order to support the continued growth of our business;

·      our ability to finance our operations;

·      potential costs resulting from product liability or other third-party claims;

·      our ability to protect our proprietary technologies; and

·a variety of risks common to our industry, including healthcare reform in jurisdictions outside the U.S. where our products are sold, which may negatively impact our business, ongoing regulatory review, public and investment community perception of the biopharmaceutical industry, statutory or regulatory changes including with respect to federal and state taxation, and our ability to attract and retain talented employees.

Overview

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is provided in addition to the accompanying condensed consolidated financial statements and footnotes to assist the reader in understanding our results of operations, financial condition and cash flows. We have organized the MD&A as follows:

·Overview: This section provides a summary of our business, of our product pipeline and our performance

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during the three and six months ended June 30, 2010.

·Results of Operations: This section provides a review of our results of operations for the three and six months ended June 30, 2010 and 2009.

·Liquidity and Capital Resources: This section provides a summary of our financial condition, including our sources and uses of cash, capital resources, commitments and liquidity.

·Commitments and Contingencies: This section provides a summary of our material legal proceedings and commitments and contingencies that are outside our normal course of business, as well as our commitment to make potential future milestone payments to third parties as part of our various business agreements.

·Critical Accounting Policies and Estimates: This section describes our critical accounting policies and the significant judgments and estimates that we have made in preparing our condensed consolidated financial statements, as well as recently issued accounting pronouncements that we have not yet adopted.

We are a biopharmaceutical company headquartered in Lexington, Massachusetts, focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. CUBICIN is, and our drug product candidates are expected to be, used primarily in hospitals but also may be used in other acute care settings, including home infusion and outpatient clinics.

We had a total of $562.8 million in cash, cash equivalents and investments as of June 30, 2010, as compared to $496.2 million in cash, cash equivalents and investments as of December 31, 2009. As of June 30, 2010, we had an accumulated deficit of $190.4 million.

Our net income and net income per share for the three and six months ended June 30, 2010 and 2009, was as follows:

	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
	(in millions, except per share data)
Net income	$	28.1	$	23.8	$	48.5	$	31.6
Basic net income per common share	$	0.48	$	0.41	$	0.83	$	0.55
Diluted net income per common share	$	0.45	$	0.40	$	0.80	$	0.54

CUBICIN. We currently derive substantially all of our revenues from CUBICIN, which we launched in the U.S. in November 2003. We currently commercialize CUBICIN on our own in the U.S. and have established distribution agreements with other companies for commercialization of CUBICIN in countries outside the U.S. CUBICIN is a once-daily, bactericidal, intravenous, or I.V., antibiotic with activity against certain Gram-positive organisms, including MRSA. CUBICIN is approved in the U.S. for the treatment of complicated skin and skin structure infections, or cSSSI, caused by S. aureus, and certain other Gram-positive bacteria, and for S. aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis, or RIE, caused by methicillin-susceptible and methicillin-resistant isolates. In the European Union, or EU, CUBICIN is approved for the treatment of complicated skin and soft tissue infections, or cSSTI, where the presence of susceptible Gram-positive bacteria is confirmed or suspected and for RIE due to S. aureus bacteremia and S. aureus bacteremia associated with RIE or cSSTI.

Our net product revenues from worldwide product sales of CUBICIN for the three and six months ended June 30, 2010, were $161.6 million and $303.2 million, respectively, as compared to $128.8 million and $243.5 million for the three and six months ended June 30, 2009, respectively. We expect both net revenues from sales of CUBICIN in the U.S. and our revenues from CUBICIN sales outside the U.S. to continue to increase due primarily to increased vial sales, market penetration into a large and growing market, and price increases we and our international partners may implement. Continuing to grow CUBICIN revenues in the U.S. is, to a large extent, dependent upon:

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·our ability to compete successfully with the products of current and future competitors;

·the growth of the market for CUBICIN;

·our ability to secure sufficient quantities of CUBICIN to meet demand and, in particular, to work with the manufacturer of our CUBICIN API to complete the expansion of capacity at the facility at which it manufactures CUBICIN API, including the receipt of any required regulatory approvals, on a timely basis;

·our ability to obtain, maintain and enforce U.S. and foreign patent protection for CUBICIN;

·continuing to have CUBICIN reimbursed by third-party payors at adequate levels, and maintaining reimbursement and rebate levels under federal government programs at levels that are similar to the levels established by recent healthcare reform; and

·future healthcare reform not including additional discount or rebate programs that impact CUBICIN, such as the expansion of the Public Health Service, or PHS, 340B drug pricing program into the outpatient (non-hospital) setting.

On February 9, 2009, we received a Paragraph IV Certification Notice Letter from Teva notifying us that Teva had submitted an ANDA to the FDA for approval to market a generic version of CUBICIN. Teva’s notice letter advised that it is seeking FDA approval to market daptomycin for injection, the active ingredient in CUBICIN, prior to the expiration of U.S. Patent Nos. 6,468,967 and 6,852,689, which expire on September 24, 2019, and U.S. Patent No. RE39,071, which expires on June 15, 2016. Each of these patents is listed in the FDA’s list of “Approved Drug Products with Therapeutic Equivalence Evaluations,” also known as the Orange Book. The notice letter further stated that Teva is asserting that claims in the referenced patents are not infringed and/or are invalid. On March 23, 2009, we filed a patent infringement lawsuit against Teva, Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries Ltd. in response to the ANDA filing. The complaint, which was filed in the U.S. District Court for the District of Delaware, alleges infringement of the referenced patents. Under current U.S. law, the filing of the lawsuit automatically prevents the FDA from approving the ANDA for 30 months from our receipt of Teva’s Paragraph IV notification letter on February 9, 2009, unless the court enters judgment in favor of Teva in less than 30 months, or finds that a party has failed to cooperate reasonably to expedite the lawsuit. The court has set a date for trial beginning on April 25, 2011. The court also issued its claim construction order on June 7, 2010. The court has indicated that summary judgment motions will not be permitted in this lawsuit. We are confident in our intellectual property portfolio protecting CUBICIN, including the patents listed in the Orange Book. It is possible that additional third parties may seek to market generic versions of CUBICIN in the U.S. by filing an ANDA.

MERREM® I.V. In July 2008, we entered into an exclusive agreement with AstraZeneca Pharmaceuticals LP, an indirect wholly-owned subsidiary of AstraZeneca PLC, or AstraZeneca, to promote and provide other support in the U.S. for MERREM I.V., an established (carbapenem class) I.V. antibiotic. Under the agreement, we promoted and supported MERREM I.V. using our existing U.S. acute care sales and medical affairs organizations. AstraZeneca provided marketing and commercial support for MERREM I.V. We recognized revenues from this agreement as service revenues. Given anticipated market conditions for carbapenems and the potential impact of the June 2010 expiration of the composition of matter patent for MERREM I.V. in the U.S., we and AstraZeneca entered into an amendment to the agreement in December 2009. The amendment established a baseline sales amount for the period from January to June 2010 with a six month baseline payment from AstraZeneca to us of $9.0 million, paid in quarterly increments, to be adjusted up or down by a true-up payment or refund at the end of the six month period based on actual U.S. sales of MERREM I.V. exceeding or falling short of the established baseline sales amount. The agreement with AstraZeneca, as amended, expired in accordance with its terms on June 30, 2010. As a result of the sales level achieved during the performance period, we recognized $6.5 million and $8.5 million of revenue for the three and six months ended June 30, 2010, respectively.

For 2009, the agreement established a baseline annual payment by AstraZeneca to us of $20.0 million, received in quarterly increments, to be adjusted up or down by a true-up payment or refund at the end of the year based on actual U.S. sales of MERREM I.V. exceeding or falling short of an established annual baseline sales amount, subject to a minimum annual payment of $6.0 million. We also could have earned a percentage of the gross

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profit on sales exceeding the annual baseline sales amount. The payments for any such sales over the baseline amount would have been recognized in the quarter in which AstraZeneca provided us with its annual sales report. Service revenues were $1.5 million and $7.6 million for the three and six months ended June 30, 2009, respectively, and consisted of $1.5 million and $3.0 million, respectively, of revenue related to the estimated minimum annual payment amount that we could have received under the agreement with AstraZeneca. The six month period ended June 30, 2009, also included a $4.6 million payment reflecting the percentage of gross profit that we received during the first quarter of 2009 for sales exceeding the 2008 annual baseline sales amount. The 2009 actual U.S. sales were below the established annual baseline sales amount. As such, we did not receive a gross profit percentage payment for 2009 sales in 2010.

Product Pipeline. We continue to build a pipeline of acute care therapies through licensing and collaboration agreements, as well as by progressing into clinical development compounds that we have developed internally.

CXA-201.  In December 2009, we acquired Calixa and with it rights to CXA-201, Calixa’s lead program, an I.V. combination of a novel anti-pseudomonal cephalosporin, CXA-101, which Calixa licensed from Astellas Pharma, Inc., or Astellas, and the beta-lactamase inhibitor tazobactam. With the acquisition of Calixa, we obtained Calixa’s rights to develop and commercialize the lead compound, CXA-201, and other products that incorporate CXA-101. Under a license agreement with Astellas, we have the exclusive rights to develop, manufacture, market and sell any eventual products which incorporate CXA-101, including CXA-201, in all territories of the world except select Asia-Pacific and Middle East territories. CXA-201 is being developed as a first-line therapy for the treatment of certain serious Gram-negative bacterial infections in the hospital, including those caused by multi-drug resistant, or MDR, Pseudomonas aeruginosa, or P. aeruginosa. Pan-resistant P. aeruginosa—resistant in vitro to all groups of antibiotics—is a major cause of opportunistic infections, particularly among immunocompromised patients. In June 2010, we completed the Phase 2 clinical trial of CXA-101 for complicated urinary tract infections, or cUTI, and all study objectives were met, resulting in our making a $20.0 million milestone payment to Calixa’s former shareholders. The next study in the cUTI program will take into consideration the results of the recently-completed Phase 2 cUTI trial of CXA-101.  We have advanced the clinical program for treatment of complicated intra-abdominal infections, or cIAI, with CXA-201 in the first half of 2010, enrolling the first patient in a Phase 2 study with CXA-201 in this indication. This multicenter, double-blind, randomized study is comparing the safety and efficacy of intravenous CXA-201 to an active comparator in patients with cIAI. In the second half of 2010, we intend to initiate a clinical trial assessing CXA-201 levels in the lung to support indications in hospital acquired pneumonia and ventilator associated pneumonia.

CB-182,804. CB-182,804 is in Phase 1 clinical trials for the treatment of MDR Gram-negative infections. We plan to make a Go/No Go Phase 2 decision for CB-182,804 in September 2010. CB-182,804 is a novel, proprietary, I.V. administered Gram-negative antibiotic that has demonstrated in vitro efficacy and rapid bactericidal activity against the key MDR Gram-negative pathogens, including P. aeruginosa, E. coli, K. pnuemoniae, and A. baumannii. In animal models, CB-182,804 was shown to be effective against lung, kidney, bloodstream and thigh infections against all MDR Gram-negative strains tested.

CB-183,315. This oral antibiotic is in a Phase 2 clinical trial for the treatment of Clostridium difficile-associated diarrhea, or CDAD, which began in April 2010. We expect to complete enrollment and provide top line results for this trial in the second half of 2011. CB-183,315 is a potent, oral, cidal lipopeptide with rapid in vitro bactericidal activity against C. difficile, which is an opportunistic anaerobic Gram-positive bacterium which causes CDAD.

CB-500,929.  In April 2008, we entered into a license and collaboration agreement with Dyax Corp., or Dyax, pursuant to which we obtained an exclusive license for the development and commercialization of the I.V. formulation of Dyax’s ecallantide compound. In March 2010, we decided to end the development of CB-500,929 after reviewing top line efficacy and safety data from the CB-500,929 Phase 2 CONSERV™ 1 and CONSERV 2 trials. Given this decision, we intend to terminate our 2008 agreement with Dyax in accordance with the terms of the agreement.

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Results of Operations for the Three Months Ended June 30, 2010 and 2009

Revenues

The following table sets forth revenues for the three months ended June 30, 2010 and 2009:

	Three months ended June 30,
	2010		2009		% Change
	(in millions)
U.S. product revenues, net	$	155.0	$	126.1	23	%
International product revenues	6.6		2.7		141	%
Service revenues	6.5		1.5		333	%
Other revenues	0.4		0.4		0	%
Total revenues, net	$	168.5	$	130.7	29	%

Product Revenues, net

Our net revenues from sales of CUBICIN, which consists of U.S. product revenues, net, and international product revenues, were $161.6 million in the three months ended June 30, 2010, and $128.8 million in the three months ended June 30, 2009, an increase of $32.8 million, or 25%. Gross U.S. revenues from sales of CUBICIN totaled $172.2 million and $134.9 million for the three months ended June 30, 2010 and 2009, respectively. The $37.3 million increase in gross U.S. revenues was due to both increased vial sales of CUBICIN in the U.S., which resulted in higher gross revenues of $16.8 million, as well as the 6.9% and 7.0% price increases for CUBICIN in April 2010 and June 2009, respectively, which resulted in $20.5 million of additional gross U.S. product revenues. Gross U.S. product revenues are offset by allowances for sales returns, Medicaid rebates, chargebacks, discounts and wholesaler management fees of $17.2 million and $8.8 million, for the three months ended June 30, 2010 and 2009, respectively, an increase of $8.4 million or 95%. The increase in allowances against gross product revenue was primarily driven by increases in Medicaid rebates, chargebacks and pricing discounts due to increased U.S. sales of CUBICIN, and the price increases described above, as well as an increase in Medicaid rebates due to the increase in the scope and amount of Medicaid rebates established by U.S. healthcare reform legislation that was enacted in March 2010. As a result of the U.S. healthcare reform legislation, provisions for Medicaid rebates are expected to increase at a higher rate than in prior periods. International product revenues of $6.6 million and $2.7 million for the three months ended June 30, 2010 and 2009, respectively, consisted primarily of CUBICIN product sales to, and royalty payments based on CUBICIN net sales in the EU from, Novartis AG, or Novartis, our EU partner for CUBICIN.

We generally do not allow wholesalers to stock CUBICIN. We have a drop-ship program in place through which orders are processed through wholesalers, but shipments are sent directly to our end-users. This results in sales trends closely tracking actual hospital and out-patient administration location purchases of our product. We pay certain wholesalers various fees for data supply and administration services. Net product revenue is reduced by any such fees.

Service Revenues

Service revenues for the three months ended June 30, 2010 and 2009, were $6.5 million and $1.5 million, respectively, and related to our exclusive agreement with AstraZeneca to promote and provide other support in the U.S. for MERREM I.V., as described further in the Overview section of this MD&A. The agreement expired in accordance with its terms at the end of June 2010.

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Costs and Expenses

The following table sets forth costs and expenses for the three months ended June 30, 2010 and 2009:

	Three months ended June 30,
	2010		2009		% Change
	(in millions)
Cost of product revenues	$	36.4	$	28.2	29	%
Research and development	40.2		32.4		24	%
Contingent consideration	1.2		—		100	%
Sales and marketing	23.0		21.7		6	%
General and administrative	14.0		12.6		11	%
Total costs and expenses	$	114.8	$	94.9	21	%

Cost of Product Revenues

Cost of product revenues were $36.4 million and $28.2 million for the three months ended June 30, 2010 and 2009, respectively, an increase of $8.2 million, or 29%. Included in our cost of product revenues are royalties owed on worldwide net sales of CUBICIN under our license agreement with Eli Lilly & Co., or Eli Lilly, costs to manufacture, test, store and distribute CUBICIN, and the amortization expense related to certain intangible assets.

Our gross margin was 78% for each of the three months ended June 30, 2010 and June 30, 2009, respectively. The increase in our cost of product revenues of $8.2 million during the three months ended June 30, 2010, as compared to the three months ended June 30, 2009, is attributable to the increase of sales of CUBICIN in the U.S. and internationally, as reported by our international partners. We expect our gross margin percentage in 2010 to be similar to our gross margin percentage in 2009.

Research and Development Expense

Total research and development expense was $40.2 million in the three months ended June 30, 2010, as compared to $32.4 million in the three months ended June 30, 2009, an increase of $7.8 million, or 24%. The increase in research and development expenses is due primarily to increases of (i) $2.9 million in clinical trial expenses related to our clinical stage compounds, including the CXA program, which was not in our pipeline during the three months ended June 30, 2009; and (ii) $3.2 million in employee-related expenses due to an increase in headcount to support our increased research and development efforts.

We expect a modest increase in research and development expenses in 2010 as compared to 2009 resulting from shifts in our various research and development investment activities. While expense relating to upfront and milestone payments is expected to be less than 2009, expenses related to manufacturing and development activity to advance our commercial, development and pre-clinical stage compounds are expected to increase.

Contingent Consideration Expense

Contingent consideration expense was $1.2 million in the three months ended June 30, 2010. This expense is due to the change in the fair value of the contingent consideration liability relating to potential amounts payable to Calixa’s former shareholders pursuant to our agreement to acquire Calixa. The change in fair value for the three months ended June 30, 2010, relates to the time value of money.

Sales and Marketing Expense

Sales and marketing expense in the three months ended June 30, 2010, was $23.0 million, as compared to $21.7 million in the three months ended June 30, 2009, an increase of $1.3 million, or 6%. The increase is primarily due to an increase of $1.9 million in employee-related expenses due to an increase in headcount, partially offset by a decrease of $0.9 million in expense incurred for promotional programs. Sales and marketing expenses are expected

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to increase in 2010 as compared to 2009 reflecting the cost associated with a series of pilot sales and marketing programs supported by an increase in the sales staff.

General and Administrative Expense

General and administrative expense was $14.0 million in the three months ended June 30, 2010, as compared to $12.6 million in the three months ended June 30, 2009, an increase of $1.4 million, or 11%. This increase is primarily due to an increase of $1.8 million in employee-related expenses due to an increase in headcount.

We expect general and administrative expense in 2010 to increase as compared to 2009 primarily due to (i) an increase in salaries, benefits and employee-related expenses due to additional headcount hired throughout 2009 and planned new hires during 2010 to support the continued growth of the business; (ii) an increase in stock-based compensation expense in 2010; and (iii) the first full year of fees and expenses related to the patent infringement litigation with Teva.

Other Income (Expense), net

The following table sets forth other income (expense), net for the three months ended June 30, 2010 and 2009:

	Three months ended June 30,
	2010			2009			% Change
	(in millions)
Interest income	$	1.3		$	0.9		43	%
Interest expense	(5.5		)	(5.2		)	5	%
Other income (expense)	(1.2		)	—			100	%
Total other income (expense), net	$	(5.4	)	$	(4.3	)	26	%

Interest Income

Interest income in the three months ended June 30, 2010, was $1.3 million as compared to $0.9 million in the three months ended June 30, 2009, an increase of $0.4 million, or 43%. The increase is primarily related to the accretion of credit loss impairments previously recognized on our auction rate securities due to an increase in cash flows expected to be collected.

Interest Expense

Interest expense in the three months ended June 30, 2010, was $5.5 million as compared to $5.2 million in the three months ended June 30, 2009, an increase of $0.3 million, or 5%. The table below summarizes our interest expense for the three months ended June 30, 2010 and 2009:

	Three months ended June 30,
	2010		2009
	(in millions)
Contractual interest coupon payment	$	1.7	$	1.7
Amortization of debt discount	3.6		3.3
Amortization of the liability component of debt issuance costs	0.2		0.2
Total interest expense	$	5.5	$	5.2

Other Income (Expense)

Other expense was $1.2 million for the three months ended June 30, 2010, as compared to zero for the three months ended June 30, 2009. Other expense for the three months ended June 30, 2010, primarily consists of foreign

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exchange losses for certain available-for-sale investments denominated in Euros purchased in December 2009, which are re-measured at the end of each period.

Provision for Income Taxes

The following table summarizes the effective tax rates and income tax provisions for the three months ended June 30, 2010 and 2009:

	Three months ended June 30,
	2010			2009
	(in millions, except percentages)
Effective tax rate	41.6		%	24.7		%
Provision for income taxes	$	20.2		$	7.8

The effective tax rates of 41.6% and 24.7% for the three months ended June 30, 2010 and 2009, respectively, differ from the U.S. federal statutory income tax rate of 35.0% mainly due to state income taxes net of state tax credits and contingent consideration expense in 2010, and the impact of federal and state research and development credits and a $3.0 million net income tax benefit for discrete items related to the termination, in 2009, of the development of the Hepatitis C Virus, or HCV, compound acquired as a result of our acquisition of Illumigen Biosciences, Inc., or Illumigen. The increase in the effective tax rate for June 30, 2010, as compared to June 30, 2009, is also partially related to not recording a benefit for the 2010 federal research and development tax credit as it had not been extended by Congress and approved by the President.

We expect our full-year 2010 effective tax rate to be 40.9%. This rate does not consider the impact of a potential extension of the federal research and development tax credit. The difference between the effective tax rate of 41.6% for the three months ended June 30, 2010, and the forecasted annual effective tax rate of 40.9% is the result of recording discrete items primarily related to state research and development tax credits.

At December 31, 2009, we had federal and state NOL carryforwards of $102.5 million and $49.8 million, respectively. Included in the NOLs are federal and state NOLs of $47.6 million and $9.8 million, respectively, attributable to excess tax benefits from stock-based awards. The tax benefits attributable to these NOLs are generally credited directly to additional paid-in capital when realized. Since we expect to realize the tax benefits attributable to these NOLs during 2010, we have credited the federal and state tax benefits of these NOLs in the amount of $1.9 million to additional paid-in capital during the three months ended June 30, 2010.

Results of Operations for the Six Months Ended June 30, 2010 and 2009

Revenues

The following table sets forth revenues for the six months ended June 30, 2010 and 2009:

	Six months ended June 30,
	2010		2009		% Change
	(in millions)
U.S. product revenues, net	$	290.3	$	238.5	22	%
International product revenues	13.0		4.9		162	%
Service revenues	8.5		7.6		13	%
Other revenues	0.8		0.8		0	%
Total revenues, net	$	312.6	$	251.8	24	%

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Product Revenues, net

Our net revenues from sales of CUBICIN, which consist of U.S. product revenues, net, and international product revenues, were $303.3 million in the six months ended June 30, 2010, and $243.4 million in the six months ended June 30, 2009, an increase of $59.9 million, or 25%. Gross U.S. revenues from sales of CUBICIN totaled $319.1 million and $255.8 million for the six months ended June 30, 2010 and 2009, respectively. The $63.3 million increase in gross U.S. revenues was due to both increased vial sales of CUBICIN in the U.S., which resulted in higher gross revenues of $33.1 million, as well as the 6.9% and 7.0% price increases for CUBICIN in April 2010 and June 2009, respectively, which resulted in $30.2 million of additional gross U.S. product revenues. Gross U.S. product revenues are offset by allowances for sales returns, Medicaid rebates, chargebacks, discounts and wholesaler management fees of $28.8 million and $17.3 million, for the six months ended June 30, 2010 and 2009, respectively, an increase of $11.5 million or 66%. The increase in allowances against gross product revenue was primarily driven by increases in Medicaid rebates, chargebacks and pricing discounts due to increased U.S. sales of CUBICIN, and the price increases described above, as well as an increase in Medicaid rebates due to the increase in the scope and amount of Medicaid rebates established by U.S. healthcare reform legislation that was enacted in March 2010. As a result of the U.S. healthcare reform legislation, provisions for Medicaid rebates are expected to increase at a greater rate than in prior periods. International product revenues of $13.0 million and $4.9 million for the six months ended June 30, 2010 and 2009, respectively, consisted primarily of CUBICIN product sales to, and royalty payments based on CUBICIN net sales in the EU from, Novartis, our EU partner for CUBICIN.

Service Revenues

Service revenues for the six months ended June 30, 2010 and 2009, were $8.5 million and $7.6 million, respectively, and related to our exclusive agreement with AstraZeneca to promote and provide other support in the U.S. for MERREM I.V., which is described further in the Overview section of this MD&A. The agreement expired in accordance with its terms in June 2010. The service revenues for the six months ended June 30, 2009, included a $4.6 million payment reflecting the percentage of gross profit that we received in the second quarter of 2009 for sales in 2008 exceeding the 2008 baseline sales amount.  2009 U.S. sales of MERREM I.V. did not exceed the established annual sales amount. As such, we did not receive a gross profit percentage payment for 2009 sales in 2010.

Costs and Expenses

The following table sets forth costs and expenses for the six months ended June 30, 2010 and 2009:

	Six months ended June 30,
	2010		2009		% Change
	(in millions)
Cost of product revenues	$	68.2	$	52.6	30	%
Research and development	79.0		82.9		-5	%
Contingent consideration	2.7		—		100	%
Sales and marketing	42.8		41.1		4	%
General and administrative	28.8		23.6		22	%
Total costs and expenses	$	221.5	$	200.2	11	%

Cost of Product Revenues

Cost of product revenues were $68.2 million and $52.6 million for the six months ended June 30, 2010 and 2009, respectively, an increase of $15.6 million, or 30%. Included in our cost of product revenues are royalties owed on worldwide net sales of CUBICIN under our license agreement with Eli Lilly, costs to manufacture, test, store and distribute CUBICIN, and the amortization expense related to certain intangible assets. Our gross margin was 78% for each of the six months ended June 30, 2010 and June 30, 2009, respectively. The increase in our cost of product revenues of $15.6 million during the six months ended June 30, 2010, as compared to the six months ended June 30, 2009, is attributable to the increase of sales of CUBICIN in the U.S. and internationally, as reported by our international partners.

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Research and Development Expense

Total research and development expense was $79.0 million in the six months ended June 30, 2010, as compared to $82.9 million in the six months ended June 30, 2009, a decrease of $3.9 million, or 5%. The decrease in research and development expenses was due primarily to a $20.0 million upfront payment made to Alnylam Pharmaceuticals, Inc., or Alnylam, in connection with a collaboration agreement, in the six months ended June 30, 2009, and no similar payment made in the six months ended June 30, 2010. This decrease was partially offset by increases of (i) $5.9 million in employee-related expenses due to an increase in headcount needed to support the increased research and development efforts; (ii) $4.7 million in clinical trial expenses related to our clinical stage compounds, including the CXA program, which was not in our pipeline during the six months ended June 30, 2009; and (iii) $3.8 million in process development expenses.

Contingent Consideration Expense

Contingent consideration expense was $2.7 million in the six months ended June 30, 2010. This expense is due to the change in the fair value of the contingent consideration liability relating to potential amounts payable to Calixa’s former shareholders. The change in fair value for the six months ended June 30, 2010, relates to the time value of money.

Sales and Marketing Expense

Sales and marketing expense in the six months ended June 30, 2010, was $42.8 million, as compared to $41.1 million in the six months ended June 30, 2009, an increase of $1.7 million, or 4%. The increase is primarily due to an increase of $2.4 million in employee-related expenses due to an increase in headcount, partially offset by a decrease of $1.0 million in expense incurred for promotional programs.

General and Administrative Expense

General and administrative expense was $28.8 million in the six months ended June 30, 2010, as compared to $23.6 million in the six months ended June 30, 2009, an increase of $5.2 million, or 22%. This increase is primarily due to an increase of $3.9 million in employee-related expenses due to increased headcount, as well as an increase of $1.0 million in professional service costs primarily related to the patent infringement litigation with Teva and its affiliates.

Other Income (Expense), net

The following table sets forth other income (expense), net for the six months ended June 30, 2010 and 2009:

	Six months ended June 30,
	2010			2009			% Change
	(in millions)
Interest income	$	2.5		$	2.0		30	%
Interest expense	(10.8		)	(10.3		)	5	%
Other income (expense)	(2.4		)	—			100	%
Total other income (expense), net	$	(10.7	)	$	(8.3	)	29	%

Interest Income

Interest income in the six months ended June 30, 2010, was $2.5 million as compared to $2.0 million in the six months ended June 30, 2009, an increase of $0.5 million, or 30%. The increase is primarily related to the accretion of credit loss impairments previously recognized on our auction rate securities due to an increase in cash flows expected to be collected.

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Interest Expense

Interest expense in the six months ended June 30, 2010, was $10.8 million as compared to $10.3 million in the six months ended June 30, 2009, an increase of $0.5 million, or 5%. The table below summarizes our interest expense for the six months ended June 30, 2010 and 2009:

	Six months ended June 30,
	2010		2009
	(in millions)
Contractual interest coupon payment	$	3.4	$	3.4
Amortization of debt discount	7.0		6.5
Amortization of the liability component of debt issuance costs	0.4		0.4
Total interest expense	$	10.8	$	10.3

Other Income (Expense)

Other expense was $2.4 million for the six months ended June 30, 2010, as compared to zero for the six months ended June 30, 2009. Other expense for the six months ended June 30, 2010, primarily consists of foreign exchange losses for certain available-for-sale investments denominated in Euros purchased in December 2009, which are re-measured at the end of each period.

Provision for Income Taxes

The following table summarizes the effective tax rates and income tax provisions for the six months ended June 30, 2010 and 2009:

	Six months ended June 30,
	2010			2009
	(in millions, except percentages)
Effective tax rate	39.5		%	27.2		%
Provision for income taxes	$	31.8		$	11.8

The effective tax rates of 39.5% and 27.2% for the six months ended June 30, 2010 and 2009, respectively, differ from the U.S. federal statutory income tax rate of 35.0% mainly due to state income taxes net of state tax credits and contingent consideration expense in 2010, and the impact of federal and state research and development tax credits and a $3.0 million net income tax benefit for discrete items related to the termination, in 2009, of the development of the HCV compound acquired from Illumigen. The increase in the effective tax rate for June 30, 2010, as compared to June 30, 2009, is also partially related to not recording a benefit for the 2010 federal research and development tax credit as it had not been extended by Congress and approved by the President.

At December 31, 2009, we had federal and state NOL carryforwards of $102.5 million and $49.8 million, respectively. Included in the NOLs are federal and state NOLs of $47.6 million and $9.8 million, respectively, attributable to excess tax benefits from stock-based awards. The tax benefits attributable to these NOLs are generally credited directly to additional paid-in capital when realized. Since we expect to realize the tax benefits attributable to these NOLs during 2010, we have credited the federal and state tax benefits of these NOLs in the amount of $18.9 million to additional paid-in capital during the six months ended June 30, 2010.

Liquidity and Capital Resources

Currently, we require cash to fund our working capital needs, to purchase capital assets, and to pay our debt service, including principal and interest. We fund our cash requirements through the following methods:

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·sales of CUBICIN in the U.S.;

·payments made through June 2010 from AstraZeneca for our promotion of MERREM I.V. in the U.S.;

·payments from our strategic collaborators and international CUBICIN partners, including payments related to product sales, license fees, royalty and milestone payments and sponsored research funding;

·equity and debt financings; and

·interest earned on invested capital.

As of June 30, 2010, we had an accumulated deficit of $190.4 million. We expect to incur significant expenses in the future for the continued development and commercialization of CUBICIN, the development of our other drug candidates, investments in other product opportunities, our business development activities, the enforcement of our intellectual property rights, the construction and other expenses related to the expansion of our facility at 65 Hayden Avenue, Lexington, Massachusetts, and for the funding of the current capacity expansion at the manufacturing facility of our CUBICIN API supplier to meet our expected future demand for CUBICIN API. Our total cash, cash equivalents and investments at June 30, 2010, was $562.8 million as compared to $496.2 million at December 31, 2009. Based on our current business plan, we believe that our available cash, cash equivalents, investments and projected cash flows from revenues will be sufficient to fund our operating expenses, debt obligation, including the $300.0 million aggregate principal amount of our 2.25% Notes that mature on June 15, 2013, and capital requirements for the foreseeable future. Certain economic or strategic factors may require that we seek to raise additional cash by selling debt or equity securities. However, such funds may not be available when needed or we may not be able to obtain funding on favorable terms, or at all, particularly if the credit and financial markets continue to be constrained.

Operating Activities

Net cash flows provided by operating activities are as follows:

	Six months ended June 30,
	2010			2009			% Change
	(in millions)
Net income	$	48.5		$	31.6		54	%
Non-cash adjustments, net	53.4			31.0			72	%
Change in working capital	(31.4		)	(5.8		)	441	%
Net cash provided by operating activities	$	70.5		$	56.8		24	%

Net cash provided by operating activities for the six months ended June 30, 2010, was $70.5 million, compared to $56.8 million for the six months ended June 30, 2009, an increase of $13.7 million. This increase in cash provided by operations is related to increases in net income after adjustments for non-cash charges, partially offset by an increase in cash used for working capital. The $22.4 million increase in non-cash charges primarily relates to increases in deferred income taxes. The $25.6 million increase in additional cash used in working capital is primarily related to an $18.9 million reduction of income taxes payable during the six months ended June 30, 2010, resulting from the excess tax benefit related to stock-based awards.

Investing Activities

Net cash used in investing activities in the six months ended June 30, 2010 and 2009, was $79.4 million and $58.3 million, respectively. Net cash used in investing activities in the six months ended June 30, 2010, primarily consisted of the purchase of $252.5 million of investments, partially offset by proceeds of $179.6 million from our investments, as well as $6.5 million of purchases of property and equipment. Net cash used in investing activities in the six months ended June 30, 2009, included cash outflows of $52.0 million for purchases of

39

investments, as well as $6.3 million for purchases of property and equipment. Net cash used in investing activities may fluctuate significantly from period to period due to the timing of our capital expenditures and other investments.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2010 and 2009, was $8.6 million and $1.8 million, respectively. Net cash provided by financing activities in the six months ended June 30, 2010, included $9.7 million of cash received from employees’ exercise of stock options and purchases of common stock through our employee stock purchase plan, as well as an $18.9 million credit to additional paid-in capital relating to the excess tax benefit of stock-based awards. In addition, in June 2010, we completed the Phase 2 clinical trial of CXA-101 for cUTI and all study objectives were met, resulting in our making a $20.0 million milestone payment to Calixa’s former shareholders. Net cash provided by financing activities for the six months ended June 30, 2009, consisted of $1.8 million of cash received from employees’ exercise of stock options and purchases of common stock through our employee stock purchase plan.

Auction Rate Securities

At June 30, 2010 and December 31, 2009, we held auction rate securities with an original par value of $58.1 million, all of which mature in 2017. These auction rate securities, which consist of private placement, synthetic collateralized debt obligations, are classified as available-for-sale and carried at fair value. Due to repeated failed auctions since August 2007, we do not consider these securities to be liquid and have therefore classified them as long-term investments. A decline in the financial markets has impacted the fair value of our auction rate securities. As of June 30, 2010 and December 31, 2009, we estimate the fair value of the auction rate securities to be $26.2 million and $25.9 million, respectively. As of June 30, 2010, our investment in auction rate securities is our only financial asset measured using Level 3 inputs in accordance with accounting guidance for fair value measurements and represents approximately 6% of the total financial assets measured at fair value. Please refer to Note D., “Investments,” for additional information.

The fair value of our auction rate securities decreased by $1.4 million during the three months ended June 30, 2010, and increased by $0.3 million during the six months then ended. The change in fair value during the three months ended June 30, 2010, primarily relates to decreased market bids and increased risk spreads.  The change in fair value during the six months ended June 30, 2010, is primarily the result of higher market bids. The estimated fair value of the auction rate securities could change significantly based on future financial market conditions.

Credit Facility

In December 2008, we entered into a $90.0 million revolving credit facility with RBS Citizens National Association, or RBS Citizens, for general corporate purposes. Under the revolving credit facility, we may request to borrow at any time a minimum of $1.0 million up to the maximum of the available remaining credit. The facility will be secured by the pledge of a certificate of deposit issued by RBS Citizens and/or an RBS Citizens money market account equal to an aggregate of 102% of the outstanding principal amount of the loans, so long as such loans are outstanding. Interest on the borrowings can be calculated, at our option, based on LIBOR plus a margin or the Prime Rate. Any borrowings under the facility are due on demand or upon termination of the revolving credit agreement. There were no outstanding borrowings under the credit facility as of June 30, 2010 or December 31, 2009.

Repurchases of Common Stock or Convertible Subordinated Notes Outstanding

From time to time, our Board of Directors may consider authorizing us to repurchase shares of our common stock or our outstanding convertible subordinated notes in privately negotiated transactions, or publicly announced programs. If and when our Board of Directors should determine to authorize any such action, it would be on terms and under market conditions the Board of Directors determines are in the best interest of our company. Any such repurchases could deplete some of our cash resources.

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Commitments and Contingencies

Legal Proceedings

On February 9, 2009, we received a Paragraph IV Certification Notice Letter from Teva notifying us that Teva had submitted an ANDA to the FDA for approval to market a generic version of CUBICIN. Teva’s notice letter advised that it is seeking FDA approval to market daptomycin for injection, the active ingredient in CUBICIN, prior to the expiration of U.S. Patent Nos. 6,468,967 and 6,852,689, which expire on September 24, 2019, and U.S. Patent No. RE39,071, which expires on June 15, 2016. Each of these patents is listed in the FDA’s Orange Book. The notice letter further stated that Teva is asserting that claims in the referenced patents are not infringed and/or are invalid. On March 23, 2009, we filed a patent infringement lawsuit against Teva, Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries Ltd. in response to the ANDA filing. The complaint, which was filed in the U.S. District Court for the District of Delaware, alleges infringement of the referenced patents. Under current U.S. law, the filing of the lawsuit automatically prevents the FDA from approving the ANDA for 30 months from our receipt of Teva’s Paragraph IV notification letter on February 9, 2009, unless the court enters judgment in favor of Teva in less than 30 months, or finds that a party has failed to cooperate reasonably to expedite the lawsuit. The court issued its claim construction order on June 7, 2010. The court also has set a date for trial beginning on April 25, 2011. The court has indicated that summary judgment motions will not be permitted in this lawsuit.

We have retained the services of Wilmer Cutler Pickering Hale and Dorr LLP, or WilmerHale, to represent us in the ANDA litigation. We have entered into a fee arrangement with WilmerHale under which we will pay WilmerHale a fixed monthly fee over the course of the litigation and a potential additional payment that could be due to WilmerHale based on the ultimate outcome of the lawsuit. We are accruing amounts due to WilmerHale based on our best estimate of the fees that we expect to incur as services are provided. Based on the nature of this fee arrangement, we could incur legal fees in excess of amounts accrued as a result of future events.

Business Agreements

Upon achievement of certain development, regulatory, or commercial milestones, we have committed to make potential future milestone payments to third parties as part of our various business agreements, including license, collaboration and commercialization agreements. Additional information regarding our business agreements can be found in Note C., “Business Agreements,” in the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009.

Contingent Consideration

If certain development, regulatory, or commercial milestones are achieved with respect to products incorporating CXA-101, we have committed, under the terms of the merger agreement pursuant to which we acquired Calixa in December 2009, to make future milestone payments to the former shareholders of Calixa. In June 2010, we completed the Phase 2 clinical trial of CXA-101 for cUTI and all study objectives were met, resulting in our making a $20.0 million milestone payment to Calixa’s former shareholders.  In accordance with accounting for business combinations guidance, this contingent consideration liability is required to be recognized on the balance sheet at fair value. The total undiscounted potential milestone payments range from $20.0 million to $310.0 million. The estimated fair value of these payments, after adjustments for probabilities of success and a discount factor less milestone payments made, was $84.3 million and $101.6 million as of June 30, 2010 and December 31, 2009, respectively. As of June 30, 2010, the contingent consideration related to the Calixa acquisition is our only financial liability measured using Level 3 inputs in accordance with accounting guidance for fair value measurements and represents 100% of the total financial liabilities measured at fair value. The fair value of contingent consideration is required to be reassessed at each reporting period, with changes in fair value reflected in the condensed consolidated statement of income. Additional information can be found in Note C., “Business Combinations,” in the accompanying notes to the condensed consolidated financial statements.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP. The preparation of consolidated financial statements

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requires estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates. The accounting policies that we believe are most critical to fully understand our consolidated financial statements include those relating to: revenue recognition; inventories; clinical research costs; investments; property and equipment; other intangible assets; income taxes; accounting for stock-based compensation and business combinations.

Our critical accounting policies and the methodologies and assumptions we apply under them have not materially changed since February 26, 2010, the date we filed our Annual Report on Form 10-K for the year ended December 31, 2009, or 2009 Form 10-K. For more information on our critical accounting policies, refer to our 2009 Form 10-K.

Recent Accounting Standards

Refer to Note B., “Accounting Policies,” in the accompanying notes to the condensed consolidated financial statements for a discussion of recent accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in our exposure to market risk since December 31, 2009. For discussion of our market risk exposure, refer to “Item 7A — Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2009.

The potential change in the fair value of our fixed-rate investments has been assessed on a hypothetical 100 basis point adverse movement across all maturities. We estimate that such hypothetical adverse 100 basis point movement would result in a decrease in fair value of $1.8 million on our fixed-rate investments. We estimate that a hypothetical adverse 100 basis point movement in our auction rate securities would result in no loss in fair value due to the fact that our investment return is based on a floating LIBOR rate. In addition to interest risk, we are subject to liquidity and credit risk as it relates to these investments.

Our fixed rate 2.25% Notes are carried at cost, net of a debt discount, on our condensed consolidated balance sheets. As of June 30, 2010, the fair value of the 2.25% Notes was estimated by us to be $281.3 million. We determined the estimated fair value of the 2.25% Notes by using quoted market rates. If interest rates were to increase by 100 basis points, the fair value of our long-term debt would decrease by approximately $5.0 million.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the Securities and Exchange Commission, or SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on the evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2010, our Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and regulations.

There has been no change in the our internal control over financial reporting during the three months ended June 30, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

On February 9, 2009, Cubist received a Paragraph IV Certification Notice Letter from Teva notifying Cubist that Teva had submitted an ANDA to the FDA for approval to market a generic version of CUBICIN. Teva’s notice letter advised that it is seeking FDA approval to market daptomycin for injection, the active ingredient in CUBICIN, prior to the expiration of U.S. Patent Nos. 6,468,967 and 6,852,689, which expire on September 24, 2019, and U.S. Patent No. RE39,071, which expires on June 15, 2016. Each of these patents is listed in the FDA’s Orange Book. The notice letter further stated that Teva is asserting that claims in the referenced patents are not infringed and/or are invalid. On March 23, 2009, Cubist filed a patent infringement lawsuit against Teva, Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries Ltd. in response to the ANDA filing. The complaint, which was filed in the U.S. District Court for the District of Delaware, alleges infringement of the referenced patents. Under current U.S. law, the filing of the lawsuit automatically prevents the FDA from approving the ANDA for 30 months from Cubist’s receipt of Teva’s Paragraph IV notification letter on February 9, 2009, unless the court enters judgment in favor of Teva in less than 30 months, or finds that a party has failed to cooperate reasonably to expedite the lawsuit. The court issued its claim construction order on June 7, 2010. The court also has set a date for trial beginning on April 25, 2011. The court has indicated that summary judgment motions will not be permitted in this lawsuit.

From time to time we are party to other legal proceedings in the course of our business. We do not, however, expect such other legal proceedings to have a material adverse effect on our business, financial condition or results of operations.

ITEM 1A.RISK FACTORS

Our future operating results could differ materially from the results described in this report due to the risks and uncertainties related to our business, including those discussed below.  Furthermore, these factors represent risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements.  We refer you to our “Cautionary Note Regarding Forward-Looking Statements,” which identifies the forward-looking statements in this report.

Risks Related to Our Business

We depend heavily on the commercial success of CUBICIN.

For the foreseeable future, our ability to generate revenues will depend primarily on the commercial success of CUBICIN in the U.S., which depends upon CUBICIN’s continued acceptance by the medical community and the future market demand and medical need for CUBICIN. CUBICIN is approved in the U.S. as a treatment for cSSSI and S. aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis, caused by methicillin-susceptible and methicillin-resistant isolates.

We cannot be sure that CUBICIN will continue to be accepted by hospitals, physicians and other healthcare providers for its approved indications in the U.S. Further, CUBICIN faces intense competition in the U.S. from a number of currently-approved antibiotic drugs manufactured and marketed by major pharmaceutical companies, including an inexpensive generic product and a recently approved drug, and may in the future compete with other drugs that are being reviewed for approval by the FDA or are under development, including late-stage development.

The degree of continued market acceptance of CUBICIN in the U.S., and our ability to grow revenues from the sale of CUBICIN, depends on a number of additional factors, including those set forth below and the other CUBICIN-related risk factors described in this “Risk Factors” section:

·the favorable resolution of our patent infringement lawsuit against Teva and its affiliates in connection with the February 9, 2009, notification to us by Teva that it had submitted an ANDA to the FDA seeking approval to market a generic version of CUBICIN before the expiration of the patents covering CUBICIN;

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·the continued safety and efficacy of CUBICIN, both actual and perceived;

·target organisms developing resistance to CUBICIN;

·unanticipated adverse reactions to CUBICIN in patients;

·maintaining prescribing information, also known as a label, that is substantially consistent with current prescribing information for CUBICIN in the U.S. and other jurisdictions where CUBICIN is sold;

·the advantages and disadvantages of CUBICIN, both actual and perceived, compared to alternative therapies with respect to cost, availability of reimbursement, convenience, safety, efficacy and other factors;

·the ability of our third-party manufacturers, including our single source provider of CUBICIN API, to manufacture, release and deliver sufficient quantities of CUBICIN in accordance with Good Manufacturing Practices and other requirements of the regulatory approvals for CUBICIN and to do so at an acceptable cost;

·the reimbursement policies of government and third-party payors;

·the level and scope of rebates and discounts that we are required to pay or provide under federal government programs in the U.S., such as Medicare, Medicaid and the PHS 340B drug pricing program;

·the continued growth, and the rate of such growth, of the overall market into which CUBICIN is sold, including the market for products to treat MRSA skin and bloodstream infections;

·the ability to increase the opportunities for our sales force to provide clinical information to those physicians who treat patients for whom CUBICIN would be appropriate;

·maintaining the level of fees and discounts payable to distributors and wholesalers who distribute CUBICIN at the same or similar levels; and

·effects of the economic downturn in the U.S. and around the world, which could lower demand for CUBICIN due to, for example, pharmacists’, hospitals’, insurers’ and third-party payors’ attempts to minimize costs by encouraging the purchase of lower-cost alternative therapies, including generic products like vancomycin, patients electing lower cost alternative therapies due to increased out-of-pocket costs, patients choosing to have fewer elective surgeries and other procedures, and lower overall admissions to hospitals.

We market and sell CUBICIN in the U.S. through our own sales force and marketing team. Significant turnover or changes in the level of experience of our sales and marketing personnel, particularly our most senior sales and marketing personnel, would impact our ability to effectively sell and market CUBICIN.

As of June 30, 2010, CUBICIN had been approved or received an import license in more than 65 countries outside of the U.S. and is being marketed by our international partners in more than 35 of these countries, including countries in the EU. Our partners may not be successful in launching or marketing CUBICIN in their markets. For example, to date, EU sales have grown more slowly than U.S. sales due primarily to lower MRSA rates both in and outside the hospital in some EU countries, an additional glycopeptide competitor (teicoplanin), which is not approved in the U.S., the evolving commercialization strategy and mix of resources that our EU partner, Novartis, has been using to commercialize CUBICIN, as well as other factors. Even if our international partners are successful in commercializing CUBICIN, we only receive a portion of the revenues from non-U.S. sales of CUBICIN.

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We may not be able to obtain, maintain or protect proprietary rights necessary for the development and commercialization of CUBICIN, particularly given our litigation with Teva, or our drug candidates and research technologies.

CUBICIN Patents/Teva Litigation.  The primary composition of matter patent covering CUBICIN in the U.S. has expired. We own or have licensed rights to a limited number of patents directed toward methods of administration and methods of manufacture of CUBICIN. We cannot be sure that patents will be granted to us or to our licensors or collaborators with respect to any of our or their pending patent applications for CUBICIN. Of particular concern for a company like ours that is primarily dependent upon one product, CUBICIN, to generate revenues and profits, is that third parties may seek to market generic versions of CUBICIN by filing an ANDA with the FDA, in which they claim that patents protecting CUBICIN, owned or licensed by us and listed with the FDA in the Orange Book, are invalid, unenforceable and/or not infringed. This type of ANDA is referred to as a Paragraph IV filing.

On February 9, 2009, we received a Paragraph IV Certification Notice Letter from Teva notifying us that it had submitted an ANDA to the FDA for approval to market a generic version of daptomycin, the active ingredient in CUBICIN, prior to the expiration of U.S. Patent Nos. 6,468,967 and 6,852,689, which expire on September 24, 2019, and RE39,071, which expires on June 15, 2016. Each of these patents is listed in the Orange Book. The notice letter further stated that Teva is asserting that claims in the referenced patents are not infringed and/or are invalid. On March 23, 2009, we filed a patent infringement lawsuit against Teva, Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries Ltd. in response to the ANDA filing, which we refer to as the Teva litigation. The complaint, which was filed in the U.S. District Court for the District of Delaware, alleges infringement of the referenced patents. Under current U.S. law, the filing of the lawsuit automatically prevents the FDA from approving the ANDA for 30 months from our receipt of Teva’s Paragraph IV notification letter on February 9, 2009, or until August 9, 2011, unless the court enters judgment in favor of Teva in less than 30 months or finds that a party has failed to cooperate reasonably to expedite the lawsuit. In the lawsuit, which is currently scheduled for trial beginning on April 25, 2011, the court may find the patents that are the subject of the notice letter invalid, not infringed and/or unenforceable. During the period in which the Teva litigation is pending, the uncertainty of its outcome may cause our stock price to decline. In addition, an adverse result in the Teva litigation, whether appealable or not, will likely cause our stock price to decline. Any final, unappealable, adverse result in the Teva litigation will likely have a material adverse effect on our results of operations and financial condition and cause our stock price to decline.

Proprietary Rights Generally.  Our commercial success will depend in part on obtaining and maintaining U.S. and foreign patent protection for CUBICIN, our drug candidates, and our research technologies and successfully enforcing and defending these patents against third-party challenges, including with respect to generic challenges.

We cannot be sure that our patents and patent applications, including those that we own or license from third parties, will adequately protect our intellectual property for a number of reasons, including but not limited to the following:

·the patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions;

·the actual protection afforded by a patent can vary from country to country and may depend upon the type of patent, the scope of its coverage and the availability of legal remedies in the country;

·the laws of foreign countries in which we market our drug products may afford little or no effective protection to our intellectual property, thereby easing our competitors’ ability to compete with us in such countries;

·intellectual property laws and regulations and legal standards relating to the validity, scope and enforcement of patents covering pharmaceutical and biotechnological inventions are continually developing and changing, both in the U.S. and in other important markets outside the U.S.;

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·because publication of discoveries in scientific or patent literature often lag behind the date of such discoveries, we cannot be certain that the named applicants or inventors of the subject matter covered by our patent applications or patents, whether directly owned by us or licensed to us, were the first to invent or the first to file patent applications for such inventions;

·third parties may challenge, infringe, circumvent or seek to invalidate existing or future patents owned by or licensed to us; and

·the coverage claimed in a patent application can be significantly reduced before the patent is issued, and, as a consequence, our patent applications may result in patents with narrow coverage.

The patents or the unpatented proprietary technology we hold or have rights to may not be commercially useful in protecting CUBICIN or our other drug candidates. Even if we have valid and enforceable patents, these patents still may not provide us with sufficient proprietary protection or competitive advantages against competing products or processes.

If our licensors, collaborators or consultants develop inventions or processes independently that may be applicable to our products under development, disputes may arise about ownership of proprietary rights to those inventions and/or processes. Such inventions and/or processes will not necessarily become our property but may remain the property of those persons or their employers. Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights.

We have and may in the future engage in collaborations, sponsored research agreements, and other arrangements with academic researchers and institutions that have received and may receive funding from U.S. government agencies. As a result of these arrangements, the U.S. government or certain third parties may have rights in certain inventions developed during the course of the performance of such collaborations and agreements as required by law or by such agreements.

We also rely on trade secrets and other unpatented proprietary information in our manufacturing and product development activities. To the extent that we maintain a competitive advantage by relying on trade secrets and unpatented proprietary information, such competitive advantage may be compromised if others independently develop the same or similar technology, resulting in an adverse effect on our business, financial condition and results of operations. We seek to protect trade secrets and proprietary information in part through confidentiality provisions and invention assignment provisions in agreements with our collaborators, employees and consultants. These agreements could be invalidated or breached and we might not have adequate remedies.

Our trademarks, CUBICIN and Cubist, in the aggregate are considered to be material to our business. These trademarks are covered by registrations or pending applications for registration in the United States Patent and Trademark Office and in other countries. Trademark protection continues in some countries for as long as the mark is used and, in other countries, for as long as it is registered. Registrations generally are for fixed, but renewable, terms. The trademark protection that we have pursued or will pursue in the future may not afford us commercial protection.

We are completely dependent on third parties to manufacture CUBICIN and other products that we are developing.

CUBICIN.  We do not have the capability to manufacture our own CUBICIN API or CUBICIN finished drug product. We contract with ACS Dobfar SpA, or ACSD, to manufacture and supply us with CUBICIN API for commercial purposes. ACSD is our sole provider of our commercial supply of CUBICIN API. ACSD currently stores some CUBICIN API at its facilities in Italy. In order to offset the risk of a single-source API supplier, we currently hold a safety stock of API in addition to what is stored at ACSD at the Integrated Commercialization Solutions, Inc., or ICS, warehouse/distribution center in Kentucky. Any disaster at the facilities where we hold this safety stock, such as a fire or loss of power, that causes a loss of this safety stock would heighten the risk that we face from having only one supplier of API. ACSD is currently in the process of expanding and making certain improvements to its CUBICIN API manufacturing facility to increase the production capacity. We are assisting in the planning for this project and sharing in the costs. Any delays in this project may result in our inability to achieve

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supply of CUBICIN API in adequate quantities to meet demand and could have a material adverse effect on our results of operations and financial condition. In addition, any significant additional costs of this project could have a material adverse effect on our results of operations and financial condition.

We contract with both Hospira Worldwide, Inc., or Hospira, and Oso BioPharmaceuticals Manufacturing, LLC, or Oso, to manufacture and supply to us finished drug product.

If Hospira, Oso, or, in particular, ACSD, experience any significant difficulties in their respective manufacturing processes, including any difficulties with their raw materials or supplies, if they have significant problems with their businesses, including lack of capacity, whether as a result of the constrained credit and financial markets or otherwise, if they experience staffing difficulties or slow-downs in their systems which affect the manufacturing and release of CUBICIN, or if our relationship with any of these manufacturers terminates, we could experience significant interruptions in the supply of CUBICIN. Any such supply interruptions could impair our ability to supply CUBICIN at levels to meet market demand, which could have a material adverse effect on our results of operations and financial condition. Because of the significant regulatory requirements that we would need to satisfy in order to qualify a new API or finished drug product supplier, we could experience significant interruptions in the supply of CUBICIN if we decided to transfer the manufacture of CUBICIN API or the finished drug product to one or more other suppliers in an effort to address these or any other difficulties with our current suppliers.

Because the ACSD manufacturing facilities are located in Italy, we must ship CUBICIN API to the U.S. for finishing, packaging and labeling. Each shipment of API is of significant value. While in transit to the U.S., stored at ICS or in transit to our finished product manufacturers, our API could be lost or become adulterated. Depending on when in this process the API is lost or adulterated, we could experience significant interruptions in the supply of CUBICIN and our financial performance could be negatively impacted. We may also experience interruption or significant delay in the supply of CUBICIN API due to natural disasters, acts of war or terrorism, shipping embargoes, labor unrest or political instability, particularly if any of such events took place in Italy where ACSD is located.

Reliance on third-party suppliers also entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including reliance, in part, on the third party for regulatory compliance and quality assurance, including some aspects of product release. Our third-party suppliers may not be able to comply with current Good Manufacturing Practice requirements or similar regulatory requirements outside the U.S. Failure of our third-party suppliers to comply with applicable regulations could result in their inability to continue supplying us in a timely manner and could also be the basis for sanctions being imposed on them or us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our financial performance.

Development Products.  If the third-party suppliers of our pipeline products fail to supply us with sufficient quantities of bulk or finished products to meet our development needs, our development of these products could be stopped, delayed or impeded.

We face significant competition from other biotechnology and pharmaceutical companies and may face additional competition in the future, particularly with respect to CUBICIN, including from Teva, who is seeking to market a generic version of CUBICIN.

The biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the U.S. and internationally, including major multinational pharmaceutical and chemical companies, biotechnology companies and universities and other research institutions. Many of our competitors have greater financial and other resources, such as larger research and development staffs, more experienced marketing organizations, and greater manufacturing capabilities. Our competitors may develop, acquire or license on an exclusive basis technologies and drug products that are safer, easier to administer, more effective, or less costly than CUBICIN or any drug candidate that we may have or develop, which could render our technology obsolete and noncompetitive. If price competition inhibits the continued acceptance of CUBICIN, if physicians prefer other drug products over CUBICIN, or if

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physicians switch to new drug products or choose to reserve CUBICIN for use in limited circumstances, our financial condition and results of operations would be negatively impacted.

Competition in the market for therapeutic products that address serious Gram-positive bacterial infections is intense. CUBICIN faces competition in the U.S. from commercially available drugs such as vancomycin, marketed generically by Abbott Laboratories, Shionogi & Co., Ltd. and others, Zyvox®, marketed by Pfizer, Inc., or Pfizer, Synercid®, marketed by King Pharmaceuticals, Inc., and Tygacil®, marketed by Wyeth, which is now a wholly-owned subsidiary of Pfizer. In particular, vancomycin has been a widely used and well known antibiotic for over 40 years and is sold in a relatively inexpensive generic form. CUBICIN also faces competition from VIBATIV™ (telavancin), which was approved by the FDA in September 2009 as a treatment for cSSSI and is co-marketed in the U.S. by Astellas Pharma US, Inc. and Theravance, Inc. In addition, CUBICIN may face competition in the U.S. from generic versions of CUBICIN if Teva’s ANDA is approved and/or another third party files an ANDA that is ultimately approved. Teva’s launch of a generic version of CUBICIN could occur after the district court proceeding if the district court rules in favor of Teva or before the completion of the district court proceeding if the 30-month statutory stay (as shortened or lengthened by the court), which is currently expected to expire in August 2011, has expired and Teva decides to launch prior to the district court decision. The trial in this case currently is scheduled to begin in April 2011. CUBICIN may also face competition in the future from drug candidates currently in clinical development, including drug candidates being developed as treatments for cSSSI for which NDAs have been filed. These include oritavancin, which is being developed by The Medicines Company, ceftaroline, which is being developed by Forest Laboratories, Inc., and ceftobiprole, which was being developed by a Johnson & Johnson company and now is in the process of being transferred back to Basilea Pharmaceutica Ltd.

Any inability on our part to compete with current or subsequently introduced drug products would have a material adverse impact on our operating results.

We need to manage our growth and increased breadth of our activities effectively.

We have expanded the scope of our business significantly in recent years. We have acquired and in-licensed several drug candidates and been progressing pre-clinical and multiple clinical stage drug candidates. We also have grown our employee base substantially, particularly in research and development and sales. We plan to continue adding products and drug candidates through internal development, in-licensing and acquisition over the next several years and to continue developing our existing drug candidates that demonstrate the requisite efficacy and safety to advance into and through clinical trials. To manage the existing and planned future growth and the increasing breadth and complexity of our activities, we will need to continue building our organization and making significant additional investments in personnel, infrastructure, information management systems and resources. Our ability to develop and grow the commercialization of our products, achieve our research and development objectives, add and integrate new products, and satisfy our commitments under our collaboration and acquisition agreements depends on our ability to respond effectively to these demands and expand our internal organization and infrastructure to accommodate additional anticipated growth. If we are unable to effectively manage and progress all of these activities, our ability to maximize the value of one or more of our products or drug candidates could suffer, which could materially adversely affect our business. For example, we are currently engaged in construction to expand the laboratory space at our headquarters in Lexington, Massachusetts. If we are unable to expand according to our projected timeline, we may not be able to sufficiently grow our organization and this could have a material adverse impact on our business.

Our long-term strategy is dependent upon our ability to attract and retain highly qualified personnel.

Our ability to compete in the highly competitive biotechnology and pharmaceutical industries depends in large part upon our ability to attract and retain highly qualified managerial, scientific, medical and sales personnel. In order to induce valuable employees to remain at Cubist, we have provided stock options and restricted stock units that vest over time. In the future, we expect to continue using stock options, restricted stock units or other equity incentives to attract and retain employees. The value to employees of these equity-based incentives, particularly stock options, is significantly affected by movements in our stock price that we have limited control over and may at any time be insufficient to counteract more lucrative offers from other companies. We also have provided retention letters to our executive officers and certain other key employees. Despite our efforts to retain valuable employees, members of our management, scientific, medical and sales teams have in the past and may in the future terminate

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their employment with us. The failure to attract and retain our executive officers or other key employees could potentially harm our business and financial results.

Our long-term strategy is dependent upon successfully discovering, obtaining, developing and commercializing drug candidates.

We have made significant investments in research and development and have recently increased our research and development workforce. However, except for CB-182,804 for which we initiated a Phase 1 clinical trial in February 2009, and CB-183,315, for which we initiated a Phase 2 clinical trial in April 2010, none of our internally-discovered product candidates have reached the clinical development stage. We cannot assure you that we will reach this stage for any additional internally-discovered drug candidates or that there will be clinical benefits associated with CB-182,804, CB-183,315 or any other drug candidates that we do develop.

Except for CB-183,315, all of our other drug candidates that have progressed to or beyond Phase 2 clinical trials, including CUBICIN, were the result of in-licensing or acquiring patents, patent rights, product candidates and technologies from third parties. These types of activities represent a significant expense, as they generally require us to pay to other parties upfront payments, development and commercialization milestone payments and royalties on product sales. In addition, we may structure our in-licensing arrangements as cost and profit sharing arrangements, in which case we would share development and commercialization costs, as well as any resulting profits, with a third party.

We may not be able to acquire, in-license or otherwise obtain rights to additional desirable drug candidates or marketed drug products on acceptable terms or at all. In fact, we have faced and will continue to face significant competition for these types of drug candidates and marketed products from a variety of other companies with interest in the anti-infective and acute care marketplace, many of which have significantly more experience than we have in pharmaceutical development and sales and significantly more financial resources than we have. Because of the rising intensity of the level of competition for these types of drug candidates and marketed products, the cost of acquiring, in-licensing or otherwise obtaining rights to such candidates and products has grown dramatically in recent years and are often at levels that we cannot afford or that we believe are not justified by market potential. Such competition and higher prices are most pronounced for late-stage candidates and marketed products, which have the lowest risk and would have the most immediate impact on our financial performance. If we need additional capital to fund our acquisition, in-licensing or otherwise obtaining rights to a drug candidate or marketed product, we would need to seek financing by borrowing funds or through the capital markets. Given the current state of the financial and credit markets, it may be difficult for us to acquire the capital that we would need.

If we are unable to discover or acquire additional promising candidates or to develop successfully the candidates we have, we will not be able to implement our business strategy. Even if we succeed in discovering or acquiring drug candidates, there can be no assurance that we will be successful in developing them or any of our current candidates to gain approval for use in humans, that they can be manufactured economically, that they can be successfully commercialized or that they will be widely accepted in the marketplace. For example, in March 2010, we decided to stop development of our product candidate, CB-500,929 (ecallantide), based on the top line efficacy and safety data from the CONSERV Phase 2 trials. Because of the long development timelines and the fact that most drug candidates that make it into clinical development are not ultimately approved for commercialization, none of the drug candidates that we currently are developing would generate revenues for many years, if at all. If we are unable to bring any of our current or future drug candidates to market or to acquire or obtain other rights to any additional marketed drug products, our ability to create long-term shareholder value may be limited and could have a material adverse effect on our long term business, operating results and financial condition.

We have undertaken and may in the future undertake strategic acquisitions, and we may not realize the benefits of such acquisitions.

As noted above, one of the ways we intend to grow our pipeline and business is through acquisitions, such as our recent acquisition of Calixa. We have limited experience in acquiring businesses. Acquisitions involve a number of particular risks, including: diversion of management’s attention from current operations; disruption of our ongoing business; difficulties in integrating and retaining all or part of the acquired business, its customers and its personnel; assumption of disclosed and undisclosed liabilities; and uncertainty about the effectiveness of the

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acquired company’s internal controls and procedures. The individual or combined effect of these risks could have a material adverse effect on our business. Also, in paying for acquisitions and/or funding the development and commercialization of drug products that we acquire through acquisitions, we may deplete our cash resources or need to raise additional funds through public or private debt or equity financings, which would result in dilution for stockholders or the incurrence of indebtedness, and we may not be able to raise such funds on favorable or desirable terms or at all, especially if the credit and financial markets continue to be constrained. Furthermore, there is the risk that our technical and valuation assumptions and our models for an acquired product or business may turn out to be erroneous or inappropriate due to foreseen or unforeseen circumstances and thereby cause us to have overvalued an acquisition target or result in the accounting effect of the acquisition being different than what we had anticipated. We may also have to adjust certain aspects of the accounting for acquisitions, such as goodwill, in-process research and development, or IPR&D, other intangible assets and contingent consideration over time as events or circumstances occur, which could have a material adverse effect on our results of operations.

We may not be able to realize the benefit of acquiring businesses with promising drug candidates if we are unable to successfully develop and commercialize such drug candidates, as happened with the HCV compound that we acquired through our acquisition of Illumigen in December 2007. As a result, we cannot assure you that, following the acquisition of Calixa or any future acquisitions, we will achieve revenues that justify the acquisition or that the acquisition will result in increased earnings, or reduced losses, for the combined company in any future period.

The FDA and other competent authorities worldwide may change their approval requirements or policies for antibiotics, or apply interpretations to their requirements or policies, in a manner that could delay or prevent commercialization of our antibiotic product candidates or approval of any additional indications for CUBICIN that we may seek in the U.S. and other countries.

Regulatory requirements for the approval of antibiotics in the U.S. may change in a manner that requires us to conduct additional large-scale clinical trials, which may delay or prevent commercialization of our antibiotic product candidates or approval of any additional indications for CUBICIN that we may seek. Historically, the FDA has not required placebo-controlled clinical trials for approval of antibiotics but instead has relied on non-inferiority studies. In a non-inferiority study, a drug candidate is compared with an approved antibiotic treatment, and it must be shown that the product candidate is not less effective than the approved treatment by a defined margin.

In 2006, the FDA refused to accept successfully completed non-inferiority studies as the basis of approval for certain types of antibiotics. In October 2007, the FDA issued draft guidance on the use of non-inferiority studies to support approval of antibiotics. Under this draft guidance, the FDA recommended that for some antibiotic indications, sponsor companies carefully consider study designs other than non-inferiority, such as placebo-controlled trials demonstrating the superiority of a drug candidate to placebo. The draft guidance did not articulate clear standards or policies for demonstrating the safety and efficacy of antibiotics generally. In November 2008, the FDA’s Anti-Infective Drugs Advisory Committee, or AIDAC, concluded that non-inferiority trials are acceptable for cSSSI indications and that a 10% non-inferiority margin may be acceptable if major abscess types of cSSSI infections are excluded and the antibiotic provides safety, cost, or antimicrobial benefits. The AIDAC discussed but did not reach consensus about whether the non-inferiority margin should be justified by the type of cSSSI infection or applied to cSSSI as a group. The position of the AIDAC may or may not be applied by the FDA in its review of applications of regulatory filings. In March 2010, the FDA issued draft guidance on the use of non-inferiority studies in all therapeutic areas. This draft guidance attempts to provide advice on when non-inferiority studies can be interpretable, how to choose the non-inferiority margin, how to analyze the results and other considerations relevant to the design of non-inferiority studies. Because the advice provided is generalized and open to interpretation and negotiation on a case-by-case basis, it is unclear whether the application of the draft guidance will make it more or less difficult to develop and/or obtain approval of antibiotics. The lack of clear guidance from the FDA creates uncertainties about the standards for the approval of antibiotics in the U.S.

In addition, non-inferiority studies have come under scrutiny from Congress, in part because of a congressional investigation as to the safety of Ketek®, an antibiotic approved by the FDA on the basis of non-inferiority studies. The increased scrutiny by Congress and regulatory authorities may significantly delay or prevent regulatory approval, as well as impose more stringent product labeling and post-marketing testing requirements with respect to antibiotics.

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The factors described above could delay for several years or ultimately prevent commercialization of any new antibiotic product candidates that we are developing or may seek to develop, such as CXA-201, CB-182,804, CB-183,315 or the approval of any additional indications for CUBICIN in the U.S. This would likely have a material adverse effect on our business and results of operations.

We have collaborative and other similar types of relationships that expose us to a number of risks.

We have entered into, and anticipate continuing to enter into, collaborative and other types of contractual arrangements, which we refer to as collaborations, with multiple third parties to discover, test, develop, manufacture and market drug candidates and drug products. For example, we have agreements with several pharmaceutical companies, including a Novartis subsidiary, AstraZeneca AB and a Merck & Co. Inc. subsidiary, to develop and commercialize CUBICIN outside the U.S., and we have collaborations with respect to certain of our preclinical candidates. Collaborations such as these are necessary for us to research, develop, and commercialize drug candidates.

In order for existing and future collaborations to be successful, we need to be able to work successfully with our collaborators or their successors. If not, these arrangements would likely be unsuccessful and/or terminate early. In addition, factors external to our collaborations, such as patent coverage, regulatory developments or market dynamics could impact the collaboration.

Reliance on collaborations poses a number of risks including the following:

·other than the rights we have by contract, the focus, direction, amount and timing of resources dedicated by our CUBICIN international distributors to their efforts to develop and commercialize CUBICIN is not under our control, which may result in less successful commercialization of CUBICIN in our partners’ territories than if we had control over the CUBICIN franchise in these territories;

·our CUBICIN international partners may not perform their contractual obligations, including appropriate and timely reporting on adverse events in their territories, as expected;

·we may be dependent upon other collaborators to manufacture and supply drug product to us in order to develop or commercialize the drug product that is the subject of the collaboration, and our collaborators may encounter unexpected issues or delays in manufacturing and/or supplying such drug product;

·our collaborators may have retained rights in certain territories in which we may need their consent to conduct important activities, such as running clinical trials or manufacturing activities, with respect to our drug candidates. If we are unable to gain such consent, our ability to develop and commercialize our drug candidates may be impaired or delayed;

·in situations where we and our collaborator share decision-making power with respect to development of the product, we and our collaborator may not agree on decisions that could affect the development, regulatory approval, manufacture or commercial viability of the product;

·in situations where we and our collaborator are sharing the costs of development, our collaborators may not have the funds to contribute to their share of the costs of the collaboration;

·disagreements with collaborators, including disagreements over proprietary rights, contract interpretation, commercial terms, the level of efforts being utilized to develop or commercialize product candidates that are the subject of a particular collaboration, or the preferred course of development or commercialization strategy, might cause delays or termination of the research, development or commercialization of drug candidates or products that we are marketing, lead to additional responsibilities with respect to drug candidates or marketed products, or result in litigation or arbitration, any of which would be time-consuming and expensive and could cause disruptions in the collaborative nature of these relationships, which could impede the success of our endeavors;

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·some drug candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their own drug candidates or drug products, which may lead them to reduce their effort on the drug candidates or drug products on which we are collaborating with them;

·the protection of proprietary rights, including patent rights, for the technology underlying the drug products we license may be under the control of our collaborators and therefore our ability to control the patent protection of the drug product may be limited;

·some of our collaborators might develop independently, or with others, drug products that compete with ours; and

·our collaborators could merge with or be acquired by another company or experience financial or other setbacks unrelated to our collaboration.

Collaborations with third parties are a critical part of our business strategy, and any inability on our part to establish and successfully maintain such arrangements on terms favorable to us or to work successfully with our collaborators or third parties with whom we have similar arrangements will have an adverse effect on our operations and financial performance.

The investment of our cash is subject to risks which could result in losses.

We invest our cash in a variety of financial instruments, principally securities issued by the U.S. government and its agencies, investment grade corporate bonds, auction rate securities and money market instruments. These investments are subject to credit, liquidity, market and interest rate risk. These risks have been heightened in today’s tightened and fluctuating credit and financial markets. Such risks, including any additional write-downs of our auction rate securities or the failure or severe financial distress of the financial institutions that hold our cash, cash equivalents and investments, may result in a loss of liquidity, additional impairment to our investments, realization of substantial future losses, or a complete loss of the investments in the long-term, which may have a material adverse effect on our business, results of operations, liquidity and financial condition. For example, we have previously recorded an other-than-temporary impairment charge on our $58.1 million par value auction rate securities, which are currently recorded at their estimated fair value of $26.2 million.

We have incurred substantial losses in the past and may incur additional losses.

We have been profitable for twelve consecutive quarters before considering the retrospective application, on January 1, 2009, of the provisions of accounting guidance for convertible debt with conversion and other options. Despite our recent profitability, we may incur future operating losses related to the development of our other drug candidates or investments in other product opportunities or a negative outcome in the ANDA litigation with Teva. If we fail to maintain profitability, the market price of our common stock may decline.

We may require additional funds and we do not know if additional funds would be available to us at all, or on terms that we find acceptable, particularly given the strain in the financial and credit markets.

We may be required to seek additional funds due to economic and strategic factors. We expect capital outlays and operating expenditures to increase over the next several years as we continue our commercialization of CUBICIN, develop our existing and any newly-acquired drug candidates, actively seek to acquire companies with marketed products or product candidates, acquire or in-license additional products or product candidates, expand our research and development activities and infrastructure, and enforce our intellectual property rights. We may need to spend more money than currently expected because of unforeseen circumstances or circumstances beyond our control. In addition, $300.0 million aggregate principal amount of the 2.25% Notes mature on June 15, 2013. Other than our $90.0 million credit facility with RBS Citizens, we have no other committed sources of capital and do not know whether additional financing will be available when and if needed, or, if available, that the terms will be favorable to our shareholders or us, particularly if the credit and financial markets continue to be constrained.

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We may seek additional funding through public or private financing or other arrangements with collaborators. If we raise additional funds by issuing equity securities, further dilution to existing stockholders may result. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. We cannot be certain, however, that additional financing will be available from any of these sources or, if available, will be on acceptable or affordable terms, particularly if the credit and financial markets continue to be constrained.

Our annual debt service obligations on our outstanding convertible notes are approximately $6.8 million per year in interest payments. We may add additional lease lines to finance capital expenditures and may obtain additional long-term debt and lines of credit. If we issue other debt securities in the future, our debt service obligations will increase further. If we are unable to generate sufficient cash to meet these obligations and need to use existing cash or liquidate investments in order to fund our debt service obligations or to repay our debt, we may be forced to delay or terminate clinical trials or curtail operations. We may also be forced to obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights or potential markets or grant licenses on terms that are not favorable to us. If we fail to obtain additional capital, if needed, we will not be able to execute our current business plan successfully.

Changes in our effective income tax rate could adversely affect our results of operations, particularly once we utilize our remaining federal and state net operating losses (NOLs).

We are subject to income taxes in the U.S. Various factors may have favorable or unfavorable effects on our effective income tax rate (sometimes referred to as “book tax”). These factors include, but are not limited to, interpretations of existing tax laws, the accounting for stock options and other stock-based compensation, the accounting for business combinations, changes in tax laws and rates, the tax impact of recently enacted healthcare reform or future healthcare reform, future levels of research and development spending, changes in accounting standards, changes in the mix of earnings in the various tax jurisdictions in which we operate, the outcome of examinations by the Internal Revenue Service and other jurisdictions, the accuracy of our estimates for unrecognized tax benefits and realization of deferred tax assets, and changes in overall levels of pre-tax earnings. The impact on our provision for income tax resulting from the above-mentioned factors may be significant and could affect our results of operations, including our net income, particularly once we utilize our remaining federal and state NOLs. The effect on our results of operations may impact, or be perceived to impact, our financial condition and may therefore cause our stock price to decline.

Risks Related to Our Industry

Patent litigation or other intellectual property proceedings relating to our products or processes could result in liability for damages or stop our development and commercialization efforts for such products.

The pharmaceutical industry has been characterized by significant litigation and interference and other proceedings regarding patents, patent applications, trademarks and other intellectual property rights. The types of situations in which we may become parties to such litigation or proceedings include the risks set forth elsewhere in this “Risk Factors” section and the following:

·if third parties file ANDAs with the FDA seeking to market generic versions of our products prior to expiration of relevant patents owned or licensed by us, we may need to defend our patents, including by filing lawsuits alleging patent infringement, as we have done in the Teva litigation described above;

·we or our collaborators may initiate litigation or other proceedings against third parties to enforce our patent rights;

·we or our collaborators may initiate litigation or other proceedings against third parties to seek to invalidate the patents held by such third parties or to obtain a judgment that our products or processes do not infringe such third parties’ patents;

·if third parties initiate litigation claiming that our processes or products infringe their patent or other intellectual property rights, we or our collaborators will need to defend against such proceedings;

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·if our competitors file patent applications that claim technology also claimed by us, we or our collaborators may participate in interference or opposition proceedings to determine the priority of invention of such technology; and

·if third parties initiate litigation claiming that our brand names infringe their trademarks, we or our collaborators will need to defend against such proceedings.

An adverse outcome in any litigation or other proceeding could subject us to significant liabilities to third parties and require us to cease using the technology that is at issue or to license the technology from third parties. We may not be able to obtain any required licenses on commercially acceptable terms or at all. For the reasons stated in this “Risk Factors” section above regarding the possibility that we may not be able to obtain, maintain or protect our proprietary rights, the uncertainty of the outcome of the Teva litigation, and developments in the Teva litigation that may be perceived to negatively impact our position in the litigation, our stock price may decline. In addition, an adverse result in the Teva litigation, whether appealable or not, will likely cause our stock price to decline and will likely have a material adverse effect on our results of operations and financial condition.

The cost of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. We expect to incur significant costs in connection with the Teva litigation. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Some of our competitors may be able to sustain the cost of similar litigation and proceedings more effectively than we can because of their substantially greater resources.

Revenues generated by products we currently commercialize or may commercialize in the future depend on reimbursement from third-party payors.

In both domestic and foreign markets, sales of CUBICIN and any future drug product we may market are dependent, in part, on the availability of reimbursement from third-party payors such as state and federal governments, including Medicare and Medicaid, managed care providers, and private insurance plans. Our future revenues and profitability will be adversely affected if these third-party payors do not sufficiently cover and reimburse the cost of CUBICIN, or related procedures or services, or any other future drug product we may market. If these entities do not provide coverage and reimbursement for CUBICIN or provide an insufficient level of coverage and reimbursement, CUBICIN may be too costly for general use, and physicians may not prescribe it. In this manner, levels of reimbursement for drug products by government authorities, private health insurers, and other organizations, such as Health Maintenance Organizations, or HMOs, are likely to have an effect on the successful commercialization of, and our ability to attract collaborative partners to invest in the development of CUBICIN and our drug product candidates.

In both the U.S. and in foreign jurisdictions, legislative and regulatory actions, including but not limited to the following, impact the revenues that we derive from CUBICIN:

·The statutory requirement that Medicare may not make a higher payment for inpatient services that are necessitated by hospital acquired medical conditions, or HACs, arising after a patient is admitted to a hospital may affect the rate of reimbursement for CUBICIN. Although MRSA has not been designated as a HAC, it is implicated by this statutory requirement in situations where MRSA triggers another condition that is itself a HAC. In addition, MRSA may be added as a HAC in the future. As a result of this policy, in certain circumstances, hospitals may receive less reimbursement for Medicare patients that develop a HAC which may be treated with CUBICIN.

·The Medicare Part B payment rate to physicians and hospital outpatient departments for CUBICIN is set on a quarterly basis based upon the average sales price for previous quarters. Significant downward fluctuations in such reimbursement rate could negatively affect sales of CUBICIN. While hospital outpatient rates can change through regulatory or legislative action, the Medicare Part B payment methodology for physicians can only change through legislation.

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·A portion of CUBICIN administered in outpatient settings is subject to reimbursement under the federal Medicare Part D prescription drug program. Recently-enacted legislation requires a number of changes to this program that will largely eliminate the patient coverage gap, which is sometimes referred to as “doughnut hole,” over a number of years beginning in 2011. One element of this legislation requires, as a condition of coverage of a drug under Part D, beginning in 2011, that pharmaceutical manufacturers, such as Cubist, provide a 50% discount for prescriptions of their brand-name drugs filled within the coverage gap.

·Under the Medicaid rebate program, we pay a rebate for each unit of product reimbursed by Medicaid under a fee-for-service benefit. The amount of the rebate for each product is set by law and is required to be recomputed each quarter based on our report of current average manufacturer price, or AMP, and best price for CUBICIN to the Centers for Medicare and Medicaid Services. The terms of our participation in the program imposes a requirement for us to report revisions to AMP or best price, and such revisions could have the impact of increasing or decreasing our rebate liability for prior quarters, depending on the direction of the revision. Recently-enacted legislation altered the Medicaid rebate amount formula in a manner that will increase our rebate liability starting in 2010, which may negatively impact CUBICIN revenues and revenues from other products that we may sell in the future. That legislation, upon enactment, also expanded the universe of Medicaid utilization subject to rebates to include utilization that occurs under a capitated benefit structure, which also may reduce our revenues. In addition, that legislation provides additional conditions, to be phased in between 2010 and 2014, under which individuals may qualify for the Medicaid program and its drug benefit; these changes could increase the number of individuals eligible for the Medicaid drug benefit. Expanded Medicaid eligibility could increase the portion of CUBICIN sales that are subject to Medicaid rebates and, thereby, reduce our revenues. The legislation also provides for the public availability of retail survey prices and certain weighted average AMPs under the Medicaid program, which could impact CUBICIN sales. Finally, that legislation also changes the definition of AMP effective October 2010, which may impact our Medicaid rebate liability and, as a result, impact our revenues. The revised AMP definition is already the subject of new pending legislation, which if enacted, could further impact our Medicaid rebate liability and thus our revenues.

·The availability of federal funds to pay for CUBICIN under the Medicaid and Medicare Part B programs requires that we extend discounts under the PHS 340B drug pricing program. The PHS 340B drug pricing program extends discounts on outpatient drugs to a variety of community health clinics and other entities that receive health services grants from the PHS, as well as hospitals that serve a disproportionate share of poor Medicare beneficiaries. The required discount is calculated based on the reported AMP and Medicaid rebate amount for CUBICIN.  The recent legislative revisions to the Medicaid rebate formula and AMP definition could cause this required discount to increase. Recent legislation extends the discounts to new types of entities in 2010, and pending legislation would further expand the program to drugs used in the inpatient setting under certain circumstances. In addition, recently-enacted legislation requires, beginning in 2014, substantial reductions to the special federal Medicare funding that hospitals with disproportionate share status receive; this reduced funding and the anticipation of it could cause such hospitals to re-evaluate their purchases of branded pharmaceuticals, including CUBICIN.

·We also make our products available for purchase by authorized users of the Federal Supply Schedule, or FSS, of the General Services Administration pursuant to our FSS contract with the Department of Veterans Affairs. Under the Veterans Health Care Act of 1992, we are required to offer deeply discounted FSS contract pricing to four federal agencies for federal funding to be made available to pay for any of our products under the Medicaid program and Medicare Part B and for our products to be eligible to be purchased by those federal agencies and certain federal grantees.

·Recently-enacted legislation requires pharmaceutical manufacturers, such as Cubist, to pay an annual fee to the federal government beginning in 2011. Each individual pharmaceutical manufacturer will pay a prorated share of the industry’s overall fee requirement (approximately $2.5 billion in 2011 and set to increase in ensuing years) based on the dollar value of its sales to certain federal programs identified in the law. Cubist’s annual share of the fee will be difficult to project, as it will be

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determined not only by Cubist’s own sales to these programs, but also by similar sales by all other pharmaceutical companies.

In addition to these existing legislative and regulatory mandates, future legislation or regulatory actions altering these mandates or imposing new ones may have a significant effect on our business. In the U.S. and elsewhere, there have been, and we expect there will continue to be, legislative and regulatory actions and proposals to control and reduce health care costs.

Third-party payors, including the U.S. government, are increasingly challenging the prices charged for and the cost-effectiveness of medical products, and they are increasingly limiting both coverage and the level of reimbursement for prescription drugs. Also, the trend toward managed health care in the U.S. and the concurrent growth of organizations such as HMOs, as well as the implementation of health care reform legislation, may result in lower prices for pharmaceutical products, including any products that may be offered by us in the future. Cost-cutting measures that health care providers are instituting, and the implementation of health care reform legislation, could materially adversely affect our ability to sell any drug products that are successfully developed by us and approved by regulators. We are unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on our business.

Furthermore, substantial uncertainty exists as to the reimbursement status of newly-approved health care products by third-party payors. We will not know what the reimbursement rates will be for our future drug products, if any, until we are ready to market the product and we actually negotiate the rates. If we are unable to obtain sufficiently high reimbursement rates for our products, they may not be commercially viable or our future revenues and gross margins may be adversely affected.

Finally, outside the U.S., certain countries set prices in connection with the regulatory process. We cannot be sure that such prices will be acceptable to us or our collaborators. Such prices may negatively impact our revenues from sales by our collaborators in those countries.

Our business and industry is highly regulated and scrutinized and our long-term strategy and success is dependent upon compliance with applicable regulations and maintaining our business integrity.

Research and Development.  Our drug candidates are subject to extensive pre-clinical testing and clinical trials to demonstrate their safety and efficacy in humans. Conducting pre-clinical testing and clinical trials is a lengthy, time-consuming and expensive process that takes many years. We cannot be sure that pre-clinical testing or clinical trials of any of our drug candidates will demonstrate the quality, safety and efficacy necessary to obtain marketing approvals. In addition, drug candidates that experience success in pre-clinical testing and early-stage clinical trials will not necessarily experience the same success in late-stage clinical trials.

Some of the drug candidates that we are developing are in the pre-clinical stage. In order for a drug candidate to move from this stage to human clinical trials, we must submit an investigational new drug application, or IND, to the FDA or a similar document to competent health authorities outside the U.S. The FDA and other countries’ authorities will allow us to begin clinical trials under an IND if we demonstrate in our submission that a potential drug candidate will not expose humans to unreasonable risks and that the compound has pharmacological activity that justifies clinical development. It takes significant time and expense to generate the data to support an IND. In many cases, companies spend the time and resources only to discover that the data are not sufficient to support an IND and therefore are unable to enter clinical trials. In the past, we have had pre-clinical drug candidates for which we did not have sufficient data to file for an IND and proceed with clinical trials, and this likely will happen again in the future.

Once a drug candidate enters human clinical trials, the trials must be carried out under protocols that are acceptable to regulatory authorities and to the independent committees responsible for the ethical review of clinical studies (e.g. Institutional Review Boards and Ethical Committees, or ECs,) associated with the institutions where the studies are conducted. There may be delays in preparing protocols or receiving approval for them that may delay either or both the start and the finish of the clinical trials. Feedback from regulatory authorities or safety monitoring boards or results from earlier stage and/or concurrent clinical studies might require modifications or delays in later stage

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clinical trials or could cause a termination or suspension of an entire drug development program. These types of delays or suspensions can result in increased development costs, delays in marketing approvals, and/or abandoning future development activities. For example, in December 2009, we announced the early closing of enrollment of both Phase 2 trials of CB-500,929 subsequent to a recommendation from the Data Safety Monitoring Board to temporarily suspend enrollment in one of the trials, known as the CONSERV-2 trial, due to the observation of a statistically significant increase in mortality observed in the CB-500,929 arm of the trial relative to the comparator arm in that trial. In March 2010, we decided to stop development of CB-500,929 due to the top line efficacy and safety data from the CONSERV Phase 2 trials.

Furthermore, there are a number of additional factors that may cause our clinical trials to be delayed or prematurely terminated, such as:

·unforeseen safety issues or findings of an unacceptable safety profile;

·findings of an unacceptable risk-benefit profile as a result of analyses conducted during the course or upon completion of ongoing clinical trials or other types of adverse events that occur in clinical trials that are disproportionate to statistical expectations;

·inadequate efficacy observed in the clinical trials;

·the rate of patient enrollment, including limited availability of patients who meet the criteria for certain clinical trials or inability to enroll patients;

·our inability to manufacture, or obtain from a third-party manufacturer, sufficient quantities of acceptable materials for use in clinical trials;

·the impact of the results of other clinical trials on the drug candidates that we are developing, including by other parties who have rights to develop drug candidates being developed by us in other indications or other jurisdictions, such as clinical trials of CXA-101 or CXA-201 that may be conducted by Astellas;

·the delay or failure in reaching agreement on contract terms with prospective study sites and other third-party vendors who are supporting our clinical trials;

·our inability to reach agreement on trial design and priorities with collaborators with whom we are co-developing a drug candidate;

·the difficulties and complexity of testing our drug candidates in clinical trials with pediatric patients as subjects, particularly with respect to CUBICIN;

·the failure of third-party clinical research organizations and other third-party service providers and independent clinical investigators that we have engaged to manage and conduct the trials with appropriate quality and in compliance with regulatory requirements to perform their oversight of the trials or to meet expected deadlines;

·the failure of our clinical investigational sites, and related facilities and the records kept at such sites, and clinical trial data to be in compliance with the FDA’s Good Clinical Practices, or EU legislation governing good clinical practice, including the failure to pass FDA, European Medicines Agency, or EU Member State inspections of clinical trials;

·our inability to reach agreement with the FDA, the competent national authorities of EU Member States or ECs on a trial design that we are able to execute;

·the FDA or the competent national authorities of EU Member States, ECs or a Data Safety Monitoring Committee for a trial placing a trial on “clinical hold,” temporarily or permanently stopping a trial, or requesting modifications of a trial for a variety of reasons, principally for safety concerns;

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·difficulty in adequately following up with patients after treatment; and

·changes in laws, regulation, regulatory policy, or clinical practices.

If clinical trials for our drug candidates are unsuccessful, delayed or cancelled, we will be unable to meet our anticipated development and commercialization timelines and we may incur increased development costs and delays in marketing approvals, which could harm our business and cause our stock price to decline.

Regulatory Product Approvals.  We must obtain government approvals before marketing or selling our drug candidates in the U.S. and in foreign jurisdictions. To date, we have not obtained government approval in the U.S. for any drug product other than CUBICIN. In territories around the world where CUBICIN is not already approved, our international collaborators have submitted or plan on submitting applications for approvals to market CUBICIN. However, we cannot be sure that any regulatory authority will approve these or any future submissions on a timely basis or at all. The FDA and comparable regulatory agencies in foreign countries impose substantial and rigorous requirements for the development, production and commercial introduction of drug products. These include pre-clinical, laboratory and clinical testing procedures, sampling activities, clinical trials and other costly and time-consuming procedures. In addition, regulation is not static and regulatory authorities, including the FDA, evolve in their staff, interpretations and practices and may impose more stringent requirements than currently in effect, which may adversely affect our planned drug development and/or our sales and marketing efforts. Satisfaction of the requirements of the FDA and of foreign regulators typically takes a significant number of years and can vary substantially based upon the type, complexity and novelty of the drug candidate. The approval procedure and the time required to obtain approval also varies among countries. Regulatory agencies may have varying interpretations of the same data, and approval by one regulatory authority does not ensure approval by regulatory authorities in other jurisdictions.

Generally, no product can receive FDA approval or approval from comparable regulatory agencies in foreign countries unless human clinical trials show both safety and efficacy for each target indication in accordance with FDA standards or standards developed by regulatory agencies in countries other than the U.S. The large majority of drug candidates that begin human clinical trials fail to demonstrate the required safety and efficacy characteristics. Failure to demonstrate the safety and efficacy of any of our drug candidates for each target indication in clinical trials would prevent us from obtaining required approvals from regulatory authorities, which would prevent us from commercializing those drug candidates. The results of our clinical testing of a drug candidate may cause us to suspend, terminate or redesign our clinical testing program for that drug candidate. We cannot be sure when we, independently or with our collaborators, might be in a position to submit additional drug candidates for regulatory review. Negative or inconclusive results from the clinical trials or adverse medical events during the trials could lead to requirements that trials be repeated or extended, or that a program be terminated, even if other studies or trials relating to the program are successful. In addition, data obtained from clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval and could even affect the commercial success of a product that is already on the market based on earlier trials, such as CUBICIN. Moreover, recent events, including complications experienced by patients taking FDA-approved drugs, have raised questions about the safety of marketed drugs and may result in new legislation by the U.S. Congress and increased caution by the FDA and comparable foreign regulatory authorities in reviewing new drugs. In summary, we cannot be sure that regulatory approval will be granted for drug candidates that we submit for regulatory review. Our ability to generate revenues from the commercialization and sale of additional drug products will be limited by any failure to obtain these approvals. In addition, biotechnology stock prices have declined significantly in certain instances where companies have failed to obtain FDA approval of a drug candidate or if the timing of FDA approval is delayed. If the FDA’s or any foreign regulatory authority’s response to any application for approval is delayed or not favorable for any of our drug candidates, our stock price could decline significantly.

Moreover, even if regulatory approval to market a drug product is granted, the approval may impose limitations on the indicated use for which the drug product may be marketed as well as additional post-approval requirements. Even if our drug products are approved for marketing and commercialization, we may need to comply with post-approval clinical study commitments in order to maintain certain aspects of the approval of such products. For example, in connection with our U.S. marketing approvals for CUBICIN, we have made certain Phase 4 clinical study commitments to the FDA, including for studies of renal-compromised patients, pediatric patients, and those

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with gentamycin combination therapy in the treatment of S. aureus infective right-sided bacterial endocarditis. Our business could be seriously harmed if we do not complete these studies and the FDA, as a result, requires us to change related sections of the marketing label for CUBICIN.

In addition, adverse medical events that occur during clinical trials or during commercial marketing of CUBICIN could result in legal claims against us and the temporary or permanent withdrawal of CUBICIN from commercial marketing, which could seriously harm our business and cause our stock price to decline. In particular, our ongoing pediatric trial, which we are conducting as part of our Phase 4 clinical study commitments to the FDA, exposes us to more uncertain and potentially greater risk because of the age of the patients.

Commercialization.  Our company, our drug products, the manufacturing facilities for our drug products and our promotion and marketing materials are subject to continual review and periodic inspection by the FDA and other regulatory agencies for compliance with pre-approval and post-approval regulatory requirements, including Good Manufacturing Practices, adverse event reporting, advertising and product promotion regulations, and other requirements. In addition, if there are any modifications to a drug product that we are developing or commercializing, further regulatory approval will be required.

Other U.S. state and federal laws and regulations and similar provisions in other countries may also affect our ability to manufacture, market and ship our product and may be difficult or costly for us to comply with. These include state or federal U.S. legislation, or legislation in other countries, that in the future could require us or the third parties that we utilize to manufacture and supply our marketed products and product candidates to maintain an electronic pedigree or other similar tracking requirements on our marketed products or product candidates. If any changes to our product or the manufacturing process are required, we may have to seek approval from the FDA or other regulatory agencies in order to comply with the new laws.

Failure to comply with manufacturing and other post-approval state or federal U.S. law, or similar laws of other countries, including laws that prohibit certain payments to health care professionals and/or require reports with respect to the payments and marketing efforts with respect to health care professionals, or any regulations of the FDA and other regulatory agencies can, among other things, result in fines, increased compliance expense, denial or withdrawal of regulatory approvals, product recalls or seizures, forced discontinuance of or changes to important promotion and marketing campaigns, operating restrictions and criminal prosecution. Later discovery of previously unknown problems with a drug product, manufacturer or facility may result in restrictions on the drug product, us or our manufacturing facilities, including withdrawal of the drug product from the market. The cost of compliance with pre- and post-approval regulations may have a negative effect on our operating results and financial condition.

Compliance/Fraud and Abuse.  We are subject to extensive and complex laws and regulation, including but not limited to, health care “fraud and abuse” laws, such as the federal False Claims Act, the federal Anti-Kickback Statute, and other state and federal laws and regulations. While we have developed and implemented a corporate compliance program designed to promote compliance with applicable U.S. laws and regulations, we cannot guarantee that this program will protect us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions. Our partners responsible for authorization and marketing of CUBICIN in other countries have developed pricing, distribution and contracting procedures that are independent of our compliance program and over which we have no control. Our partners may have inadequate compliance programs or may fail to respect both their own programs and laws and guidance of the territories in which they are promoting the product. Compliance violations by our distribution partners could have a negative effect on the revenues that are generated from sales of CUBICIN in these countries.

International Operations/Relationships.  We have manufacturing, collaborative and clinical trial relationships outside the U.S., and CUBICIN is marketed internationally through collaborations. Consequently, we are and will continue to be subject to additional risks related to operating in foreign countries, including:

·unexpected CUBICIN adverse events that occur in foreign markets that we have not experienced in the U.S.;

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·foreign currency fluctuations, which could result in increased or unpredictable operating expenses and reduced revenues, and other obligations incident to doing business in another country;

·unexpected changes in tariffs, trade barriers and regulatory requirements;

·economic weakness, including inflation, or political instability in particular foreign economies and markets; and

·actions by our licensees, distributors, manufacturers, clinical research organizations, other third parties who act on our behalf or with whom we do business in foreign countries, or our employees who are working abroad that could subject us to investigation or prosecution under foreign or U.S. laws, including the U.S. Foreign Corrupt Practices Act, or the anti-bribery or anti-corruption laws, regulations or rules of such foreign countries.

These and other risks associated with our international operations, including those described elsewhere in this “Risk Factors” section, may materially adversely affect our business and results of operations.

Environmental, Safety and Climate Control.  Our research, development and manufacturing efforts, and those of third parties that research, develop and manufacture our products and product candidates on our behalf or in collaboration with us, involve the controlled use of hazardous materials, including chemicals, viruses, bacteria and various radioactive compounds, and are therefore subject to numerous U.S. and international environmental and safety laws and regulations and to periodic inspections for possible violations of these laws and regulations. In addition, we, and our collaborators and third-party manufacturers, may also become subject to laws and regulations related to climate change, including the impact of global warming. The costs of compliance with environmental and safety laws and regulations are significant and the costs of complying with climate change laws could also be significant. Any violations, even if inadvertent or accidental, of current or future environmental, safety or climate change laws or regulations could subject us to substantial fines, penalties or environmental remediation costs, or cause us to lose permits or other authorizations to operate affected facilities, any of which could adversely affect our operations.

Employment and Human Resources.  The laws and regulations applicable to our relationships with our employees and contractors are complex, extensive and fluid, and are subject to evolving interpretations by regulatory and judicial authorities.  The failure to comply with these laws and regulations could result in significant damages, orders and/or fines and therefore could adversely affect our operations.  For example, a recent decision by the U.S. Court of Appeals for the Second Circuit, In re Novartis Wage & Hour Litigation, in a split from an earlier decision from the U.S Court of Appeals for the Third Circuit, held that pharmaceutical sales representatives were non-exempt employees under the Fair Labor Standards Act.  The Second Circuit’s decision may trigger additional litigation against pharmaceutical companies, including us.  An adverse result in any such litigation could result in significant damages to us and could therefore have a material adverse effect on our business and results of operations.

The current credit and financial market conditions may exacerbate certain risks affecting our business.

Sales of our products are made, in part, through direct sales to our customers, which include hospitals, physicians and other health care providers. As a result of current global credit and financial market conditions, our customers may be unable to satisfy their payment obligations for invoiced product sales or may delay payments, which could negatively affect our revenues, earnings and cash flow. In addition, we rely upon third parties for certain aspects of our business, including collaboration partners, wholesale distributors for our products, contract clinical trial providers, research organizations and manufacturers, and third-party suppliers. Because of the recent tightening of global credit and the volatility in the financial markets, there may be a delay or disruption in the performance or satisfaction of commitments to us by these third parties, which could adversely affect our business.

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The way that we account for our operational and business activities is based on estimates and assumptions that may differ from actual results, and new accounting pronouncements or guidance may require us to change the way in which we account for our operational or business activities.

Our financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, our management evaluates its critical estimates and judgments, including, among others, those related to revenue recognition, inventories, investments, impairment of long-lived assets including other intangible assets, goodwill, and IPR&D, accrued clinical research costs, income taxes, stock-based compensation, contingent consideration, and product rebate and return accruals. Those critical estimates and assumptions are based on our historical experience, our observance of trends in the industry, and various other factors that are believed to be reasonable under the circumstances, and they form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If actual results differ from these estimates under different assumptions or conditions or events occur which cause us to have to re-assess our assumptions, there could be a material adverse impact on our financial results and the performance of our stock.

The Financial Accounting Standards Board, or FASB, the SEC, and other bodies that have jurisdiction over the form and content of our accounts, our financial statements and other public disclosure are constantly discussing and interpreting proposals and existing pronouncements designed to ensure that companies best display relevant and transparent information relating to their respective businesses. The pronouncements and interpretations of pronouncements by the FASB, the SEC and other bodies may have the effect of requiring us to make changes in our accounting policies, including how we account for revenues and/or expenses, which could have a material adverse impact on our financial results.

We could incur substantial costs resulting from product liability claims relating to our pharmaceutical products.

The nature of our business exposes us to potential liability inherent in the testing, manufacturing and marketing of pharmaceutical and biotechnology products. Our products and the clinical trials utilizing our products and drug candidates may expose us to product liability claims and possible adverse publicity. Product liability insurance is expensive, is subject to deductibles and coverage limitations, and may not be available in the amounts that we desire for a price we are willing to pay. While we currently maintain product liability insurance coverage, we cannot be sure that such coverage will be adequate to cover any incident or all incidents. In addition, we cannot be sure that we will be able to obtain or maintain insurance coverage at acceptable costs or in a sufficient amount, that our insurer will not disclaim coverage as to a future claim or that a product liability claim would not otherwise adversely affect our business, operating results or financial condition. The cost of any products liability litigation or other proceeding, even if resolved in our favor, could be substantial. Uncertainties resulting from the initiation and continuation of products liability litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Products liability litigation and other related proceedings may also absorb significant management time.

Risks Related to Ownership of Our Common Stock

Our stock price may be volatile, and the value of our stock could decline.

The trading price of our common stock has been, and is likely to continue to be volatile. Our stock price could be subject to downward fluctuations in response to a variety of factors, including those factors described elsewhere in this “Risk Factors” section and the following:

·the investment community’s view of the revenue, financial and business projections we provide to the public, and whether we succeed or fail in meeting or exceeding these projections;

·actual or anticipated variations in our quarterly operating results;

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·an adverse result, even if not final, in the Teva litigation;

·additional third parties filing ANDAs with the FDA relating to our products and the results of any litigation that we file to defend and/or assert our patents against such third parties;

·any liabilities in excess of amounts that we have accrued or reserved on our balance sheet;

·failure of third-party reporters of sales data to accurately report our sales figures;

·changes in the market, medical need or demand for CUBICIN;

·new legislation, laws or regulatory decisions that are adverse to us or our products;

·the announcements of acquisitions, strategic partnerships, collaborations, joint ventures or capital commitments by us or our competitors;

·rumors, whether based in fact or unfounded, of any such transactions that are publicized in the media or are otherwise disseminated to investors in our stock and expectations in the financial markets that we may or may not be the target of potential acquirers;

·litigation, including stockholder or patent litigation;

·our failure to adequately protect our confidential, electronically-stored, transmitted and communicated information; and

·volatility in the markets unrelated to our business and other events or factors, many of which are beyond our control.

In addition, the stock market in general and the NASDAQ Global Select Market and the stock of biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against companies. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

Several aspects of our corporate governance may discourage a third party from attempting to acquire us.

Several factors might discourage an attempt to acquire us that could be viewed as beneficial to our stockholders who wish to receive a premium for their shares from a potential bidder. For example:

·we are subject to Section 203 of the Delaware General Corporation Law, which provides that we may not enter into a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in the manner prescribed in Section 203;

·our Board of Directors, or our Board, has the authority to issue, without a vote or action of stockholders, up to 5,000,000 shares of preferred stock and to fix the price, rights, preferences and privileges of those shares, each of which could be superior to the rights of holders of our common stock;

·our directors are elected to staggered terms, which prevents our entire Board from being replaced in any single year; and

·advance notice is required for nomination of candidates for election as a director.

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Our business could be negatively affected as a result of the actions of activist shareholders.

Proxy contests have been waged against many companies in the biopharmaceutical industry over the last few years. If faced with a proxy contest, we may not be able to successfully respond to the contest, which would be disruptive to our business. Even if we are successful, our business could be adversely affected by a proxy contest because:

·responding to proxy contests and other actions by activist shareholders may be costly and time-consuming, and may disrupt our operations and divert the attention of management and our employees;

·perceived uncertainties as to our future direction may result in our inability to consummate potential acquisitions, collaborations or in-licensing opportunities and may make it more difficult to attract and retain qualified personnel and business partners; and

·if individuals are elected to our Board with a specific agenda different from ours, it may adversely affect our ability to effectively and timely implement our strategic plan and create additional value for our stockholders.

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ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.(REMOVED AND RESERVED)

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

(a) The following exhibits have been filed with this report or otherwise filed during the period covered by this report:

10.1*Amendment No. 2, dated April 18, 2007, to Processing Services Agreement between Oso BioPharmaceuticals Manufacturing, LLC (successor-in-interest to Cardinal Health PTS, LLC) and Cubist, dated August 11, 2004.

10.2**2010 Equity Incentive Plan (Appendix A, Definitive Proxy Statement on Form DEF-14A filed on April 30, 2010, File No. 000-21379).

10.3**2010 Equity Incentive Plan.

10.4**Separation Agreement and Release, dated June 15, 2010, between Cubist and Lindon Fellows.

10.5**Performance-Based Management Incentive Plan (Appendix B, Definitive Proxy Statement on Form DEF-14A filed on April 30, 2010, File No. 000-21379).

23.1Consent of Houlihan Smith & Company Inc.

31.1Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101***The following materials from Cubist Pharmaceuticals, Inc.’s Form 10-Q for the quarter ended June 30, 2010, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009, (ii) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009, and (iv) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.

* Confidential treatment requested

** Management contract or compensatory plan or arrangement

*** Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended (“Securities Act”) and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liabilities of those sections.

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SIGNATURE

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

CUBIST PHARMACEUTICALS, INC.
July 30, 2010
By:
	/s/ David W.J. McGirr
	David W.J. McGirr
	Senior Vice President and Chief Financial Officer
	(Authorized Officer and Principal Finance and Accounting Officer)

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EX-10.1

Exhibit 10.1

CONFIDENTIAL TREATMENT

AMENDMENT NO. 2

Cardinal Health PTS, LLC (“Cardinal Health”) and Cubist Pharmaceuticals, Inc., (“Cubist”) are parties to a Processing Services Agreement dated August 11, 2004, as amended by Amendment No. 1 dated May 23, 2005 (the “Agreement”).

The parties now desire to amend the Agreement pursuant to the terms of this Amendment No. 2 to set forth the terms and conditions upon which Cardinal Health would move the manufacture of the Product primarily to a second facility.

Cardinal Health and Cubist have executed a December 1, 2006 Quotation QTE-2006-0361.00 (“Tech Transfer Feasibility Quote”) pursuant to which Cardinal Health will produce a Process Transfer Feasibility Report and a Plant Certification Document pursuant to the terms of the Tech Transfer Feasibility Quote.  Cubist will pay Cardinal Health $13,900 for the work performed under the Tech Transfer Feasibility Quote.  The Process Transfer Feasibility Report and the Plant Certification Document will detail how Cardinal Health’s second facility will be validated and the costs and responsibilities of each of the Parties associated with such validation.

Now therefore, in consideration of the mutual conditions and covenants set forth herein, Cardinal Health and Cubist agree as follows:

1.Cardinal Health shall perform the activities described in the Plant Certification Document (“Certification Activities”) in accordance with the terms and the schedules contained in the Plant Certification Document.

2.Provided that Cardinal Health performs the Certification Activities in accordance with the Plant Certification Document, Cubist shall use diligent and commercially reasonable efforts to achieve the approval of the Cardinal Health facility located at 8900 Capital Blvd, Raleigh, NC for the Processing of the commercial supplies of the Product (“FDA Approval”) as soon as reasonably possible.

3.Effective upon FDA Approval,

a.Section 1.20 of the Agreement shall be amended by adding “(“NM Facility”) and at 8900 Capital Blvd, Raleigh, NC (“NC Facility”) immediately after “Albuquerque, New Mexico.”

b.The Agreement shall be amended by adding the following sentence to the end of Section 2.1:

* Confidential Treatment Requested.  Omitted portions filed with the Securities and Exchange Commission (the “Commission”).

Upon approval of the NC Facility, Cardinal Health shall Process Product in a quantity not more than []* batches []*, and not more than []* batch []* during the Term at the NM Facility without Cubist’s prior written consent.

c.The Agreement shall be amended by adding the following sentence to the end of Section 3.3:

All Product Processed (other than packaging) at the NC Facility shall be packaged by Cardinal Health at its packaging facility located at 3001 Red Lion Road, Philadelphia, PA.

d.The first sentence of Section 15.1 of the Agreement shall be deleted in its entirety and replaced with the following:

This Agreement shall commence on the Effective Date and shall continue until August 11, 2010, unless earlier terminated under Section 15.2 below (the “Term”).

e.A new Section 4.8 shall be added to the Agreement, as follows:

4.8             Minimum Requirement. Upon regulatory approval of the NC Facility, Cubist shall order a minimum of []* of Product to be Processed (“Minimum Requirement”) during []* commencing on []* and Cardinal Health shall accept Cubist’s Purchase Orders including such minimum number of units and shall Process and Deliver at least such minimum number of units according to such Purchase Orders. Notwithstanding the foregoing, Cardinal Health may propose alternative delivery date(s) that are within []* of what is requested in Cubist’s Purchase Order in order to permit Cardinal Health to manage its available manufacturing capacity in respect of commitments previously made to its clients; in such cases, the parties shall reasonably agree to the revised delivery date(s).    The Minimum Requirement shall be pro-rated in any partial []*. If Cubist does not order such Minimum Requirement during []*, within []* after the end of []*, Cubist shall pay Cardinal Health the difference between []*.  Notwithstanding anything herein to the contrary, if at any time during the initial term but following the first []* batches of Product produced under this Agreement, if Cubist appropriately rejects Product due to Cardinal Health’s breach of its obligations hereunder to provide Product conforming to the Specifications and Applicable Laws []* or more times in []*, Cubist shall have the right, at Cubist’s sole discretion, to withdraw any or all Purchase Orders which have been submitted at the time of []*, and any remaining Minimum Requirement during the Term shall no longer apply.

f.The Agreement shall be amended by inserting the following sentence after the first sentence of Section 7.1:

Cubist shall pay []* for the []* of Product purchased from Cardinal Health under this Agreement []*.

* Confidential Treatment Requested.  Omitted portions filed with the Commission.

4.Termination Prior to FDA Approval.

a.If FDA Approval does not occur by December 31, 2008, the provisions set forth in Sections 2, 3 and 7 of this Amendment No. 2 shall have no further force or effect unless otherwise agreed to by the parties in writing.

b.If Cubist elects to cease efforts to transfer the Product to the NC Facility or otherwise fails to support or elects to abandon its pursuit of FDA Approval for any reason other than a Cardinal Reason, as defined below, then []*.

c.If a Cardinal Reason occurs, then []*.

d..  As used in this Amendment No. 2, a “Cardinal Reason” shall mean: (i) Cardinal Health’s failure to completely perform the Certification Activities in accordance with the Plant Certification Document; (ii) Cardinal Health’s election to abandon its pursuit of FDA Approval for any reason; or (iii) the NC Facility’s failure to comply with FDA requirements or Cardinal Health’s failure to satisfactorily address any FDA documented observations at the NC Facility.

5.The first sentence of Section 7.2 of the Agreement is hereby amended to delete the phrase “,effective on the anniversary date of this Agreement” in its entirety and to replace such language with “commencing on January 1, 2008”.

6.Section 16.1 of the Agreement is hereby amended by adding []* within the parenthetical, immediately before []*.

7.Effective as of October 1, 2006, Exhibit B-1 of the Agreement shall be deleted in its entirety and replaced with Exhibit B-1 attached to this Amendment No. 2.

Any conflict between the provisions of this Amendment No. 2 and the Agreement shall be resolved in favor of this Amendment No. 2 and capitalized terms used in this Amendment No. 2 shall have the same meaning given to them in the Agreement, unless otherwise defined in this Amendment No. 2.

This Amendment No. 2 shall be effective April 18, 2007 (“Amendment No. 2 Effective Date”).  Unless otherwise expressly set forth herein, all other terms and conditions set forth in the Agreement shall remain in full force and effect.  Following the Amendment No. 2 Effective Date, the term “Agreement” shall be deemed a reference to the Agreement as amended by this Amendment No. 2.

This Amendment No. 2 may be signed in counterparts, each of which shall be deemed to be an original and all of which together shall constitute but one and the same instrument, and such counterparts may be exchanged by facsimile.

In witness whereof, this Amendment No. 2 has been executed by the Parties to be effective as of the Amendment No. 2 Effective Date.

* Confidential Treatment Requested.  Omitted portions filed with the Commission.

CARDINAL HEALTH PTS, LLC		CUBIST PHARMACEUTICALS, INC.
By:	/s/ Shawn L. Gallagher	By:	/s/ Lindon M. Fellows
Name:	Shawn L. Gallagher	Name:	Lindon M. Fellows
Title:	VP and General Manager	Title:	Senior Vice President
			Technical Operations

*Confidential Treatment Requested.  Omitted portions filed with the Commission.

EXHIBIT B-1

[]*

*Confidential Treatment Requested.  Omitted portions filed with the Commission.

EX-10.3

Exhibit 10.3

CUBIST PHARMACEUTICALS, INC.

2010 EQUITY INCENTIVE PLAN

TABLE OF CONTENTS

	Page
1. PURPOSE	1
2. DEFINITIONS	1
3. TERM OF THE PLAN	5
4. STOCK SUBJECT TO THE PLAN	5
5. ADMINISTRATION	6
6. AUTHORIZATION OF GRANTS	6
7. SPECIFIC TERMS OF AWARDS	8
8. ADJUSTMENT PROVISIONS	14
9. SETTLEMENT OF AWARDS	15
10. LIMITATION OF RIGHTS IN STOCK; NO SPECIAL SERVICE RIGHTS	17
11. UNFUNDED STATUS OF PLAN AND SECTION 409A	18
12. NONEXCLUSIVITY OF THE PLAN	18
13. TERMINATION AND AMENDMENT OF THE PLAN	18
14. CORPORATE ARTICLES AND BYLAWS; OTHER COMPANY POLICIES	19
15. NOTICES AND OTHER COMMUNICATIONS	20
16. GOVERNING LAW	20

i

CUBIST PHARMACEUTICALS, INC.

2010 EQUITY INCENTIVE PLAN

1.Purpose

This Plan is intended to encourage ownership of Stock by employees, consultants and directors of the Company and its Affiliates and to provide additional incentive for them to promote the success of the Company’s business through the grant of Awards of or pertaining to shares of the Company’s Stock.  The Plan is intended to be an incentive stock option plan within the meaning of Section 422 of the Code, but not all Awards are required to be Incentive Options.

2.Definitions

As used in this Plan, the following terms shall have the following meanings:

2.1.Accelerate, Accelerated, and Acceleration, means: (a) when used with respect to an Option or Stock Appreciation Right, that as of the time of reference the Option or Stock Appreciation Right will become exercisable with respect to some or all of the shares of Stock for which it was not then otherwise exercisable by its terms; (b) when used with respect to Restricted Stock or Restricted Stock Units, that the Risk of Forfeiture otherwise applicable to the Restricted Stock or Restricted Stock Units shall expire with respect to some or all of the shares of Restricted Stock or Restricted Stock Units then still otherwise subject to the Risk of Forfeiture; and (c) when used with respect to Performance Units, that the applicable Performance Goals shall be deemed to have been met as to some or all of the Units.

2.2.Affiliate means any corporation, partnership, limited liability company, business trust, or other entity controlling, controlled by or under common control with the Company.

2.3.Award means any grant or sale pursuant to the Plan of Options, Stock Appreciation Rights, Performance Units, Restricted Stock, Restricted Stock Units, or Stock Grants.

2.4.Award Agreement means an agreement between the Company and the recipient of an Award, setting forth the terms and conditions of the Award.

2.5.Board means the Company’s Board of Directors.

2.6.Change of Control means (1) the closing of (A) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Stock would be converted into cash, securities or other property, other than a merger or consolidation in which the holders of Stock immediately prior to the merger or consolidation will have the same proportionate ownership of common stock of the surviving corporation immediately after the merger or consolidation as before the merger or consolidation, or (B) any sale, lease, exchange or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of the Company, or (2) the date on which any “person” (as defined in Section 13(d) of the Exchange Act), other than the Company or a Subsidiary or employee benefit plan or trust maintained by the Company or any of its Subsidiaries shall become (together with its “affiliates” and “associates,” as defined in Rule 12b-2

under the Exchange Act) the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% of the Stock outstanding at the time, with the prior approval of the Board, or (3) a Hostile Change of Control.

2.7.Code means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto, and any regulations issued from time to time thereunder.

2.8.Committee means the Compensation Committee of the Board, which in general is responsible for the administration of the Plan, as provided in Section 5.  For any period during which no such committee is in existence “Committee” shall mean the Board and all authority and responsibility assigned to the Committee under the Plan shall be exercised, if at all, by the Board.

2.9.Company means Cubist Pharmaceuticals, Inc., a corporation organized under the laws of the State of Delaware.

2.10.Covered Employee means an employee who is a “covered employee” within the meaning of Section 162(m) of the Code.

2.11.Exchange Act means the Securities and Exchange Act of 1934.

2.12.For Cause means dishonesty with respect to the Company or any Affiliate, insubordination, substantial malfeasance or non-feasance of duty, intentional and unauthorized disclosure of confidential information, material breach by a Participant of any provision of any employment, nondisclosure, non-competition or similar agreement between the Participant and the Company or any Affiliate, conduct substantially prejudicial to the business of the Company or an Affiliate, and any other type of conduct that is similar to that described in this sentence. The determination of the Company as to the existence of circumstances warranting a termination For Cause shall be conclusive. Notwithstanding the foregoing, in the event that the Participant is a party to an effective employment, retention or similar agreement with the Company or an Affiliate which contains a “cause” definition, such definition shall be controlling for purposes of the Plan.

2.13Grant Date means the date as of which an Award is granted, as determined under Section 6.2.

2.14Hostile Change of Control means (1) the date on which any “person” (as defined in Section 13(d) of the Exchange Act), other than the Company or a Subsidiary or employee benefit plan or trust maintained by the company of any of its Subsidiaries shall become (together with its “affiliates” and “associates,” as defined in Rule 12b-2 under the Exchange Act) the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 25% of the Stock outstanding at the time, without the prior approval of the Board; or (2) over a period of 36 consecutive months or less, there is a change in the composition of the Board such that a majority of the Board members (rounded up to the next whole number, if a fraction) ceases, by reason of one or more proxy contests for the election of Board members, to be composed of individuals who either (i) have been Board members continuously since the beginning of that period, or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in the preceding clause (i) who were still in office at the time that election or nomination was approved by the Board.

2

2.15Incentive Option means an Option which by its terms is to be treated as an “incentive stock option” within the meaning of Section 422 of the Code.

2.16Incumbent Directors means, following a Hostile Change of Control, those Board members who were members of the Board immediately prior to such Hostile Change of Control.

2.17Market Value means the value of a share of Stock on a particular date determined by such methods or procedures as may be established by the Committee.  Unless otherwise determined by the Committee, the Market Value of Stock as of any date is the closing price for the Stock as reported on the NASDAQ Stock Market (or on any other national securities exchange on which the Stock is then listed) for that date or, if no closing price is reported for that date, the closing price on the next preceding date for which a closing price was reported.

2.18Nonstatutory Option means any Option that is not an Incentive Option.

2.19Officer means any employee of the Company who, from time to time, is subject to the reporting requirements of Section 16 of the Exchange Act.

2.20Option means an option to purchase shares of Stock.

2.21Optionee means a Participant to whom an Option shall have been granted under the Plan.

2.22Participant means any holder of an outstanding Award under the Plan.

2.23Performance Criteria means the criteria that the Committee selects for purposes of establishing the Performance Goal or Performance Goals under an Award for the Performance Period applicable to such Award.  Performance Goals will be based on objectively determinable measures of performance relating to any of or to any combination of the following (measured either absolutely or by reference to an index or indices and determined either on a consolidated basis or, as the context permits, on a divisional, functional, subsidiary, line of business, project or geographical basis or in combinations thereof) and will be limited to: sales; revenues; assets; expenses; earnings or earnings per share; return on equity, investment, capital or assets; one or more operating ratios; borrowing levels, leverage ratios or credit rating; market share; capital expenditures; cash flow; stock price; stockholder return; income, pre-tax income, net income, operating income, pre-tax profit, operating profit, net operating profit or economic profit; gross margin, operating margin, profit margin, return on operating revenue, return on operating assets, cash from operations, operating ratio or operating revenue; market capitalization; expenses or certain types of expenses; sales of particular products or services; customer acquisition, expansion or retention; acquisitions and divestitures (in whole or in part) and/or integration activities related thereto; joint ventures, collaborations, licenses and strategic alliances, and/or the management and performance of such relationships; spin-offs, split-ups or similar transactions; reorganizations; recapitalizations, restructurings, financings (issuance of debt or equity) or refinancings; achievement of clinical trial or research objectives; achievement of manufacturing and/or supply chain objectives; achievement of litigation-related objectives and/or objectives related to litigation expenses; achievement of human resource, organizational and/or personnel objectives; achievement of information technology or information services objectives; or achievement of real estate, facilities or space planning objectives.

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2.24Performance Goals means, for a Performance Period, the written goal or goals established by the Committee for the Performance Period based upon the Performance Criteria selected by the Committee.  The Performance Goals may be expressed in terms of overall Company performance or the performance of a division, business unit, subsidiary, or an individual, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit or Affiliate, either individually, alternatively or in any combination, and measured either quarterly, annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as specified by the Committee. The Committee will, in the manner and within the time prescribed by Section 162(m) of the Code in the case of Qualified Performance-Based Awards, objectively define the manner of calculating the Performance Goal or Goals it selects to use for such Performance Period for such Participant.  To the extent consistent with the requirements of the performance-based compensation exception under Section 162(m) of the Code, the Committee may determine that one or more of the Performance Goals applicable to such Award will be adjusted in an objectively determinable manner to reflect events (for example, but without limitation, acquisitions or dispositions) occurring during the Performance Period that affect the applicable Performance Goal or Goals.

2.25Performance Period means one or more periods of time, which may be of varying and overlapping durations, selected by the Committee, over which the attainment of one or more Performance Goals or other business objectives will be measured for purposes of determining a Participant’s right to, and the payment of, a Qualified Performance-Based Award.

2.26Performance Unit means a right granted to a Participant, to receive cash, Stock or other Awards, the payment of which is contingent on achieving Performance Goals or other business objectives established by the Committee.

2.27Plan means this 2010 Equity Incentive Plan of the Company, as amended from time to time, and including any attachments or addenda hereto.

2.28Qualified Performance-Based Awards means Awards intended to qualify as “performance-based compensation” under Section 162(m) of the Code.

2.29Restricted Stock means shares of Stock that are subject to a Risk of Forfeiture.

2.30Restricted Stock Unit means a right to receive shares of Stock at the close of a Restriction Period, subject to a Risk of Forfeiture.

2.31Restriction Period means the period of time, established by the Committee in connection with an Award of Restricted Stock or Restricted Stock Units, during which the shares of Restricted Stock or Restricted Stock Units are subject to a Risk of Forfeiture described in the applicable Award Agreement.

2.32Retirement or Retire means, (a) with respect to any Participant who is an employee of the Company or any of its Affiliates, such person’s termination of employment with the Company and its Affiliates after reaching age 65 with at least five (5) years of service as an employee of the Company or its Affiliates, but not including any termination of employment For Cause or for insufficient performance, as determined by the Company; and (b) with respect to any Participant who is a director of the Company, such person’s retirement from the Board after reaching age 65 and serving the number of full terms that are specified from time to time by the

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Board in writing, and in effect at the time of such termination, as being the number of full terms that a Director should serve before being considered retired,

2.33Risk of Forfeiture means a limitation on the right of the Participant to retain Restricted Stock or Restricted Stock Units, including a right of the Company to reacquire shares of Restricted Stock at less than their then Market Value, arising because of the occurrence or non-occurrence of specified events or conditions.

2.34Stock means common stock, par value $0.001 per share, of the Company, and such other securities as may be substituted for Stock pursuant to Section 8.

2.35Stock Appreciation Right means a right to receive any excess in the Market Value of shares of Stock over a specified exercise price.

2.36Stock Grant means the grant of shares of Stock not subject to restrictions or other forfeiture conditions.

2.37Subsidiary means any corporation which qualifies as a subsidiary of the Company under the definition of “subsidiary corporation” in Section 424(f) of the Code.

2.38Ten Percent Owner means a person who owns, or is deemed within the meaning of Section 422(b)(6) of the Code to own, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or any parent corporation of the Company, as defined in Section 424(e) of the Code, or any Subsidiary).  Whether a person is a Ten Percent Owner shall be determined with respect to an Option based on the facts existing immediately prior to the Grant Date of the Option.

3.Term of the Plan

Unless the Plan shall have been earlier terminated by the Board, Awards may be granted under this Plan at any time in the period commencing on the date of approval of the Plan by the Board and ending on December 31, 2020, provided, however, that in no event may an Incentive Option be granted under this Plan after the date immediately prior to the tenth anniversary of the adoption of the Plan by the Board.  Awards granted pursuant to the Plan during its term shall not expire solely by reason of the termination of the Plan.

4.Stock Subject to the Plan

At no time shall the number of shares of Stock issued pursuant to outstanding Awards granted under the Plan (including Incentive Options) exceed six million (6,000,000) plus the number of shares of Stock subject to stock options and restricted stock units granted under the Company’s Amended and Restated 2000 Equity Incentive Plan (the “2000 Plan”) which become available for additional awards thereunder by reason of the forfeiture, cancellation, expiration or termination of those awards, subject, however, to the provisions of this Section 4 and Section 8 of the Plan.  Each Stock Grant Award and each Award of Restricted Stock, Restricted Stock Units and Performance Units shall reduce the number of shares of Stock available for Awards by two shares for every one share of Stock underlying the Award; each other Award shall reduce the number of shares of Stock available for Awards by one share for every one share of Stock underlying the Award.  When a Stock Appreciation Right is settled for shares of Stock upon exercise, the total number of shares of Stock underlying the Award shall be counted against the

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number of shares of Stock available for issuance under the Plan, regardless of the number of shares of Stock used to settle the Stock Appreciation Right upon exercise.  Except for Stock Appreciation Rights that are settled for shares of Stock upon exercise prior to expiration, termination or cancellation, in which case the terms of the preceding sentence shall apply, if any Option or Stock Appreciation Right expires, terminates or is cancelled for any reason without having been exercised in full, or if any other Award is forfeited by the recipient, the shares of Stock underlying such Award which are not purchased by the Participant or which are forfeited by the Participant shall again be available for Awards to be granted under the Plan to the same extent that the grant of such Award reduced the number of shares of Stock available for Awards under the Plan. If any stock option granted under the 2000 Plan expires, terminates, or is cancelled for any reason without having been exercised in full, or if any award of restricted stock units under the 2000 plan is forfeited by the recipient, the shares of Stock underlying such award not purchased by the Participant or which are forfeited by the Participant shall become available for Awards to be granted under the Plan to the same extent that the grant of such award reduced the number of shares of Stock available for awards under the 2000 Plan.  Shares of Stock issued pursuant to the Plan may be either authorized but unissued shares or shares held by the Company in its treasury.

5.Administration

The Plan shall be administered by the Committee; provided, however, that at any time and on any one or more occasions the Board may itself exercise any of the powers and responsibilities assigned to the Committee under the Plan and when so acting, the Board shall have the benefit of all of the provisions of the Plan pertaining to the Committee’s exercise of its authorities hereunder; and provided further, however, that the Committee may delegate to the Company’s Chief Executive Officer the authority to grant Awards hereunder to employees who are not Officers, and to consultants, in accordance with such guidelines as the Committee shall set forth at any time or from time to time (but in no event to any non-employee member of the Board or of any board of directors (or similar governing authority) of any Affiliate). Subject to the provisions of the Plan, the Committee shall have complete authority, in its discretion, to make or to select the manner of making all determinations with respect to each Award to be granted by the Company under the Plan including the employee, consultant or director to receive the Award and the form of Award.  In making such determinations, the Committee may take into account the nature of the services rendered by the respective employee, consultant, and director, their present and potential contributions to the success of the Company and its Affiliates, and such other factors as the Committee in its discretion shall deem relevant.  Subject to the provisions of the Plan, the Committee shall also have complete authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of the respective Award Agreements (which need not be identical), and to make all other determinations necessary or advisable, in the Committee’s discretion, for the administration of the Plan.  The Committee’s determinations made in good faith on matters referred to in the Plan shall be final, binding and conclusive on all persons having or claiming any interest under the Plan or an Award made pursuant hereto.

6.Authorization of Grants

6.1.Eligibility.  The Committee may grant from time to time and at any time prior to the termination of the Plan one or more Awards, either alone or in combination with any other Awards, to any employee of or consultant to one or more of the Company and its Affiliates or to any non-employee member of the Board or of any board of directors (or similar governing

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authority) of any Affiliate. However, only employees of the Company and of any parent corporation of the Company, as defined in Section 424(e) of the Code, or any Subsidiary, shall be eligible for the grant of an Incentive Option.  Further, in no event shall the number of shares of Stock issued pursuant to Options and other Awards granted to any one person in any one calendar year exceed 750,000 shares of Stock (subject to the provisions of Section 8 of the Plan, but only to the extent consistent with Section 162(m) of the Code).

6.2.Date of Grant.  The granting of an Award shall take place at the time specified in the Award Agreement.  Only if expressly so provided in the applicable Award Agreement shall the Grant Date be the date on which the Award Agreement shall have been duly executed and delivered by the Company and the Participant.

6.3.General Terms of Awards.  Each grant of an Award shall be subject to all applicable terms and conditions of the Plan (including but not limited to any specific terms and conditions applicable to that type of Award set out in the following Sections), and such other terms and conditions, not inconsistent with the terms of the Plan, as the Committee may prescribe.  No Participant shall have any rights with respect to an Award, unless and until such Participant shall have complied with the applicable terms and conditions of such Award (including if applicable delivering to the Company or its designated broker a fully executed copy of an Award Agreement evidencing an Award).  In addition, a Participant will forfeit an Award if the receipt of the Award is subject to the Participant accepting an Award Agreement and the Participant does not accept the Award Agreement in the manner and within the time period after the Award date that the Company and/or its designated broker specifies in writing.

6.4.Effect of Termination of Employment, Etc.

(a)Unless the Committee shall provide otherwise with respect to any Award, and except as otherwise provided in this Section 6.4, if the Participant’s employment or other association with the Company and its Affiliates ends for any reason other than Retirement or death of such Participant, including because of the Participant’s employer ceasing to be an Affiliate, (a) any outstanding Option or Stock Appreciation Right of the Participant shall cease to be exercisable in any respect not later than ninety (90) days following that event and, for the period it remains exercisable following that event, shall be exercisable only to the extent exercisable at the date of that event, and (b) any other outstanding Award of the Participant shall, to the extent subject to a Risk of Forfeiture, vesting requirements or other similar restrictions, be forfeited or otherwise subject to return to or repurchase by the Company on the terms specified in the applicable Award Agreement.  Military or sick leave or other bona fide leave shall not be deemed a termination of employment or other association for purposes of the Plan, provided that it does not exceed the longer of ninety (90) days or the period during which the absent Participant’s reemployment rights, if any, are guaranteed by statute or by contract.

(b)Unless the Committee shall provide otherwise with respect to any Award, and except as otherwise provided in this Section 6.4, if a Participant Retires or dies, any Option or Stock Appreciation Right held by such Participant or such Participant’s legal representative may be exercised by the Participant or such Participant’s legal representative at any time within the shorter of the applicable option period, as defined in the Award Agreement consistent with Section 7.1(b), or 12 months after the date of the Participant’s Retirement or death, but only to the extent exercisable at the time of such Participant’s Retirement or death.

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(c)Solely with respect to an Incentive Option, (i) if a Participant’s employment or other association with the Company and its Affiliates ends because the Participant dies, such Incentive Option held by such Participant may be exercised by such Participant’s legal representative at any time within the shorter of the applicable option period, as defined in the Award Agreement consistent with Section 7.1(b), or 12 months after the date of the Participant’s death, but only to the extent exercisable at the time of such Participant’s death, and (ii) if the Participant’s employment or other association with the Company and its Affiliates ends for any reason other than death, including Retirement or because of the Participant’s employer ceasing to be an Affiliate, such Incentive Option shall cease to be exercisable in any respect not later than ninety (90) days following that event and, for the period it remains exercisable, shall be exercisable only to the extent exercisable at the date of that event.

6.5.Non-Transferability of Awards.  Except as otherwise provided in this Section 6.5, Awards shall not be transferable, and no Award or interest therein may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution.  All of a Participant’s rights in any Award may be exercised during the life of the Participant only by the Participant or the Participant’s legal representative.  However, the Committee may, at or after the grant of an Award other than an Incentive Option, provide that such Award may be transferred by the recipient to a “family member” (as defined below); provided, however, that any such transfer is without payment of any consideration whatsoever and that no transfer shall be valid unless first approved by the Committee, acting in its sole discretion.  For this purpose, “family member” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the employee’s household (other than a tenant or employee), a trust in which the foregoing persons have more than 50% of the beneficial interests, a foundation in which the foregoing persons (or the Participant) control the management of assets, and any other entity in which these persons (or the Participant) own more than 50% of the voting interests.

7.Specific Terms of Awards

7.1.Options.

(a)Exercise Price.  The price at which shares of Stock may be acquired under each Option shall be not less than 100% of the Market Value of Stock on the Grant Date, or not less than 110% of the Market Value of Stock on the Grant Date in the case of an Incentive Option if the Optionee is a Ten Percent Owner.

(b)Option Period.  No Option may be exercised on or after the earlier of (a) the Option expiration date, as specified in Section 6.4, or (b) the tenth anniversary of the Grant Date, or on or after the fifth anniversary of the Grant Date in the case of an Incentive Option if the Optionee is a Ten Percent Owner.  In the event that the last date to exercise an Option by its terms falls on a date when the primary stock exchange or national market on which the Company’s Stock is listed (the “Primary Stock Exchange”) is closed, then the expiration date and time for the Option shall be the closing time of the regular market hours for the Primary Stock Exchange on the last date prior to the expiration date that the Primary Stock Exchange is open.

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(c)Exercisability.  An Option may be immediately exercisable or become exercisable in such installments, cumulative or non-cumulative, as the Committee may determine.  In the case of an Option not otherwise immediately exercisable in full, the Committee may Accelerate such Option in whole or in part at any time; provided, however, that in the case of an Incentive Option, any such Acceleration of the Option would not cause the Option to fail to comply with the provisions of Section 422 of the Code or the Optionee consents to the Acceleration.

(d)Method of Exercise.  An Option may be exercised by the Optionee giving written notice, in the manner provided in Section 15.2, specifying the number of shares of Stock with respect to which the Option is then being exercised.  The notice shall be accompanied by payment in the form of cash or check payable to the order of the Company in an amount equal to the exercise price of the shares of Stock to be purchased or, subject in each instance to the Committee’s prior approval, acting in its sole discretion, and to such conditions, if any, as the Committee may deem necessary to avoid adverse accounting effects to the Company,

(i) by delivery to the Company of shares of Stock having a Market Value equal to the exercise price of the shares to be purchased, or

(ii) by surrender of the Option as to all or part of the shares of Stock for which the Option is then exercisable in exchange for shares of Stock having an aggregate Market Value equal to the difference between (1) the aggregate Market Value of the surrendered portion of the Option, and (2) the aggregate exercise price under the Option for the surrendered portion of the Option, or

(iii) if the Stock is traded on an established market, payment through and under the terms and conditions of a formal cashless exercise program, if any, authorized by the Company entailing the sale of the Stock subject to an Option in a brokered transaction (other than to the Company).

Receipt by the Company or its designated broker of such notice and payment in any authorized or combination of authorized means shall constitute the exercise of the Option.  Within thirty (30) days thereafter but subject to the remaining provisions of the Plan, the Company shall deliver or cause to be delivered to the Optionee or his agent a certificate or certificates for the number of shares then being purchased, or shall cause its transfer agent to register such shares in book entry form in the name of the Optionee.  Such shares of Stock shall be fully paid and nonassessable.

(e)Limit on Incentive Option Characterization.  An Incentive Option shall be considered to be an Incentive Option only to the extent that the number of shares of Stock for which the Option first becomes exercisable in a calendar year do not have an aggregate Market Value (as of the date of the grant of the Option) in excess of the “current limit”.  The current limit for any Optionee for any calendar year shall be $100,000 minus the aggregate Market Value at the date of grant of the number of shares of Stock available for purchase for the first time in the same year under each other Incentive Option previously granted to the Optionee under the Plan, and under each other incentive stock option previously granted to the Optionee under any other incentive stock option plan of the Company and its Affiliates, after December 31, 1986.  Any shares of Stock which would cause the foregoing limit to be violated shall be deemed to have

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been granted under a separate Nonstatutory Option, otherwise identical in its terms to those of the Incentive Option.

(f)Notification of Disposition.  Each person exercising any Incentive Option granted under the Plan shall be deemed to have covenanted with the Company to report to the Company any disposition of the shares of Stock issued upon such exercise prior to the expiration of the holding periods specified by Section 422(a)(1) of the Code and, if and to the extent that the realization of income in such a disposition imposes upon the Company federal, state, local or other withholding tax requirements, or any such withholding is required to secure for the Company an otherwise available tax deduction, to remit to the Company an amount in cash sufficient to satisfy those requirements.

7.2.Stock Appreciation Rights.

(a)Tandem or Stand-Alone.  Stock Appreciation Rights may be granted in tandem with an Option (at or, in the case of a Nonstatutory Option, after the award of the Option), or alone and unrelated to an Option.  Stock Appreciation Rights in tandem with an Option shall terminate to the extent that the related Option is exercised, and the related Option shall terminate to the extent that the tandem Stock Appreciation Rights are exercised.

(b)Exercise Price.  Stock Appreciation Rights shall have an exercise price of not less than 100% of the Market Value of the Stock on the Grant Date, or in the case of Stock Appreciation Rights awarded in tandem with Options, the exercise price of the related Option.

(c)Period.  No Stock Appreciation Right may be exercised on or after the earlier of (i) the tenth anniversary of the Grant Date, (ii) the date set forth in the Award Agreement, or (iii) in the case of Stock Appreciation Rights awarded in tandem with Options, the expiration date of the related Option.  In the event that the last date to exercise a Stock Appreciation Right, whether issued alone or in tandem with an Option, by its terms falls on a date when the Primary Stock Exchange is closed, then the expiration date and time for the Stock Appreciation Right shall be the closing time of the regular market hours for the Primary Stock Exchange on the last date prior to the expiration date that the Primary Stock Exchange is open.

(d)Other Terms.  Except as the Committee may deem inappropriate or inapplicable in the circumstances, Stock Appreciation Rights shall be subject to terms and conditions substantially similar to those applicable to a Nonstatutory Option.

7.3.Restricted Stock.

(a)Purchase Price.  Shares of Restricted Stock shall be issued under the Plan for such consideration, in cash, other property or services, or any combination thereof, as is determined by the Committee.

(b)Issuance of Shares.  Each Participant receiving a Restricted Stock Award, subject to subsection (c) below, shall be issued, in the Company’s discretion, in either certificate or book entry form, the shares of Restricted Stock underlying such Award.  Such shares shall be registered in the name of such Participant, and, if applicable, shall bear an appropriate legend or a notation on the records of the Company’s transfer agent referring to the terms, conditions, and restrictions applicable to such Award

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(c)Escrow of Shares.  The Committee may require that the stock certificates evidencing shares (if any) of Restricted Stock be held in custody by a designated escrow agent (which may but need not be the Company) until the restrictions thereon shall have lapsed, and that the Participant deliver a stock power, endorsed in blank, relating to the Stock underlying such Award.

(d)Restrictions and Restriction Period.  During the Restriction Period applicable to shares of Restricted Stock, such shares shall be subject to limitations on transferability and a Risk of Forfeiture arising on the basis of such conditions related to the performance of services, Company or Affiliate performance or otherwise as the Committee may determine and provide for in the applicable Award Agreement.  Any such Risk of Forfeiture may be waived or terminated, or the Restriction Period shortened, at any time by the Committee on such basis as it deems appropriate.

(e)Rights Pending Lapse of Risk of Forfeiture or Forfeiture of Award.  Except as otherwise provided in the Plan or the applicable Award Agreement, at all times prior to the lapse of any Risk of Forfeiture applicable to, or forfeiture of, an Award of Restricted Stock, the Participant shall have all of the rights of a stockholder of the Company, including the right to vote and the right to receive any dividends with respect to the shares of Restricted Stock (but any dividends or other distributions payable in shares of Stock or other securities of the Company shall constitute additional Restricted Stock, subject to the same Risk of Forfeiture as the shares of Restricted Stock in respect of which such shares of Stock or other securities are paid), provided, however that with respect to Awards that vest or have a Risk of Forfeiture that lapses based on achievement of pre-established performance goals, any dividends otherwise payable during the Restriction Period shall be paid only if, as, and to the extent the Award vests or the Risk of Forfeiture lapses.  Unless the Committee shall have provided otherwise, any such dividend shall be paid, if at all, without interest or other earnings.

(f)Lapse of Restrictions.  If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock, the Risk of Forfeiture shall be removed from the shares of Stock underlying the Award of Restricted Stock and the shares of Stock shall be delivered to the Participant promptly if not theretofore so delivered.

7.4.Restricted Stock Units.

(a)Character.  Each Restricted Stock Unit shall entitle the recipient to such shares of Stock at a close of such Restriction Period as the Committee may establish and subject to a Risk of Forfeiture arising on the basis of such conditions relating to the performance of services, Company or Affiliate performance or otherwise as the Committee may determine and provide for in the applicable Award Agreement.  Any such Risk of Forfeiture may be waived or terminated, or the Restriction Period shortened, at any time by the Committee on such basis as it deems appropriate.

(b)Form and Timing of Payment.  Settlement of earned Restricted Stock Units shall be made in a single lump sum following the close of the applicable Restriction Period.  At the discretion of the Committee, Participants may be entitled to receive payments equivalent to any dividends declared with respect to Stock underlying the Awards of Restricted Stock Units but only following the close of the applicable Restriction Period and then only if the underlying Stock shall have been earned.  Unless the Committee shall provide otherwise, any such dividend equivalents shall be paid, if at all, without interest or other earnings.

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7.5.Performance Units.

(a)Character. Each Performance Unit shall entitle the recipient to the value of a specified number of shares of Stock, over the initial value for such number of shares, if any, established by the Committee as of the Grant Date, at the close of a specified Performance Period to the extent specified business objectives, including but not limited to Performance Goals, shall have been achieved.

(b)Earning of Performance Units. The Committee shall set Performance Goals or other business objectives in its discretion which, depending on the extent to which they are met within the applicable Performance Period, will determine the number of shares of Stock underlying the Performance Units that the increase of value of which will be paid out to the Participant after the applicable Performance Period has ended.

(c)Form and Timing of Payment.  Payment of the value of earned Performance Units shall be made in a single lump sum following the close of the applicable Performance Period.  At the discretion of the Committee, Participants may be entitled to receive any dividends declared with respect to Stock which has been earned in connection with grants of Performance Units which have been earned, but not yet distributed to Participants.  The Committee may permit or, if it so provided as of the Grant Date, require a Participant to defer such Participant’s receipt of the payment of cash or the delivery of Stock that would otherwise be due to such Participant by virtue of the satisfaction of any requirements or goals with respect to Performance Units, to the extent consistent with Section 409A of the Code, if applicable.  If any such deferral election is required or permitted, the Committee shall establish rules and procedures for such payment deferrals.

7.6.Stock Grants. Stock Grants shall be awarded solely in recognition of significant prior or expected contributions to the success of the Company or its Affiliates, as an inducement to employment, in lieu of compensation otherwise already due and in such other limited circumstances as the Committee deems appropriate.  Stock Grants shall be made without forfeiture conditions of any kind.  A Stock Grant shall be issued in exchange for such consideration as the Committee shall deem satisfactory pursuant to the Delaware General Corporation Law.

7.7.Qualified Performance-Based Awards.

(a)Purpose.  The purpose of this Section 7.7 is to provide the Committee the ability to qualify Awards as “performance-based compensation” under Section 162(m) of the Code.  If the Committee, in its discretion, decides to grant an Award as a Qualified Performance-Based Award, the provisions of this Section 7.7 will control over any contrary provision contained in the Plan.  In the course of granting any Award, the Committee may specifically designate the Award as intended to qualify as a Qualified Performance-Based Award.  However, no Award shall be considered to have failed to qualify as a Qualified Performance-Based Award solely because the Award is not expressly designated as a Qualified Performance-Based Award, if the Award otherwise satisfies the provisions of this Section 7.7 and the requirements of Section 162(m) of the Code and the regulations promulgated thereunder applicable to “performance-based compensation.”

(b)Authority.  All grants of Awards intended to qualify as Qualified Performance-Based Awards and determination of terms applicable thereto shall be made by the

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Committee or, if not all of the members thereof qualify as “outside directors” within the meaning of applicable IRS regulations under Section 162 of the Code, a subcommittee of the Committee consisting of such of the members of the Committee as do so qualify.  Any action by such a subcommittee shall be considered the action of the Committee for purposes of the Plan.

(c)Applicability.  This Section 7.7 will apply only to those Covered Employees, or to those persons who the Committee determines are reasonably likely to become Covered Employees in the period covered by an Award, selected by the Committee to receive Qualified Performance-Based Awards.  The Committee may, in its discretion, grant Awards to Covered Employees that do not satisfy the requirements of this Section 7.7.

(d)Discretion of Committee with Respect to Qualified Performance-Based Awards.  Options may be granted as Qualified Performance-Based Awards in accordance with Section 7.1, except that the exercise price of any Option intended to qualify as a Qualified Performance-Based Award shall in no event be less that the Market Value of the Stock on the Grant Date.  Each Award intended to qualify as a Qualified Performance-Based Award, such as Restricted Stock, Restricted Stock Units, or Performance Units, shall be subject to satisfaction of one or more Performance Goals.  The Committee will have full discretion to select the length of any applicable Restriction Period or Performance Period, the kind and/or level of the applicable Performance Goal, and whether the Performance Goal is to apply to the Company, a subsidiary of the Company or any division or business unit or to the individual.  Any Performance Goal or Goals applicable to Qualified Performance-Based Awards shall be objective, shall be established not later than ninety (90) days after the beginning of any applicable Performance Period (or at such other date as may be required or permitted for “performance-based compensation” under Section 162(m) of the Code) and shall otherwise meet the requirements of Section 162(m) of the Code, including the requirement that the outcome of the Performance Goal or Goals be substantially uncertain (as defined in the regulations under Section 162(m) of the Code) at the time established.

(e)Payment of Qualified Performance-Based Awards.  A Participant will be eligible to receive payment under a Qualified Performance-Based Award which is subject to achievement of a Performance Goal or Goals only if the applicable Performance Goal or Goals are achieved within the applicable Performance Period, as determined by the Committee.  In determining the actual size of an individual Qualified Performance-Based Award, the Committee may reduce or eliminate the amount of the Qualified Performance-Based Award earned for the Performance Period if the Committee determines, in its sole and absolute discretion, that such reduction or elimination is appropriate.

(f)Maximum Award Payable.  The maximum Qualified Performance-Based Award payment to any one Participant under the Plan for a Performance Period is the number of shares of Stock set forth in the last sentence of Section 6.1, or if the Qualified Performance-Based Award is paid in cash, that number of shares multiplied by the Market Value of the Stock as of the Grant Date of the Qualified Performance-Based Award.

(g)Limitation on Adjustments for Certain Events.  No adjustment of any Qualified Performance-Based Award pursuant to Section 8 shall be made except on such basis, if any, as will not cause such Award to provide other than “performance-based compensation” within the meaning of Section 162(m) of the Code.

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7.8.Awards to Participants Outside the United States.  The Committee may modify the terms of any Award under the Plan granted to a Participant who is, as of the Grant Date or during the term of the Award, resident or primarily employed outside of the United States in any manner deemed by the Committee to be necessary or appropriate in order that the Award shall conform to laws, regulations, and customs of the country in which the Participant is then resident or primarily employed or so that the value and other benefits of the Award to the Participant, as affected by foreign tax laws and other restrictions applicable as a result of the Participant’s residence or employment abroad, shall be comparable to the value that such an Award would have to a Participant who is resident or primarily employed in the United States.  The Committee may establish supplements to, or amendments, restatements, or alternative versions of the Plan for the purpose of granting and administrating any such modified Award.  No such modification, supplement, amendment, restatement or alternative version may increase the share limit of Section 4.

8.Adjustment Provisions

8.1.Adjustment for Corporate Actions. All of the share numbers set forth in the Plan reflect the capital structure of the Company as of March 24, 2010.  If subsequent to that date the outstanding shares of Stock (or any other securities covered by the Plan by reason of the prior application of this Section) are increased, decreased, or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are distributed with respect to shares of Stock, as a result of a reorganization, recapitalization, reclassification, extraordinary dividend of cash or other property, stock dividend, stock split, reverse stock split, or other similar distribution with respect to such shares of Stock, an appropriate and proportionate adjustment will be made in (i) the maximum numbers and kinds of shares of Stock provided in Section 4, (ii) the numbers and kinds of shares of Stock or other securities underlying the then outstanding Awards, (iii) the exercise price for each share or other unit of any other securities subject to then outstanding Options and Stock Appreciation Rights (without change in the aggregate purchase price for the shares of Stock as to which such Options or Stock Appreciation Rights remain exercisable), and (iv) the repurchase price of each share of Restricted Stock then subject to a Risk of Forfeiture in the form of a Company repurchase right.

8.2.Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. In the event of any corporate action not specifically covered by the preceding Section, including but not limited to an extraordinary cash distribution on Stock, a corporate separation or other reorganization or liquidation, the Committee may make such adjustment of outstanding Awards and their terms, if any, as it, in its sole discretion, may deem equitable and appropriate in the circumstances.  The Committee shall make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in this Section) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.

8.3.Related Matters.  Any adjustment in Awards made pursuant to Sections 8.1 or 8.2  shall be determined and made, if at all, by the Committee, acting in its sole discretion, and shall include any correlative modification of terms, including of Option exercise prices, rates of vesting or exercisability, Risks of Forfeiture, applicable repurchase prices for Restricted Stock, and Performance Goals and other financial objectives which the Committee may deem necessary or

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appropriate so as to ensure the rights of the Participants in their respective Awards are not substantially diminished nor enlarged as a result of the adjustment and corporate action other than as expressly contemplated in this Section 8.  The Committee, in its discretion, may determine that no fraction of a share of Stock shall be purchasable or deliverable upon exercise, and in that event if any adjustment hereunder of the number of shares of Stock underlying an Award would cause such number to include a fraction of a share of Stock, such number of shares of Stock shall be adjusted to the nearest smaller whole number of shares. No adjustment of an Option exercise price per share pursuant to Sections 8.1 or 8.2 shall result in an exercise price which is less than the par value of the Stock.

8.4.Change of Control.  Subject to any provisions of then outstanding Awards granting greater rights to the holders thereof, in the event of a Change of Control any then outstanding Awards shall Accelerate in full.  For the purposes of the preceding sentence (i) in the case of a Change of Control that is not a Hostile Change of Control, the Board (and not the Committee, notwithstanding the responsibilities assigned to the Committee pursuant to Section 5) shall have the discretion to exclude any such Change of Control from the application of the provisions of the immediately preceding sentence, and (ii) in the case of a Hostile Change of Control, a majority of the Incumbent Directors shall have the discretion to exclude any such Change of Control from the application of the provisions of the immediately preceding sentence.  To the extent Awards are not assumed, substituted or replaced upon a Change of Control that is not a Hostile Change of Control, the Board (and not the Committee, notwithstanding the responsibilities assigned to the Committee pursuant to Section 5) shall have the discretion to terminate such outstanding Awards to the extent not exercised prior to or simultaneously with such Change of Control and to terminate such other outstanding Awards to the extent not vested prior to or simultaneously with such Change of Control.  Upon a Change of Control, each outstanding Award will be appropriately adjusted simultaneously with such Change of Control in accordance with Section 8.1.

9.Settlement of Awards

9.1.In General.  Options and Restricted Stock shall be settled in accordance with the terms of the applicable Award Agreement.  All other Awards may be settled in cash, Stock, or other Awards, or a combination thereof, as determined by the Committee at or after grant and subject to any contrary Award Agreement.  The Committee may not require settlement of any Award in Stock pursuant to the immediately preceding sentence to the extent issuance of such Stock would be prohibited or unreasonably delayed by reason of any other provision of the Plan.

9.2.Violation of Law.  Notwithstanding any other provision of the Plan or the relevant Award Agreement, if, at any time, in the reasonable opinion of the Company, the issuance of shares of Stock underlying an Award may constitute a violation of law, then the Company may delay such issuance and the delivery of a certificate for such shares until (i) approval of the Award shall have been obtained from such governmental agencies, other than the Securities and Exchange Commission, as may be required under any applicable law, rule, or regulation and (ii) in the case where such issuance would constitute a violation of a law administered by or a regulation of the Securities and Exchange Commission, one of the following conditions shall have been satisfied:

(a)the shares of Stock are at the time of the issue of such shares effectively registered under the Securities Act of 1933, as amended; or

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(b)the Company shall have determined, on such basis as it deems appropriate (including an opinion of counsel in form and substance satisfactory to the Company) that the sale, transfer, assignment, pledge, encumbrance or other disposition of such shares does not require registration under the Securities Act of 1933, as amended, or any applicable state securities laws.

9.3.Corporate Restrictions on Rights in Stock. Any Stock to be issued pursuant to Awards granted under the Plan shall be subject to all restrictions upon the transfer thereof which may be now or hereafter imposed by the charter, certificate or articles, and by-laws, of the Company.

9.4.Investment Representations.  The Company shall be under no obligation to issue any shares of Stock underlying any Award unless the shares to be issued pursuant to Awards granted under the Plan have been effectively registered under the Securities Act of 1933, as amended, or the Participant shall have made such written representations to the Company (upon which the Company believes it may reasonably rely) as the Company may deem necessary or appropriate for purposes of confirming that the issuance of such shares will be exempt from the registration requirements of that Act and any applicable state securities laws and otherwise in compliance with all applicable laws, rules and regulations, including but not limited to that the Participant is acquiring the shares for his or her own account for the purpose of investment and not with a view to, or for sale in connection with, the distribution of any such shares.

9.5.Registration.  If the Company shall deem it necessary or desirable to register under the Securities Act of 1933, as amended, or other applicable statutes any shares of Stock issued or to be issued pursuant to Awards granted under the Plan, or to qualify any such shares of Stock for exemption from the Securities Act of 1933, as amended or other applicable statutes, then the Company shall take such action at its own expense.  The Company may require from each recipient of an Award, or each holder of shares of Stock acquired pursuant to the Plan, such information in writing for use in any registration statement, prospectus, preliminary prospectus or offering circular as is reasonably necessary for that purpose and may require reasonable indemnity to the Company and its Officers and directors from that holder against all losses, claims, damage and liabilities arising from use of the information so furnished and caused by any untrue statement of any material fact therein or caused by the omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made.  In addition, the Company may require of any such person that he or she agree that, without the prior written consent of the Company or the managing underwriter in any public offering of shares of Stock, he or she will not sell, make any short sale of, loan, grant any option for the purchase of, pledge or otherwise encumber, or otherwise dispose of, any shares of Stock during the one hundred eighty (180) day period commencing on the effective date of the registration statement relating to the underwritten public offering of securities. Without limiting the generality of the foregoing provisions of this Section 9.5, if in connection with any underwritten public offering of securities of the Company the managing underwriter of such offering requires that the Company’s directors and Officers enter into a lock-up agreement containing provisions that are more restrictive than the provisions set forth in the preceding sentence, then (a) each holder of shares of Stock acquired pursuant to the Plan (regardless of whether such person has complied or complies with the provisions of clause (b) below) shall be bound by, and shall be deemed to have agreed to, the same lock-up terms as those to which the Company’s directors and Officers are required to adhere; and (b) at the request of the Company or such managing underwriter, each such person shall execute and deliver a lock-

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up agreement in form and substance equivalent to that which is required to be executed by the Company’s directors and Officers.

9.6.Placement of Legends; Stop Orders; etc.  Each share of Stock to be issued pursuant to Awards granted under the Plan may bear a reference to the investment representation made in accordance with Section 9.4 in addition to any other applicable restriction under the Plan, and the terms of the Award, and to the fact that no registration statement has been filed with the Securities and Exchange Commission in respect to such shares of Stock.  All shares of Stock or other securities delivered under the Plan (in book entry form or otherwise) shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of any stock exchange upon which the Stock is then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates or a notation to be on the books of the Company’s transfer agent to make appropriate reference to such restrictions.

9.7.Tax Withholding. Whenever shares of Stock are issued or to be issued pursuant to Awards granted under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy federal, state, local or other withholding tax requirements if, when, and to the extent required by law (whether so required to secure for the Company an otherwise available tax deduction or otherwise) prior to the delivery of any such shares.  The obligations of the Company under the Plan shall be conditional on satisfaction of all such withholding obligations and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the recipient of an Award.  However, in such cases Participants may elect, subject to the approval of the Committee, acting in its sole discretion, to satisfy an applicable withholding requirement, in whole or in part, by having the Company withhold shares of Stock to satisfy their tax obligations.  Participants may only elect to have shares of Stock withheld having a Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction.  All elections shall be irrevocable, made in writing, signed by the Participant, and shall be subject to any restrictions or limitations that the Committee deems appropriate.

10.Limitation of Rights in Stock; No Special Service Rights

A Participant shall not be deemed for any purpose to be a stockholder of the Company with respect to any of the shares of Stock subject to an Award, unless and until a certificate shall have been issued therefor and delivered to the Participant or his agent, or such shares shall have been registered in the Participant’s name in book entry form by the Company’s transfer agent (including for these purposes shares of Stock held for the benefit of the Participant by an escrow agent).  Nothing contained in the Plan or in any Award Agreement shall confer upon any recipient of an Award any right with respect to the continuation of his or her employment or other association with the Company (or any Affiliate), or interfere in any way with the right of the Company (or any Affiliate), subject to the terms of any separate employment or consulting agreement or provision of law or corporate articles or by-laws to the contrary, at any time to terminate such employment or consulting agreement or to increase or decrease, or otherwise adjust, the other terms and conditions of the recipient’s employment or other association with the Company and its Affiliates.

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11.Unfunded Status of Plan and Section 409A

The Plan is intended to constitute an “unfunded” plan for incentive compensation, and the Plan is not intended to constitute a plan subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended.  With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company.  In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments with respect to Options, Stock Appreciation Rights and other Awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan.

This Plan and Awards granted hereunder are intended to either comply with, or be exempt from, Section 409A of the Code.  Notwithstanding anything to the contrary contained in this Plan or in any Award agreement, to the extent that the Committee determines that the Plan or any Award is subject to Section 409A of the Code and fails to comply with the requirements of Section 409A, the Committee reserves the right to amend or terminate the Plan and/or amend, restructure, terminate or replace the Award in order to cause the Award to either not be subject to Section 409A of the Code or to comply with the applicable provisions of such section.  Notwithstanding any provision of this Plan to the contrary, in no event shall the Company or any Affiliate be liable to a Participant on account of an Award’s failure to (i) qualify for favorable federal, state or other tax treatment; or (ii) avoid adverse tax treatment under federal, state or other law, including, without limitation, Section 409A of the Code.

12.Nonexclusivity of the Plan

Neither the adoption of the Plan by the Board nor the submission of the Plan to the stockholders of the Company shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including without limitation, the granting of stock options, restricted stock and other forms of equity-based compensation other than under the Plan, and such arrangements may be either applicable generally or only in specific cases.

13.Termination and Amendment of the Plan

13.1.Termination or Amendment of the Plan. The Board may at any time terminate the Plan or make such modifications of the Plan as it shall deem advisable.  Unless the Board otherwise expressly provides, no amendment of the Plan shall affect the terms of any Award outstanding on the date of such amendment.

13.2.Termination or Amendment of Outstanding Awards. The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, provided that the Award as amended is consistent with the terms of the Plan.  Also within the limitations of the Plan, the Committee may modify, extend or assume outstanding Awards or may accept the cancellation of outstanding Awards or of outstanding stock options or other equity-based compensation awards granted by another issuer in return for the grant of new Awards for the same or a different number of shares of Stock and on the same or different terms and conditions (including but not limited to the exercise price of any Option).  Furthermore, subject to the terms of this Plan, the Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Award previously granted, or (b) authorize the recipient of an Award to elect to

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cash out an Award previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish.

13.3.Limitations on Amendments, Etc. The Board may not amend the Plan to (i) materially increase the benefits accruing to Participants under the Plan, (ii) increase the number of shares of Stock which may be issued under the Plan, except as necessary to carry out the provisions of Section 8 (concerning certain adjustments attributable to corporate actions and other events), (iii) change the description of the persons eligible for Awards under the Plan, or (iv) effect any other change for which shareholder approval is required by law or the rules of any relevant stock exchanges, without shareholder approval.  Neither the Board nor the Committee may reprice any outstanding Award, whether by amendment, by cancellation and regrant, or by reacquiring any outstanding Award in consideration of the grant of a new Award or the payment of other compensation without shareholder approval.  For this purpose, the term “reprice” shall mean any of the following or any other action that has the same effect:  (a) to lower the exercise price of an Option after it is granted, (b) to buy out an outstanding Option at a time when its exercise price exceeds the Fair Market Value of the Stock for cash or shares, (c) to take any other action that is treated as a repricing under generally accepted accounting principles, or (d) to cancel an Option at a time when its exercise price exceeds the Fair Market Value of the Stock in exchange for another Option, or any other Award or Company equity, unless such cancellation and exchange occurs in connection with a Change of Control.  Notwithstanding the foregoing, no amendment or modification of the Plan by the Board or of an outstanding Award by the Committee shall, without the consent of any Participant with an Award outstanding on the date of such amendment or modification of such Award, (1) reduce the number of shares of Stock subject to such Award, (2) increase the exercise price or the purchase price, as the case may be, of such Award, (3) change the vesting schedule or the Risk of Forfeiture, as the case may be, of such Award in a manner that adversely affects the rights of the Participant, or (4) otherwise impair the rights of the Participant; provided, however, that no such consent shall be required if (A) the Board or Committee, as the case may be, determines in its sole discretion and prior to the date of any Change of Control that such amendment or alteration either is required or advisable in order for the Company, the Plan or the Award to satisfy any law or regulation, including without limitation the provisions of Section 409A of the Code, or to meet the requirements of or avoid adverse financial accounting consequences under any accounting standard, or (B) the Board or Committee, as the case may be, determines in its sole discretion and prior to the date of any Change of Control that such amendment or alteration is not reasonably likely to significantly diminish the benefits provided under the Award, or that any such diminution has been adequately compensated.

14.Corporate Articles and Bylaws; Other Company Policies.

This Plan and all Awards granted hereunder are subject to the corporate articles and by-laws of the Company, as they may be amended from time to time, and all other Company policies duly adopted by the Board, the Committee or any other committee of the Board and as in effect from time to time regarding the acquisition, ownership or sale of Stock by employees and other service providers, including without limitation policies intended to limit the potential for insider trading and to avoid or recover compensation payable or paid on the basis of inaccurate financial results or statements, employee conduct, and other similar events.

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15.Notices and Other Communications

15.1Notices and Other Communications (other than notices to the Company under Section 7.1(d) and in connection with the exercise of Stock Appreciation Rights).  Any notice, demand, request or other communication hereunder to any party shall be in such form as the Company may determine from time to time, and if required in writing, shall be deemed to be sufficient if contained in a written instrument delivered in person or duly sent by first class registered, certified or overnight mail, postage prepaid, or sent by facsimile or electronic mail transmission with a confirmation copy by regular, certified or overnight mail, addressed or facsimilied, as the case may be, (i) if to a Participant, at his or her residence or electronic mail address or facsimile number last filed with the Company, and (ii) if to the Company, except for written notices required to be delivered under Section 7.1(d) and in connection with the exercise of Stock Appreciation Rights, at its principal place of business, addressed to the attention of its Secretary, or to such other addressee, address, electronic mail address or facsimile number, as the case may be, as the Company may have designated by notice in accordance with this Section 15.1.  All such notices, requests, demands and other communications shall be deemed to have been received: (i) in the case of personal delivery, on the date of such delivery; (ii) in the case of mailing, when received by the addressee; and (iii) in the case of facsimile transmission, when confirmed by facsimile machine report.

15.2Notices to the Company under Section 7.1(d) and in connection with the exercise of Stock Appreciation Rights.  Unless otherwise determined by the Company, notices required under Section 7.1(d) and in connection with the exercise of Stock Appreciation Rights shall be sent to the third party broker designated by the Company to administer the Company’s equity incentive programs (as of the initial effective date of the Plan, Merrill Lynch).  Notices shall be sent to the Company’s designated broker in such manner as the broker may designate in any communications or notifications sent to Participants by mail or electronic mail and/or as set forth on the Company-dedicated website provided and maintained by the Company’s designated broker.

16.Governing Law

The Plan, all Awards and all Award Agreements and actions taken thereunder shall be governed, interpreted and enforced in accordance with the laws of the State of Delaware, without regard to the conflict of laws principles thereof.

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EX-10.4

Exhibit 10.4

STRICTLY CONFIDENTIAL

June 15, 2010

Lindon Fellows

c/o Cubist Pharmaceuticals, Inc.

65 Hayden Avenue

Lexington, MA 02421

Re:Separation Agreement and Release

Dear Lindon:

As we have discussed, your employment with Cubist Pharmaceuticals, Inc. (alternatively, “Cubist” or the “Company”) will end on June 18, 2010 (the “Departure Date”).

1.Effect of Departure.  On your Departure Date, you will be paid all wages and other compensation due, including payment for all accrued but unused vacation, through the Departure Date. Except as set forth below, your participation in all of the Company’s employee benefit plans will end as of your Departure Date, in accordance with the terms of those plans.

2.Severance Pay and Other Benefits

(a)In accordance with your Retention Letter dated as of October 9, 2007, and upon the effective date of this Separation Agreement and Release (this “Agreement”) following the seven (7) day revocation date specified below, the Company will provide you with severance pay in the amount of eighteen (18) months’ salary (“Separation Pay”). As set forth in your Retention Letter, the Separation Pay will be payable in accordance with our normal payroll cycles in twelve (12) equal semi-monthly installments. You will not be able to make any salary deferrals for contribution to the Cubist 401(k) plan from the Separation Pay.

(b)The “qualifying event” under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) shall be deemed to have occurred on the Departure Date. As also set forth in your Retention Letter, upon

completion of the appropriate COBRA election forms, and subject to all the requirements of COBRA, for the eighteen (18) month period following the Departure Date (the “Continuation Period”) you will remain eligible to participate in the Company’s health and dental insurance plans under the same terms and conditions applicable to active, full-time employees.  During the Continuation Period, you will be responsible for paying the portion of the premiums required for active, full-time employees.  Your portion of the premiums will be paid to the Company via payroll during the period in which you are receiving Severance Pay and by you by personal check to the Company during the period of the Continuation Period in which you are not receiving Severance Pay.  After the Continuation Period, you will have the right to continue your medical and dental insurance, subject to the requirements of COBRA, at your own cost (as described in the COBRA qualifying notice to be provided to you under separate cover).

(c)Cubist will provide you with a six (6)-month “Career Transition” program offered by Clear Rock to begin on a mutually agreeable date.

(d)Pursuant to the Company’s Amended and Restated 2000 Equity Incentive Plan (the “2000 Plan”) and equity incentive award notices that you have received, vesting of any options granted to you during your employment with the Company will cease as of the Departure Date.  In accordance with the discretion afforded the Compensation Committee of Cubist’s Board of Directors (the “Compensation Committee) in the 2000 Plan, the Compensation Committee has elected to extend the period during which you can exercise the vested portion of any stock options that was exercisable on the Departure Date from 90 days after the Departure Date to November 30, 2011.  Except as specifically set forth in the immediately preceding sentence, all of your stock options and other equity incentive awards will continue to be governed by the 2000 Plan and equity incentive award notices between you and the Company.

(e)All payments set forth in this Section 2 shall be subject to all applicable federal, state and/or local withholding and/or payroll taxes, and Cubist may withhold from any amounts payable to you (including any amounts payable pursuant to this Agreement) in order to comply with such withholding obligations. You further authorize Cubist to deduct any health insurance premiums that you are required to pay under Section 2(b) from your Severance Pay and to otherwise offset any amounts owed by you to Cubist.

3.Reference Requests.  Cubist will respond to any reference requests from potential employers by having a member of the Human Resources department provide the dates that you worked at Cubist only.  You agree to inform any potential employers seeking references that all such requests should be directed to the Human Resources Department.

4.Accord and Satisfaction.  You agree that the Separation Pay and other benefits described in this Agreement shall be in full and complete payment and satisfaction of any and all monetary sums and other obligations which are now, or might hereafter have become, owing to you for services rendered by you during your employment or in connection with your termination of employment including, without limitation, all claims for back wages, salary, commissions, vacation pay, sick

pay, draws, incentive pay, bonuses, commissions, intellectual property rights, equity incentives, stock options, severance pay, any and all other forms of compensation or benefits, attorney’s fees, or other costs or sums of any kind or nature.  You agree that your separation from the Company is final and that the Company has no obligation to consider you for rehire or reinstatement.

5.Your Continuing Obligations

(a)You acknowledge you have had access to information concerning the Company, its clients and its affiliates, which is confidential or proprietary in nature (the “Confidential Information”).  You hereby acknowledge and agree that you will continue to protect the Confidential Information in accordance with the provisions of the employee confidentiality agreement that you signed when you commenced employment with the Company (the “Employee Confidentiality Agreement”).  By executing this Agreement, you reaffirm all of your obligations under the Employee Confidentiality Agreement, including, without limitation, those obligations and restrictive covenants that relate to Confidential Information, inventions and non-solicitation, except to the extent that there is a conflict between the provisions of this Section 5 and the Employee Agreement, in which case the provisions of this Section 5 shall prevail.

(b)You further agree you will not, without the prior written consent of the Company’s General Counsel, directly or indirectly, either as principal, partner, stockholder, officer, director, member, employee, consultant, business or scientific advisory board member, agent, representative or in any other capacity, own, manage, operate or control, or be engaged by, employed by, or otherwise associated with, or have a financial interest in, (i) ACS Dopfar S.p.A. or any of its direct or indirect affiliates or subsidiaries, (ii) Teva Pharmaceuticals Industries, Ltd. or any of its direct or indirect affiliates or subsidiaries, including without limitation Teva Parenteral Medicines, Inc. and Teva Pharmaceuticals USA, Inc. or any agents, advisors or consultants to any of such entities, including without limitation any organizations or entities that are manufacturing daptomycin in connection with any Abbreviated New Drug Application (“ANDA”) filed with the U.S. Food and Drug Administration (“FDA”) by Teva Parenteral Medicines, Inc., or, (ii) until such time as a generic daptomycin has been approved by the FDA and such approval is not being contested by the Company or its affiliates in any manner, any other company or organization, or their affiliates or subsidiaries, that has filed or is contemplating filing an ANDA with the FDA or taking any other legal or regulatory action with respect to daptomycin and/or is manufacturing daptomycin in connection with any such ANDA or other legal or regulatory action on behalf of any such company or organization or any agents, advisors or consultants to any organization or entity covered by this Subsection (iii).

(c)You further agree that for a period of eighteen (18) months following the Departure Date you will not, without the prior written consent of the Company’s General Counsel, directly or indirectly, either as principal, partner, stockholder, officer, director, member, employee, consultant, business or scientific advisory board member, agent, representative or in any other capacity, own, manage, operate or control, or be engaged by, employed by, or otherwise associated with, or have a

financial interest in, any business which engages directly or indirectly in the research, development, manufacture, distribution, license and commercialization of antiinfective drugs that are or would be competitive with daptomycin or other drugs under development by Cubist anywhere in the United States or in any other country where the Company conducts business.

(d)You further agree that for a period of eighteen (18) months following the Departure Date you will not solicit, or provide any information, advice or recommendation or take any other action intended (or that a reasonable person acting in like circumstances would expect) to have the effect of causing any customer of the Cubist to terminate an existing business or commercial relationship with Cubist.

(e)You further agree that for a period of eighteen (18) months following the Departure Date you will not directly or indirectly, alone or as a consultant, partner, officer, director, employee, joint venturer, lender or stockholder of any entity, recruit or solicit for hire any Cubist employee, agent, representative or consultant, or any such person who has terminated his/her relationship with the Company within six months of your departure from the Company.

6.Confidentiality of Agreement.  You further agree that the terms and existence of this Agreement shall remain strictly confidential except to the extent required to obtain legal or accounting advice or to comply with legal obligations, provided if you believe you are legally required to disclose the existence or any contents of this Agreement, you shall provide the Company’s General Counsel with at least ten (10) business days’ advance written notice before making any disclosure and, if the Company desires to take action to object to the disclosure of the existence or contents of this Agreement, to cooperate with the Company in such efforts.

7.Non-Disparagement.  You agree that you will not disparage the Company or any of the people or organizations associated with it and that you will not otherwise do or say anything that would harm its business or reputation.

8.Return of Documents.  In signing this Agreement, you agree that you will return to the Company any and all documents, materials and information related to the business (including all electronic versions), whether present or otherwise, of the Company and its affiliates, and all copies, and all keys, credit cards, computers, phones, handheld devices and other tangible property of the Company and its affiliates, in your possession or control.

9.Cooperation

(a)In signing this Agreement, you agree that you will cooperate fully with Cubist’s employees and business partners in smoothly, effectively, and completely transitioning your work as the Company may designate. You further agree that you will make yourself available to the Company for reasonable periods of time, either by telephone or, if you and the Company believes necessary, in person upon reasonable notice, to assist the Company in connection with any matter relating to services performed by you on behalf of the Company, and in the defense or prosecution of any claims or actions now in existence or which may be brought or threatened in the future

against or on behalf of the Company, its directors, shareholders, officers, or employees.  The Company shall reimburse you for reasonable documented travel expenses incurred should your presence be required in person.  You further agree that should you be contacted (directly or indirectly) by any individual or any person representing an individual or entity that is or may be legally or competitively adverse to the Company in connection with any actual or potential claims or legal or regulatory proceedings, including without limitation Teva Pharmaceuticals Industries, Ltd., Teva Parenteral Medicines, Inc. and Teva Pharmaceuticals USA, Inc. and any of their direct or indirect affiliates or subsidiaries, you will promptly notify the Company’s General Counsel of that fact in writing, but in no event later than the third business day after you are contacted, and you hereby represent and warrant that you have not been so contacted as of the date you signed this Agreement (the “Execution Date”).  Such notification shall include a reasonable description of the content of the communication with the representative of the legally or competitively adverse individual or entity.

(b)Nothing herein shall prohibit or bar you from providing truthful testimony in any legal proceeding or in communicating with any governmental agency or representative or from making any truthful disclosure required, authorized or permitted under law; provided however, that in providing such testimony or making such disclosures or communications, you will use your best efforts to ensure that this Section 9 is complied with to the maximum extent possible.

10.Release of Claims

The Company wants to be certain that this Agreement will resolve any and all concerns that you might have and therefore requests that you carefully consider the terms of this Agreement, including the release of claims set forth below, which, as set forth in your Retention Letter, is a specific condition to your receipt of the Severance Pay and other benefits set forth in this Agreement.  As a result, the Company encourages you to seek the advice of an attorney before you sign this Agreement.

(a)In exchange for the Separation Pay and other benefits to be provided you under this Agreement and pursuant to the Retention Letter, you and your respective agents, heirs, legatees, successors and assigns (collectively hereinafter “you”), except as set forth below, hereby unconditionally and irrevocably release, remise, and forever discharge Cubist,(1) and all persons acting by, through, under or in concert with Cubist, of and from any and all actions, causes of actions, suits, debts, charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, and expenses (including attorney fees and costs actually incurred), of any nature whatsoever, in law or equity (collectively “Claims”), which you had, now

(1)For purposes of this Section, “Cubist Pharmaceuticals, Inc.” includes Cubist Pharmaceuticals, Inc., and any of its divisions, affiliates (which means all persons and entities directly or indirectly controlling, controlled by or under common control with Cubist Pharmaceuticals, Inc.), subsidiaries and all other related entities, and its and their directors, officers, employees, trustees, attorneys, agents, representatives successors and assigns.

have, or hereafter may have against the Company from the beginning of time through the Execution Date.  Without limiting the generality of the foregoing waiver and release of claims, you specifically waive and release Cubist from any Claim including, without limitation:

(1)Claims under any federal, state (including, without limitation, Massachusetts) or local discrimination, fair employment practices or other employment related statute, regulation or executive order (as they may have been amended through the Execution Date) prohibiting discrimination or harassment based upon any status protected by law,  including, without limitation, those laws and regulations that prohibit discrimination or harassment based on age, race, national origin, gender, marital status, disability, veteran status or sexual orientation.  Without limitation, specifically included in this paragraph are any Claims arising under the Title VII, the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Civil Rights Acts of 1866 and 1871, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Equal Pay Act, the Americans with Disabilities Act, and Massachusetts General Laws Chapter 151B;

(2)Claims under any other federal, state (including, without limitation, Massachusetts) or local employment-related statute, regulation or executive order (as they may have been amended through the Execution Date) relating to wages, hours or any other terms and conditions of employment (including, without limitation, the Fair Labor Standards Act, the National Labor Relations Act, the Employee Retirement Income Security Act of 1974, the Consolidated Omnibus Budget Reconciliation Act of 1985 and any similar statute the Worker Adjustment and Retraining Notification Act and any similar federal, state or local statute, regulation, or executive order);

(3)Claims under any federal, state (including, without limitation, Massachusetts) or local common law theory including, without limitation, wrongful discharge, breach of express or implied contract, promissory estoppel, unjust enrichment, breach of a covenant of good faith and fair dealing, violation of public policy, torts, defamation, interference with contractual relations, intentional or negligent infliction of emotional distress, invasion of privacy, misrepresentation, deceit, fraud or negligence;

(4)Claims under any federal, state (including, without limitation, Massachusetts and Delaware) or local securities law, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and any similar statute;

(5)Claims under the Federal False Claims Act, any state or local false claims act or any federal, state or local qui tam provisions of false claims or false statements statutes; and

(6)All other claims of any kind or nature.

Notwithstanding the foregoing, this paragraph shall not release Cubist from any obligation expressly set forth in this Agreement and shall not act as a waiver or release of any Claims that you cannot by law waive or release, including, without limitation,

workers’ compensation claims.  You acknowledge and agree that, but for providing this waiver and release of Claims, you would not be receiving the Separation Pay or other benefits being provided to you under the terms of this Agreement.

(b)You further agree, to the fullest extent permitted by law, that you will not sue or commence any proceeding (judicial or administrative), or participate in any action, suit or proceeding (unless compelled by legal process or court order), against Cubist with respect to any Claim you have released the Company from under this Agreement.  You also warrant and represent that as of the Execution Date, you have not taken or engaged in any of the acts described in the foregoing sentences.  If, notwithstanding the foregoing promises, you violate this provision, you shall be required, to the maximum extent permitted by law, to indemnify and hold harmless Cubist from and against any and all demands, assessments, judgments, costs, damages, losses and liabilities, and attorneys’ fees and other expenses which result from, or are incident to, such violation.

(c)It is the Company’s desire and intent to make certain that you fully understand the provisions and effects of this Agreement.  To that end, you have been encouraged and given the opportunity to consult with legal counsel for the purpose of reviewing the terms of this Agreement.  Also, because you are over the age of 40, and consistent with the provisions of the Age Discrimination in Employment Act (“ADEA”), which prohibits discrimination on the basis of age, the Company is providing you with at least twenty-one (21) days in which to consider and accept the terms of this Agreement by signing below and returning it to Maureen Powers at Cubist, 65 Hayden Avenue, Lexington, MA 02421.  You understand that you do not waive any rights or claims under the ADEA that may arise after the date this Agreement is executed.  In addition, you may rescind your assent to this Agreement if, within seven (7) days after you sign this Agreement, you deliver by hand or send by mail (certified, return receipt and postmarked within such 7-day period) a notice of rescission to Maureen Powers at the above-referenced address.

(d)Consistent with the federal discrimination laws, nothing in this release shall be deemed to prohibit you from challenging the validity of this release under the federal discrimination laws or from filing a charge or complaint of employment related discrimination with the Equal Employment Opportunity Commission (“EEOC”) or from participating in any investigation or proceeding conducted by the EEOC.  Further, nothing in this release or Agreement shall be deemed to limit the Company’s right to seek immediate dismissal of such charge or complaint on the basis that your signing of this Agreement constitutes a full release of any individual rights under the federal discrimination laws, or to seek restitution to the extent permitted by law of the economic benefits provided to you under this Agreement in the event you successfully challenge the validity of this release and prevail in any claim under the federal discrimination laws.

(e)You acknowledge and agree that: (i) you have not been subject to any undue or improper influence interfering with the exercise of your free will in deciding whether to execute this Agreement; (ii) you have carefully read and fully understand all of the provisions of this Agreement; (iii) you knowingly and voluntarily agree to all of the terms set forth in this Agreement; (iv) in entering into this Agreement, you are not relying on any representation, promise or inducement made by Cubist with the exception of those

promises contained in this Agreement; and (v) any revisions to this Agreement will not affect or extend the calculation of the 21 day period provided in subsection 10(c) above.

11.Representations and Governing Law

(a)This Agreement sets forth the complete and sole agreement between the parties and supersedes any and all other agreements or understandings, whether oral or written, except the Employee Confidentiality Agreement, which shall remain in full force and effect in accordance with their terms.  This Agreement may not be changed, amended, modified, altered or rescinded except upon the express written consent of both you and an authorized Cubist officer.  Any waiver of any provision of this Agreement shall not constitute a waiver of any other provision of this Agreement unless expressly so indicated otherwise.  The language of all parts of this Agreement shall in all cases be construed as a whole according to its fair meaning and not strictly for or against any of the parties.

(b)This Agreement shall be deemed to be made and entered into in the Commonwealth of Massachusetts.  This Agreement and any claims arising out of this Agreement (or any other claims arising out of the relationship between the parties) shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts and shall in all respects be interpreted, enforced and governed under the internal and domestic laws of such Commonwealth, without giving effect to the principles of conflicts of laws of such Commonwealth.  Any claims or legal actions by one party against the other shall be commenced and maintained in any state or federal court located in such Commonwealth, and you hereby submit to the jurisdiction and venue of any such court. In any such proceeding you agree to waive trial by jury and consent to have all legal and factual matters decided by a judge.

12.Remedies Upon Breach

If you commit a breach, or threaten to commit a breach, of any of the provisions of this Agreement that impose obligations upon you, including, without limitation, Sections 5, 6, 7, 8, 9, 10(a) and 10(b), the Company shall have the following rights and remedies:

(a)The right and remedy to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach shall cause irreparable injury to the Company and that money damages shall not provide an adequate remedy to the Company;

(b)The right and remedy to require you to account for and pay over to the Company all Separation Pay and any shares of Cubist common stock that you come to own as a result of exercising your stock options during the option extension exercise period set forth in Section 2 (the “Clawback Compensation”) and you hereby agree to account for and pay over such Clawback Compensation to the Company; and

(c)The right and remedy to immediately stop the Company’s payment of all Severance Pay and/or benefits described in this Agreement and terminate the exercise period for your Cubist stock options.

Each of the rights and remedies set forth above shall be independent of the other, and shall be severally enforceable, and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity.

You further agree to indemnify and hold the Company harmless from and against any and all loss, cost, damage, or expense, including, but not limited to, reasonable attorneys’ fees, incurred by the Company arising out of any action at law or equity, or any other proceeding, they find necessary to enforce any of the terms, covenants or conditions of this Agreement.

13.Effective Date.  For a period of seven (7) days following the Execution Date, you may revoke this Agreement and this Agreement shall not become effective or enforceable until this revocation period has expired.

14.Severability of Agreement Provisions.  The provisions of this Agreement, including, without limitation, Section 5 of the Agreement, are severable. In the event that any one or more of the provisions, or the application thereof in any circumstances is held invalid, illegal, or unenforceable in any respect for any reason, the validity and enforceability of any such provision in every other respect and of the remaining provisions of this Agreement shall not be in any way impaired or affected, it being intended that all of the rights and privileges contained in this Agreement shall be enforceable to the fullest extent permitted by law, it is expressly agreed that the Company shall then be entitled to the maximum relief allowable by law as to geography, duration and scope of relief.

15.Return Date.  If the terms of this Agreement are acceptable to you, please sign both copies of this Agreement and return one copy to me no later than twenty-one (21) days from the date hereof.  If you wish to waive the 21 day period to consider this offer, an appropriate waiver form is attached for your use.

Very truly yours,

/s/ Maureen H. Powers

Maureen H. Powers

Vice President, Human Resources

I, LINDON FELLOWS, REPRESENT THAT I HAVE READ THE FOREGOING AGREEMENT, THAT I FULLY UNDERSTAND THE TERMS AND CONDITIONS OF SUCH AGREEMENT AND THAT I AM VOLUNTARILY EXECUTING THE SAME.  IN ENTERING INTO THIS AGREEMENT, I DO NOT RELY ON ANY REPRESENTATION, PROMISE OR INDUCEMENT MADE BY THE RELEASEES WITH THE EXCEPTION OF THE CONSIDERATION DESCRIBED IN THIS DOCUMENT.

/s/ Lindon Fellows

Lindon Fellows

Dated: June 15, 2010

IF YOU DO NOT WISH TO USE THE 21-DAY PERIOD,

PLEASE CAREFULLY REVIEW AND SIGN THIS DOCUMENT

I, Lindon Fellows, acknowledge that I was informed and understand that I have 21 days within which to consider the attached Separation Agreement and Release (the “Agreement”), have been advised of my right to consult with an attorney regarding such Agreement and have considered carefully every provision of the Agreement, and that after having engaged in those actions, I prefer to and have requested that I enter into the Agreement prior to the expiration of the 21 day period.

/s/ Lindon Fellows

Lindon Fellows

Dated: June 15, 2010

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT VALUATION FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-162764, 333-162763, 333-155352, 333-148455, 333-148454, 333-136937, 333-132248, 333-126225, 333-124210, 333-118065, 333-106388, 333-101908, 333-99739, 333-60168, 333-60152, 333-54140, 333-49522, 333-32178, 333-65385, 333-65383 and 333-25707) of Cubist Pharmaceuticals, Inc. of our report dated as of June 30, 2010, relating to the valuation of financial securities which appears in this Form 10-Q.

/s/Houlihan Smith & Company Inc.

Houlihan Smith & Company Inc.

Chicago, Illinois

July 30, 2010

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Michael W. Bonney, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Cubist Pharmaceuticals, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  July 30, 2010

/s/ Michael W. Bonney

Michael W. Bonney

President and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, David W.J. McGirr, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Cubist Pharmaceuticals, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  July 30, 2010

/s/ David W.J. McGirr

David W.J. McGirr

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cubist Pharmaceuticals, Inc. (“Cubist”) on Form 10-Q for the period ending June 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael W. Bonney, President and Chief Executive Officer of Cubist, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Cubist.

July 30, 2010

/s/ Michael W. Bonney

Michael W. Bonney

President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cubist Pharmaceuticals, Inc. (“Cubist”) on Form 10-Q for the period ending June 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David W.J. McGirr, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Cubist.

July 30, 2010

/s/ David W.J. McGirr

David W.J. McGirr

Senior Vice President and

Chief Financial Officer