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, 2007

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

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 31, 2007: 55,663,388

Cubist Pharmaceuticals, Inc.
Form 10-Q
For the Quarter Ended June 30, 2007

Table of Contents

Item

PART I. Financial information

1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets at June 30, 2007 and December 31, 2006
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006
	Notes to the Condensed Consolidated Financial Statements
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
3.	Quantitative and Qualitative Disclosures About Market Risk
4.	Controls and Procedures

PART II. Other Information

1.	Legal Proceedings
1A.	Risk Factors
2.	Unregistered Sales of Equity Securities and Use of Proceeds
3.	Defaults Upon Senior Securities
4.	Submission of Matters to a Vote of Security Holders
5.	Other Information
6.	Exhibits
	Signatures

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,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	82,170		$	15,979
Short-term investments	260,431			278,012
Accounts receivable, net	25,186			21,070
Inventory, net	14,009			18,111
Prepaid expenses and other current assets	4,856			5,195
Total current assets	386,652			338,367
Property and equipment, net	49,428			49,584
Intangible assets, net	24,169			25,639
Long-term investments	10,164			15,178
Other assets	9,491			10,267
Total assets	$	479,904		$	439,035

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	5,409		$	3,602
Accrued liabilities	32,720			31,038
Short-term deferred revenue	920			—
Current portion of capital lease obligations	—			245
Total current liabilities	39,049			34,885

Long-term deferred revenue	16,625			11,800
Other long-term liabilities	1,778			1,760
Long-term debt	350,000			350,000
Total liabilities	407,452			398,445
Commitments and contingencies
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; 55,515,047 and 55,001,058 shares issued and outstanding as of June 30, 2007 and December 31, 2006, respectively	55			55
Additional paid-in capital	536,497			524,726
Accumulated deficit	(464,100		)	(484,191		)
Total stockholders’ equity	72,452			40,590
Total liabilities and stockholders’ equity	$	479,904		$	439,035

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

CUBIST PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(in thousands, except share and per share data)

	Three months ended June 30,						Six months ended June 30,
	2007			2006			2007			2006

Revenues:
U.S. product revenues, net	$	68,294		$	45,648		$	125,819		$	83,011
International product revenues	1,231			33			3,141			611
Other revenues	239			2,113			283			4,227
Total revenues, net	69,764			47,794			129,243			87,849

Costs and expenses:
Cost of product revenues	15,834			11,790			32,572			21,922
Research and development	17,145			13,674			33,015			27,255
Sales and marketing	15,993			14,249			30,987			28,317
General and administrative	7,787			6,607			15,507			13,275
Total costs and expenses	56,759			46,320			112,081			90,769

Operating income (loss)	13,005			1,474			17,162			(2,920		)

Other income (expense):
Interest income	4,373			2,180			8,346			3,119
Interest expense	(2,357		)	(8,722		)	(4,713		)	(11,180		)
Other income (expense)	(9		)	(5		)	(16		)	28
Total other income (expense), net	2,007			(6,547		)	3,617			(8,033		)

Income (loss) before income taxes	15,012			(5,073		)	20,779			(10,953		)

Provision for income taxes	522			—			688			—

Net income (loss)	$	14,490		$	(5,073	)	$	20,091		$	(10,953	)

Basic net income (loss) per common share	$	0.26		$	(0.09	)	$	0.36		$	(0.20	)
Diluted net income (loss) per common share	$	0.24		$	(0.09	)	$	0.35		$	(0.20	)

Shares used in calculating:
Basic net income (loss) per common share	55,406,882			54,347,892			55,263,940			54,214,340
Diluted net income (loss) per common share	68,754,256			54,347,892			57,180,092			54,214,340

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

Cubist Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
UNAUDITED

(in thousands)

	Six months ended June 30, 2007
	2007			2006

Cash flows from operating activities:
Net income (loss)	$	20,091		$	(10,953	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	5,838			4,000
Amortization of debt issuance costs	776			2,282
Amortization of premium on investments	(414		)	35
Charge for 401k company common stock match	1,112			1,010
Stock-based compensation	5,383			5,398
Other non-cash	14			4
Changes in assets and liabilities:
Accounts receivable	(4,116		)	(3,113		)
Inventory	1,926			(937		)
Prepaid expenses and other current assets	339			1,816
Other assets	1			(68		)
Accounts payable and accrued liabilities	3,354			(7,072		)
Deferred revenue	5,745			—
Other long-term liabilities	18			1,804
Total adjustments	19,976			5,159
Net cash provided by (used in) operating activities	40,067			(5,794		)

Cash flows from investing activities:
Purchases of property and equipment	(2,051		)	(3,667		)
Purchases of investments	(2,622,704		)	(303,973		)
Maturities of investments	2,645,713			319,800
Net cash provided by investing activities	20,958			12,160

Cash flows from financing activities:
Issuance of common stock, net	5,413			5,449
Proceeds from sale of convertible subordinated debt	—			350,000
Costs associated with sale of convertible subordinated debt	—			(10,925		)
Repayments of long-term debt and capital lease obligations	(245		)	(165,058		)
Net cash provided by financing activities	5,168			179,466

Net increase in cash and cash equivalents	66,193			185,832
Effect of changes in foreign exchange rates on cash balances	(2		)	3
Cash and cash equivalents, beginning of period	15,979			29,149
Cash and cash equivalents, end of period	$	82,170		$	214,984

Supplemental disclosures of cash flow information:
Non-cash investing and financing activities:
Capital lease obligations incurred	$	—		$	245

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

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 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 year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the financial position and results of operations for the interim periods ended June 30, 2007 and 2006.

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, 2006, which are contained in Cubist’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2007.

B. ACCOUNTING POLICIES

Revenue Recognition

Cubist recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101 (SAB 101), as amended by SAB 104, and Emerging Issues Task Force (EITF) Issue No. 00-21. Principal sources of revenue are sales of CUBICIN® (daptomycin for injection), license fees and milestone payments that are derived from collaborative agreements with other biopharmaceutical companies and distribution agreements. The Company has followed the following principles in recognizing revenue:

Multiple Element Arrangements

Cubist analyzes its multiple element arrangements to determine whether the elements can be separated and accounted for individually as separate units of accounting in accordance with EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.” An element of a contract can be accounted for separately if the delivered elements have stand-alone value and the fair value of any undelivered elements is determinable. If an element is considered to have standalone value but the fair value of any of the undelivered items cannot be determined, all elements of the arrangement are recognized as revenue over the period of performance for such undelivered items or services.

Product Revenues, net

Cubist recognizes revenue from product sales when persuasive evidence of an arrangement exists, title to product and associated risk of loss has passed to the customer, the price is fixed or determinable, collection from the customer is reasonably assured and the Company has no further performance obligations. All revenues from product sales are recorded net of applicable provisions for returns, chargebacks, rebates, wholesaler management 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 $459,000 and $652,000 at June 30, 2007 and December 31, 2006, respectively. The Company allows customers to return product within a specified period prior to and subsequent to the 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 and reorder rates of end-users. Reserves for returns, discounts, chargebacks, customer rebates and wholesaler management fees are offset against accounts receivable and were $3.7 million and $2.8 million at June 30, 2007 and December 31, 2006, respectively. In the three months ended June 30, 2007 and 2006, provisions for sales

returns, chargebacks, rebates, wholesaler management fees and prompt-pay discounts that were offset against product revenues totaled $3.7 million and $2.2 million, respectively. In the six months ended June 30, 2007 and 2006, provisions for sales returns, chargebacks, rebates, wholesaler management fees and prompt-pay discounts that were offset against product revenues totaled $7.1 million and $4.1 million, respectively.

Product Revenues from International Distribution Partners

Under agreements with international distribution partners, Cubist sells its product to international distribution partners based upon a transfer price. Once Cubist’s distribution partner sells the product to a third party, Cubist may be owed an additional payment based on a percentage of the net selling price to the third party, less the transfer price previously paid on such product. Under no circumstances would the subsequent adjustment result in a refund to the distribution partner. Cubist recognizes revenue related to product shipped to international distribution partners when persuasive evidence of an arrangement exists, title to product and associated risk of loss has passed to the distribution partner, the price is fixed or determinable, collection from the distribution partner is reasonably assured and the Company has no further performance obligations.

License Revenues

Non-refundable license fees are recognized depending on the provisions of each agreement. License fees with ongoing involvement or performance obligations are recorded as deferred revenue once received and are generally recognized ratably over the period of such performance obligation only after both the license period has commenced and the technology has been delivered.

Milestones

Revenue from milestone payments related to arrangements under which the Company has continuing performance obligations are recognized as revenue upon achievement of the milestone only if all of the following conditions are met: the milestone payments are non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved in achieving the milestone; and the amount of the milestone is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, the milestone payments are deferred and recognized as revenue over the term of the arrangement as the Company completes its performance obligations. Contingent payments under license agreements that do not involve substantial effort on the part of the Company are not considered substantive milestones. Such payments are recognized as revenue when the contingency is met only if there are no remaining performance obligations or any remaining performance obligations are priced at fair value. Otherwise, the contingent payment is recognized as the Company completes its performance obligations under the arrangement.

Research services

Revenues from Small Business Innovation Research, or SBIR, grants to conduct research and development are recognized as the eligible costs are incurred up to the granted funding limit.

Basic and Diluted Net Income (Loss) Per Share

Basic net income (loss) per share has been computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Except where the result would be antidilutive to income from continuing operations, diluted net income (loss) 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 (loss) per share (amounts in thousands, except share and per share amounts):

	Three months ended					Six months ended
	June 30,					June 30,
	2007		2006			2007		2006

Net income (loss) basic	$	14,490	$	(5,073	)	$	20,091	$	(10,953	)

Effect of dilutive securities:
Interest on 2.25% convertible subordinated notes, net of tax	1,902		—			—		—
Debt issuance costs, net of tax	375		—			—		—

Net income (loss) diluted	$	16,767	$	(5,073	)	$	20,091	$	(10,953	)

Shares used in calculating basic net income (loss) per common share	55,406,882		54,347,892			55,263,940		54,214,340

Effect of dilutive securities:
Options to purchase shares of common stock	1,973,039		—			1,916,152		—
Notes payable convertible into shares of common stock	11,374,335		—			—		—

Shares used in calculating diluted net income (loss) per common share	68,754,256		54,347,892			57,180,092		54,214,340

Net income (loss) per share, basic	$	0.26	$	(0.09	)	$	0.36	$	(0.20	)
Net income (loss) per share, diluted	$	0.24	$	(0.09	)	$	0.35	$	(0.20	)

The following amounts were not included in the calculation of net income (loss) per share because their effects were antidilutive:

	Three months ended		Six months ended
	June 30,		June 30,
	2007	2006	2007	2006

Options to purchase shares of common stock	1,752,404	8,094,284	2,730,632	8,094,284
Notes payable convertible into shares of common stock	—	11,374,335	11,374,335	11,374,335

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of only net income (loss), as there was no other comprehensive income (loss) for the three and six months ended June 30, 2007 and 2006.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123(R), which requires all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value. SFAS 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows.” In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). SFAS 123(R) requires the determination of the fair value of the share-based compensation at the grant date and the recognition of the related expense over the requisite service period. The Company elected to adopt the modified prospective application method as provided by SFAS 123(R). As a result, the Company recognized compensation expense associated with awards granted or modified after January 1, 2006, and the unvested portion of previously granted awards that remain outstanding as of January 1, 2006, in the Company’s Condensed Consolidated Statement of Operations commencing in the first quarter of 2006. See Note D., “Employee Stock Benefit Plans” for additional information.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” or SFAS 159, which is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided

the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements.” SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The implementation of SFAS 159 is not expected to have a material impact on the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFAS 157, which is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Early adoption is not permitted. Therefore, Cubist will adopt SFAS No. 157 on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. The Statement codifies the definition of fair value as 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 standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The implementation of SFAS 157 is not expected to have a material impact on the Company’s financial statements.

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109”, or FIN 48, on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This interpretation requires that the Company determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption did not have a material impact on the Company’s financial statements. See Note K., “Income Taxes,” for additional information.

In June 2007, the EITF reached a consensus on EITF Issue No. 07-03, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities.” EITF 07-03 concludes that non-refundable advance payments for future research and development activities should be deferred and capitalized until the goods have been delivered or the related services have been performed. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. This consensus is effective for fiscal years beginning after December 15, 2007. The initial adjustment to reflect the effect of applying the consensus as a change in accounting principle would be accounted for as a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The adoption of EITF 07-03 is not expected to have a material impact on the Company’s financial statements.

C. BUSINESS AGREEMENTS

2007 Commercialization Agreements

In March 2007, Cubist entered into a license agreement with Merck & Co., Inc., or Merck, for the development and commercialization of CUBICIN in Japan, the last country outside the U.S. for which Cubist did not have a partner for the distribution of CUBICIN. Merck will develop and commercialize CUBICIN through its wholly-owned subsidiary, Banyu Pharmaceutical Co., Ltd., or Banyu. In exchange for the development and commercialization rights in Japan, Merck paid Cubist an up-front fee of $6.0 million. This $6.0 million was recorded as deferred revenue. Revenue will be recognized over the performance period. Cubist will receive additional payments if Merck reaches certain regulatory and sales milestones. Cubist may receive payments for the achievement of the aforementioned milestones of up to $39.5 million under the agreement. In addition, Merck will purchase finished but unlabeled vials from Cubist in exchange for a transfer price.

D. EMPLOYEE STOCK BENEFIT PLANS

Summary of Stock Option Plans

Cubist has several stock-based compensation plans. Under the Cubist Amended and Restated 1993 Stock Option Plan, options to purchase 5,837,946 shares of common stock were authorized for issuance to employees, directors, officers or consultants. The options were generally granted at fair market value on the date of the grant, vested ratably over a four-year period and expired ten years from the date of grant. There are no shares available for future grant under this plan as it terminated in accordance with its terms in 2003.

Under the Cubist Amended and Restated 2000 Equity Incentive Stock Option Plan, or the 2000 Equity Incentive Plan, 11,535,764 shares of common stock may be issued to employees, directors, officers or consultants. Options under this plan are generally granted with exercise prices equal to the fair market value on the date of the grant, vest ratably over a four-year period and expire ten years from the date of grant. At June 30, 2007 there were 4,470,332 shares available for future grant under this plan.

Under the Cubist Amended and Restated 2002 Directors’ Equity Incentive Plan, 975,000 shares of Common Stock may be issued to members of the Board of Directors. Options under this plan are granted at fair market value on the date of the grant, vest ratably over either a one-year or a three-year period and expire ten years from the date of grant. At June 30, 2007, there were 476,250 shares available for future grant under this plan.

Cubist does not currently hold any treasury shares. Upon share option exercise, the Company issues new shares and delivers them to the participant. In line with its current business plan, Cubist does not intend to repurchase shares in the foreseeable future.

Summary of Employee Stock Purchase Plan

Qualifying employees are eligible to participate in an employee stock purchase plan sponsored by the Company. Under this program, participants purchase Cubist common stock, after a pre-determined six-month period, at 85% of the lower of the fair market value at the beginning and end of the period. Shares are purchased through payroll deductions of up to 15% of each participating employee’s annual compensation, subject to certain limitations. The current plan allows for the issuance of 750,000 shares of common stock to eligible employees. At June 30, 2007, there were 382,996 shares available for future grant under this plan.

Summary of SFAS 123(R) Expense

The effect of recording stock-based compensation in the Consolidated Statement of Operations for the three and six month periods ended June 30, 2007 and 2006 was as follows:

	Three months ended				Six months ended
	June 30,				June 30,
	2007		2006		2007		2006
	(in thousands)
Stock-based compensation expense by type of award:
Employee stock options	$	2,624	$	2,572	$	5,181	$	5,044
Employee stock purchase plan	68		104		150		207
Total stock-based compensation	$	2,692	$	2,676	$	5,331	$	5,251

Effects on earnings per share:
Basic	$	0.05	$	0.05	$	0.10	$	0.10
Diluted	$	0.04	$	0.05	$	0.08	$	0.10

Valuation Assumptions

The fair value of each share-based award was estimated on the date of grant using the Black-Scholes option-pricing model and expensed under the accelerated method for option grants prior to the first quarter of 2006 and under the straight-line method for option grants commencing in the first quarter of 2006. The following weighted-average assumptions were used:

	Three months ended		Six months ended
	June 30,		June 30,
	2007	2006	2007	2006
Stock option plans:
Expected stock price volatility	45%	52%	49%	52%
Risk free interest rate	5.0%	5.0%	4.7%	4.7%
Dividend yield	—	—	—	—
Expected life	4 years	4 years	4 years	4 years
Stock purchase plan:
Expected stock price volatility	30%	45%	30%	45%
Risk free interest rate	4.7%	4.4%	4.7%	4.4%
Dividend yield	—	—	—	—
Expected life	6 months	6 months	6 months	6 months

Cubist’s expected stock price volatility assumption is based on both current and historical volatilities of the Company’s stock price, which is obtained from public data sources. The expected stock price volatility is determined based on the instrument’s expected term. Since the employee stock purchase plan has a shorter term than the stock option plans, volatility for this plan is estimated over a shorter period. The risk-free interest rate is a less subjective assumption as it is based on factual data derived from public sources. Cubist uses a dividend yield of zero as it has never paid cash dividends and has no intention of paying cash dividends in the foreseeable future. The expected life represents the weighted average period of time that share-based awards are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. Cubist determines the expected life assumption based on the exercise behavior and post vesting cancellations that have been exhibited historically, adjusted for specific factors that may influence future exercise patterns. The Company estimates forfeitures based on its historical experience of share-based pre-vesting cancellations. The Company believes that its estimates are based on outcomes that are reasonably likely to occur. To the extent actual forfeitures differ from its estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.

General Option Information

A summary of option activity for the six months ended June 30, 2007 and 2006 are as follows:

	2007				2006
			Weighted				Weighted
			Average Exercise				Average Exercise
	Number		Price		Number		Price

Outstanding at beginning of period	7,276,450		$	16.49	6,836,077		$	14.14
Granted	1,240,350		$	20.01	1,944,925		$	22.12
Exercised	(427,890	)	$	11.39	(514,221	)	$	9.63
Canceled	(300,897	)	$	17.43	(172,497	)	$	16.79
Outstanding at end of period	7,788,013		$	17.29	8,094,284		$	16.29

Options exercisable as of June 30,	4,255,381		$	16.63	3,799,349		$	16.58

Weighted average grant-date fair value of options granted during the period			$	9.02			$	10.39

E. DEBT

In June 2006, Cubist completed the public offering of $350.0 million aggregate principal amount of 2.25% convertible subordinated notes (the “2.25% Notes”). The 2.25% Notes are convertible at any time prior to maturity into 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. Interest is payable on each June 15 and December 15, beginning December 15, 2006. The 2.25% Notes mature on June 15, 2013. Cubist retains the right to redeem the 2.25% Notes at 100% of the principal amount to be redeemed plus accrued and unpaid interest commencing in June 2011 if Cubist’s common stock closing price exceeds the conversion price for a period of time as defined in the 2.25% Notes agreement. The deferred financing costs associated with the sale of the 2.25% Notes were $10.9 million. These costs are amortized ratably over the life of the 2.25% Notes.

In 2001, Cubist completed a private placement of $165.0 million aggregate principal amount of 5.5% convertible subordinated notes (the “5.5% Notes”). The offering was made through initial purchasers to qualified institutional buyers under Rule 144A of the Securities Act. The 5.5% Notes were convertible at any time prior to maturity into common stock at a conversion price of $47.20 per share, subject to adjustment upon certain events. Interest was payable on each November 1 and May 1, beginning May 1, 2002. The 5.5% Notes had a maturity date of November 1, 2008. Cubist retained the right to redeem the 5.5% Notes prior to November 2004 if Cubist’s common stock closing price exceeded the conversion price for a period of time as defined in the 5.5% Notes agreement. The deferred financing costs associated with the sale of the 5.5% Notes were $5.3 million. In June 2006, Cubist repaid the outstanding principal and accrued interest on the 5.5% Notes, plus a prepayment penalty of $3.9 million that was recorded to interest expense. The remaining unamortized balance of the debt issuance costs, totaling $1.8 million, associated with the 5.5% Notes was written off to interest expense at the time of the repayment.

F. GUARANTEES

In connection with the Company’s efforts to reduce the number of facilities that it occupies, the Company has vacated some of its leased facilities or sublet them to third parties. When the Company sublets a facility to a third party, it remains the primary obligor under the master lease agreement with the owner of the facility. As a result, if a third party vacates the sublet facility, the Company would be obligated to make lease or other payments under the master lease agreement. The Company believes that the financial risk of default by sublessors is individually and in the aggregate not material to the Company’s financial position or results of operations.

G. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at:

	June 30,		December 31,
	2007		2006
	(in thousands)
Accrued payroll	$	500	$	590
Accrued incentive compensation	2,324		2,353
Accrued bonus	2,817		4,458
Accrued benefit costs	2,735		1,879
Accrued clinical trials	539		494
Accrued interest	350		350
Accrued manufacturing costs	2,351		1,804
Accrued royalty	15,347		12,905
Other accrued costs	5,757		6,205
Total	$	32,720	$	31,038

H. 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, or FIFO, basis. The Company analyzes its inventory levels quarterly, and writes-down 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 to cost of product revenues, or inventory that fails to meet commercial sale specifications to cost of product revenues. Expired inventory is disposed of and the related costs are written off to cost of product revenues.

Inventories consisted of the following at:

	June 30,		December 31,
	2007		2006
	(in thousands)
Raw materials	$	3,523	$	8,240
Work in process	3,182		3,616
Finished goods	7,304		6,255
	$	14,009	$	18,111

I. INTANGIBLE ASSETS

Intangible assets consisted of the following at:

	June 30,			December 31,
	2007			2006
	(in thousands)
Patents	$	2,673		$	2,673
Manufacturing rights	2,500			2,500
Acquired technology rights	28,500			28,500
Intellectual property and processes and other intangibles	5,388			5,388
	39,061			39,061
Less: accumulated amortization – patents	(2,096		)	(2,063		)
accumulated amortization - manufacturing rights	(1,042		)	(833		)
accumulated amortization - acquired technology rights	(6,380		)	(5,152		)
accumulated amortization - intellectual property	(5,374		)	(5,374		)
Intangible assets, net	$	24,169		$	25,639

In March 2005, Cubist issued to Eli Lilly & Co., or Eli Lilly, $20.0 million of its common stock in exchange for a 2% reduction in the royalty payable to Eli Lilly. Cubist is amortizing the $20.0 million over approximately eleven years, which was the remaining life of the license agreement with Eli Lilly on the date of the transaction. In 2003, Cubist issued to Eli Lilly $8.0 million of its common stock in exchange for a 1% reduction in the royalties payable to Eli Lilly. The Company also issued 38,922 shares of its common stock valued at $0.5 million in 2003 as a milestone payment to Eli Lilly. This $8.5 million is being amortized over approximately thirteen years, which was the remaining life of the license agreement with Eli Lilly on the dates of the transactions. The amortization of the Eli Lilly intangible assets are included in cost of product revenues.

In November 2005, Cubist announced that it had selected ACS Dobfar SpA, or ACS, as the single source supplier of active pharmaceutical ingredient, or API, for CUBICIN. Cubist provided notice to DSM Capua SpA, or DSM, in accordance with contract agreement terms to terminate its manufacturing and supply agreement with DSM for API. The useful life of the DSM manufacturing rights was adjusted to coincide with the revised termination date of May 2006. As Cubist will receive no future benefit from the DSM manufacturing rights, the gross asset value and related allowance for amortization expense were eliminated from the accounts with no resulting gain or loss. Amortization of these assets was allocated to inventory and was expensed to cost of product revenues as the related inventory lots were sold. The manufacturing rights associated with the ACS agreement are being amortized to inventory over the contractual term of six years and expensed to cost of product revenues as the related inventory lots are sold.

Amortization expense was $0.8 million and $1.6 million for the three months ended June 30, 2007 and 2006, respectively. Amortization expense was $3.7 million for the six months ended June 30, 2007 and 2006. The estimated aggregate amortization of intangible assets as of June 30, 2007 for each of the five succeeding years is as follows:

	(in thousands)
Remainder of 2007	$	1,470
2008	2,941
2009	2,941
2010	2,941
2011	2,524
2012 and thereafter	11,352
	$	24,169

J. 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. To date, the Company has concentrated exclusively on developing products for the antiinfective marketplace. The Company’s entire business is managed by a single management team, which reports to the Chief Executive Officer. Substantially all of the Company’s revenues are currently generated within the U.S.

Revenues from Cardinal Health accounted for approximately 33% of total revenues for the three months ended June 30, 2007 and 2006. Revenues from Amerisource Bergen Drug Corporation accounted for approximately 30% and 31% of total revenues for the three months ended June 30, 2007 and 2006, respectively. Revenues from McKesson Corporation accounted for approximately 20% and 21% of total revenues for the three months ended June 30, 2007 and 2006, respectively.

Revenues from Cardinal Health accounted for approximately 33% and 32% of total revenues for the six months ended June 30, 2007 and 2006. Revenues from Amerisource Bergen Drug Corporation accounted for approximately 31% and 30% of total revenues for the six months ended June 30, 2007 and 2006, respectively. Revenues from McKesson Corporation accounted for approximately 20% and 21% of total revenues for the six months ended June 30, 2007 and 2006, respectively.

K. INCOME TAXES

The effective tax rates for the six months ended June 30, 2007 and 2006 were 3.4 percent and 0%, respectively. The effective tax rate for the six months ended June 30, 2007 relates to federal alternative minimum tax expense and state tax expense. The Company and its subsidiaries file income tax returns with the U.S. federal government and with multiple state and local jurisdictions in the U.S.

On January 1, 2007, the Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109.” There were no adjustments to retained earnings as a result of the implementation of FIN 48. The Company’s only adjustment for uncertain tax positions relates to a $2.0 million adjustment to a research and development credit, which did not impact retained earnings or the statement of operations, as there is a full valuation allowance recorded against the deferred tax asset. All of the Company’s deferred tax assets have a full valuation allowance recorded against them as their realization does not meet the “more likely than not” criteria under SFAS No. 109 based on Cubist’s current financial status. Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying consolidated statements of operations. At January 1, 2007 and June 30, 2007 the Company did not have any interest or penalties accrued related to uncertain tax positions.

In many cases the Company’s uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. Since the Company is in a loss carryforward position, the Company is generally subject to U.S. federal, state and local income tax examinations by tax authorities for all years for which a loss carryforward is available.

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” within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, these statements can be identified by the use of forward-looking terminology such as ‘‘may,” ‘‘will,” ‘‘could,” ‘‘should,” ‘‘would,” ‘‘expect,” ‘‘anticipate,” ‘‘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 based on current expectations and are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including the risks and uncertainties described or discussed in the section entitled “Risk Factors” in this Quarterly Report. The forward-looking statements contained and incorporated herein represent our judgment as of the date of this Quarterly Report, and we caution readers not to place undue reliance on such statements. 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 include information concerning possible or assumed future results of our operations, including statements regarding:

· our expectations regarding clinical trials, development time lines and regulatory authority approval for and oversight of CUBICIN or other drug candidates;

· our expected research and development investments and expenses;

· the continuation of our collaborations and our ability to establish and maintain successful manufacturing, sales and marketing, distribution and development collaborations;

· our expectations regarding the payment of dividends;

· the impact of new accounting pronouncements;

· our future capital requirements and our ability to finance our operations; and

· our business strategy and our expectations regarding general business conditions and growth in the biopharmaceutical industry and the overall economy.

Many factors could affect our actual financial results and could cause these actual results to differ materially from those in 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;

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

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

· whether the U.S. Food and Drug Administration, or FDA, accepts proposed clinical trial protocols that may be achieved in a timely manner for additional studies of CUBICIN or any other drug candidate we seek to enter into clinical trials;

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

· legislative and policy changes in the United States 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;

· whether or not third parties may seek to market generic versions of our products by filing Abbreviated New Drug Applications, or ANDAs, with the FDA, and the results of any litigation that we file to defend and/or assert our patents against such generic companies;

· our ability to conduct successful clinical trials in a timely manner;

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

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

· our dependence upon collaborations with our partners and our partners’ ability to execute on development, regulatory and sales expectations in their territories;

· our ability to finance our operations;

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

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

· our ability to protect our proprietary technologies;

· 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;

· our ability to discover, acquire or in-license drug candidates and develop and achieve commercial success for drug candidates; and

· a variety of risks common to our industry, including ongoing regulatory review, public and investment community perception of the industry, legislative or regulatory changes, and our ability to attract and retain talented employees.

Overview

Cubist is 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. We have one marketed product, CUBICIN, which was launched in the U.S. in November 2003. CUBICIN is currently the only marketed once-daily, bactericidal, intravenous (IV) antibiotic with activity against methicillin-resistant S. aureus, or MRSA. CUBICIN is approved in the U.S. for the treatment of complicated skin and skin structure infections, or cSSSI, caused by Staphylococcus aureus, or S. aureus, and certain other Gram-

positive bacteria, and for S. aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis, 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. In July, 2007, the Committee for Medicinal Products for Human Use, or CHMP, the scientific committee of the European Agency for the Evaluation of Medicinal Products, issued a positive opinion recommending approval of an expanded Marketing Authorization for the CUBICIN label to include S. aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis or with cSSTI. The final decision regarding an expanded label for CUBICIN in the EU is expected in September, 2007.

In July 2007, Kunhil Pharma Co., Ltd, CUBICIN marketing partner for South Korea and TTY BioPharm Company, Ltd., CUBICIN marketing partner for Taiwan, received approvals for S. aureus bacteremia, including right-sided infective endocarditis, in both South Korea and Taiwan. The approval in South Korea includes both cSSSI and S. aureus bacteremia, including right-sided infective endocarditis. CUBICIN was previously approved in Taiwan for cSSSI caused by Gram-positive bacteria.

Net product sales of CUBICIN were $69.5 million and $129.0 million in the three and six months ended June 30, 2007 as compared to $45.7 million and $83.6 million in the three and six months ended June 30, 2006. Net income was $14.5 million or $0.26 and $0.24 per basic and diluted share, respectively, and $20.1 million or $0.36 and $0.35 per basic and diluted share, respectively, for the three and six months ended June 30, 2007, as compared to a net loss of $5.1 million or $0.09 per basic and diluted share, and $10.9 million or $0.20 per basic and diluted share for the three and six months ended June 30, 2006.

In March 2007, we entered into a license agreement with Merck & Co., Inc., or Merck, for the development and commercialization of CUBICIN in Japan, the last country outside the U.S. for which Cubist did not have a partner for the distribution of CUBICIN. Merck will develop and commercialize CUBICIN through its wholly-owned subsidiary, Banyu Pharmaceutical Co., Ltd., or Banyu. In exchange for the development and commercialization rights in Japan, Merck paid us $6.0 million cash upfront. This $6.0 million was recorded as deferred revenue. Revenue will be recognized over the performance period. We may receive up to an additional $39.5 million in total milestone payments if Merck reaches certain regulatory and sales milestones. In addition, Merck will purchase finished but unlabeled vials from us in exchange for a transfer price.

We continue to sell CUBICIN in the U.S. in accordance with our drop-ship program under which orders are processed through wholesalers but shipments are sent directly to our end-users. This provides us with greater visibility into end-user ordering and reordering trends. We outsource many of our supply chain activities, including: (i) manufacturing and supplying CUBICIN API; (ii) converting CUBICIN API into its finished, vialed and packaged formulation; (iii) managing warehousing and distribution of CUBICIN to our customers; and (iv) performing the order processing, order fulfillment, shipping, collection and invoicing services related to our CUBICIN product sales.

We have focused our pipeline building efforts on opportunities that leverage our antiinfective and acute-care discovery, development, regulatory, and commercialization expertise. We are currently working to identify viable antibiotic lead candidates with Gram-positive and Gram-negative activity from our lipopeptide program. We are also working with Ilypsa, Inc., or Ilypsa, to develop a non-antibiotic, toxin binder therapy for the treatment of Clostridium difficile (C. difficile) associated diarrhea, or CDAD. We continue to evaluate acute care product candidates which we might acquire to build our pipeline.

Since our inception, we have incurred net losses in every fiscal period until the third quarter of 2006 principally as a result of research and development efforts, preclinical testing, clinical trials, and administrative costs. As of June 30, 2007, we had an accumulated deficit of $464.1 million.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND 2006

Revenues

The following table sets forth revenues for the three months ended June 30, 2007 and 2006:

	Three months ended
	June 30,
	2007		2006		% Change
	(in millions)
U.S. product revenues, net	$	68.3	$	45.6	50	%
International product revenues	1.2		0.1		3630	%
Other revenues	0.3		2.1		-89	%
Total revenues, net	$	69.8	$	47.8	46	%

Product Revenues, net

Net sales of CUBICIN were $69.5 million and $45.7 million in the three months ended June 30, 2007 and 2006, respectively. Gross sales of CUBICIN totaled $73.2 million and $47.9 million for the three months ended June 30, 2007 and 2006, respectively, and are offset by $3.7 million and $2.2 million of allowances for sales returns, Medicaid rebates, chargebacks, prompt-pay discounts, wholesaler management fees and customer rebates. The increase in product revenue was primarily due to increased U.S. customer volume, as well as a 6.2% price increase in January 2007. Included in net product revenues for the three months ended June 30, 2007 is $1.2 million of international sales.

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. Certain wholesalers seek various fees for data supply and administration services. Net product revenue is reduced by any such fees paid to the wholesalers.

Other Revenues

Other revenues for the three months ended June 30, 2007 were $0.3 million as compared to $2.1 million for the three months ended June 30, 2006. Other revenues for the three months ended June 30, 2007 primarily consist of the amortization of license fees received from AstraZeneca. Included in other revenues for the three months ended June 30, 2006 is revenue related to a payment of $2.0 million under our license agreement with Novartis. The payment was received as a result of price approvals for CUBICIN in two European major market countries.

Costs and Expenses

The following table sets forth costs and expenses for the three months ended June 30, 2007 and 2006:

	Three months ended
	June 30,
	2007		2006		% Change
	(in millions)
Cost of product revenues	$	15.8	$	11.8	34	%
Research and development	17.2		13.7		25	%
Sales and marketing	16.0		14.2		12	%
General and administrative	7.8		6.6		18	%
Total costs and expenses	$	56.8	$	46.3	23	%

Cost of Product Revenues

Cost of product revenues were $15.8 million and $11.8 million for the three months ended June 30, 2007 and 2006, respectively. Our gross margin for the three months ended June 30, 2007, was 77% as compared to 74% for the three months ended June 30, 2006. The increase in our gross margin is primarily due to reduced overall pricing from our manufacturing vendors as well as higher volume resulting in lower cost per unit sold. Included in our cost of product revenues are royalties owed to Eli Lilly on net sales of CUBICIN under our license agreement with Eli Lilly. In March 2005, we issued to Eli Lilly $20.0 million of our common stock in exchange for a 2%

reduction in the royalties payable to Eli Lilly. In 2003, we issued to Eli Lilly $8.0 million of our common stock in exchange for a 1% reduction in the royalties payable to Eli Lilly. We also issued 38,922 shares of our common stock valued at $0.5 million in 2003 as a milestone payment to Eli Lilly. These amounts have been capitalized on our balance sheet as intangible assets and are amortized to cost of product revenues over the remaining life of our license agreement with Eli Lilly. Amortization included in cost of product revenues related to these expenses was $0.6 million for each of the three month periods ended June 30, 2007 and 2006.

As our production volumes increase, there is the potential for our gross margin to increase as we work to develop manufacturing process improvements. Whether that potential can be realized and the extent to which such potential can be realized are uncertain.

Research and Development Expense

Total research and development expense in the three months ended June 30, 2007 was $17.2 million as compared to $13.7 million in the three months ended June 30, 2006, an increase of $3.5 million or 25%. The increase in research and development expenses was due primarily to (i) an increase of $1.0 million in payroll, benefits, travel, and other employee related expenses; (ii) an increase of $1.7 million in collaboration expense due primarily to costs associated with our Ilypsa collaboration, which we entered into in the second quarter of 2006; (iii) an increase of $1.0 million in clinical study costs; (iv) an increase of $0.4 million in research grants; (v) an increase of $0.3 million in medical education expense; and (vi) an increase of $0.2 million in professional services. These increases were offset by (i) a decrease of $0.8 million in process development costs related to our lipopeptide program; and (ii) a decrease of $0.7 million in lab services.

We expect to continue incurring substantial research and development expenses related to: (i) Phase 2 and Phase 4 clinical trials for CUBICIN; (ii) pre-clinical and clinical testing of other products under development, such as our lipopeptide program and potential compounds under our natural products screening program; (iii) regulatory matters; and (iv) medical affairs activities.

Sales and Marketing Expense

Sales and marketing expense in the three months ended June 30, 2007 was $16.0 million as compared to $14.2 million in the three months ended June 30, 2006, an increase of $1.7 million or 12%. The increase in sales and marketing expense is primarily related to an increase of $0.7 million in payroll, benefits, travel, and other employee related expenses, an increase of $0.7 million in marketing and promotional programs, and an increase of $0.2 million in exhibits expense.

General and Administrative Expense

General and administrative expense in the three months ended June 30, 2007 was $7.8 million as compared to $6.6 million in the three months ended June 30, 2006, an increase of $1.2 million or 18%. This increase is primarily due to an increase of $0.5 million in payroll, benefits and other employee related expenses and an increase of $1.0 million in professional services. These increases were offset by a $0.3 million decrease in IT-related expenses.

Other Income (Expense), net

The following table sets forth other income (expense), net for the three months ended June 30, 2007 and 2006:

	Three months ended
	June 30,
	2007			2006			% Change
	(in millions)
Interest income	$	4.4		$	2.2		101	%
Interest expense	(2.4		)	(8.7		)	-73	%
Other income (expense)	—			—			70	%
Total other income (expense), net	$	2.0		$	(6.5	)	131	%

Interest income in the three months ended June 30, 2007 was $4.4 million as compared to $2.2 million in the three months ended June 30, 2006, an increase of $2.2 million or 101%. The increase in interest income is due primarily to a higher cash balance during the second quarter of 2007 compared to the second quarter of 2006 as well as higher rates of return on our investments. The higher average cash balance is due to the net proceeds of $339.1 million resulting from the closing of our $350.0 million aggregate principal amount of 2.25% convertible subordinated notes offering on June 6, 2006, offset by the repayment of the principal and outstanding interest of our $165.0 million aggregate principal amount of 5.5% convertible subordinated notes, plus a prepayment penalty.

Interest expense was $2.4 million for the three months ended June 30, 2007 as compared to $8.7 million for the three months ended June 30, 2006. The decrease in interest expense is primarily due to the early repayment of our $165.0 million aggregate principal amount of 5.5% convertible subordinated notes due in November 2008 on June 28, 2006. The early repayment of the $165.0 million aggregate principal amount of 5.5% convertible subordinated notes resulted in charges to interest expense of the prepayment penalty of $3.9 million as well as the write-off of the remaining unamortized balance of related debt issuance costs of $1.8 million.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006

Revenues

The following table sets forth revenues for the six months ended June 30, 2007 and 2006:

	Six months ended
	June 30,
	2007		2006		% Change
	(in millions)
U.S. product revenues, net	$	125.8	$	83.0	52	%
International product revenues	3.2		0.6		414	%
Other revenues	0.3		4.2		-93	%
Total revenues, net	$	129.2	$	87.8	47	%

Product Revenues, net

Net sales of CUBICIN were $129.0 million and $83.6 million for the six months ended June 30, 2007 and 2006, respectively. Gross sales of CUBICIN totaled $136.1 million and $87.7 million for the six months ended June 30, 2007 and 2006, respectively, and are offset by $7.1 million and $4.1 million of allowances for sales returns, Medicaid rebates, chargebacks, prompt-pay discounts, wholesaler management fees and customer rebates. The increase in product revenue was primarily due to increased U.S. customer volume, as well as a 6.5% price increase in May 2006 and an additional 6.2% price increase in January 2007. Included in net product revenues for the six months ended June 30, 2007 is $3.1 million of international sales.

Other Revenues

Other revenues for the six months ended June 30, 2007 were $0.3 million as compared to $4.2 million for the six months ended June 30, 2006. Other revenues for the six months ended June 30, 2007 primarily consist of revenue related to the amortization of license fees received from AstraZeneca. Included in other revenues for the six months ended June 30, 2006 is revenue related to payments totaling $4.0 million under our license agreement with Novartis. The payments were received as a result of regulatory and price approvals for CUBICIN in Europe.

Costs and Expenses

The following table sets forth costs and expenses for the six months ended June 30, 2007 and 2006:

	Six months ended
	June 30,
	2007		2006		% Change
	(in millions)
Cost of product revenues	$	32.6	$	21.9	49	%
Research and development	33.0		27.3		21	%
Sales and marketing	31.0		28.3		9	%
General and administrative	15.5		13.3		17	%
Total costs and expenses	$	112.1	$	90.8	23	%

Cost of Product Revenues

Cost of product revenues were $32.6 million and $21.9 million for the six months ended June 30, 2007 and 2006, respectively. Our gross margin for the six months ended June 30, 2007, was 75% as compared to 74% for the six months ended June 30, 2006. The increase in our gross margin is primarily due to reduced overall pricing from our manufacturing vendors as well as higher volume resulting in lower cost per unit sold. Included in our cost of product revenues are royalties owed to Eli Lilly on net sales of CUBICIN under our license agreement with Eli Lilly. In March of 2005, we issued to Eli Lilly $20.0 million of our common stock in exchange for a 2% reduction in the royalties payable to Eli Lilly. In 2003, we issued to Eli Lilly $8.0 million of our common stock in exchange for a 1% reduction in the royalties payable to Eli Lilly. We also issued 38,922 shares of our common stock valued at $0.5 million in 2003 as a milestone payment to Eli Lilly. These amounts have been capitalized on our balance sheet as intangible assets and are amortized to cost of product revenues over the remaining life of our license agreement with Eli Lilly. Amortization included in cost of product revenues related to these expenses was $1.2 million for the six months ended June 30, 2007 and 2006.

Research and Development Expense

Total research and development expense in the six months ended June 30, 2007 was $33.0 million as compared to $27.3 million in the six months ended June 30, 2006, an increase of $5.8 million or 21%. The increase in research and development expenses was due primarily to (i) an increase of $2.4 million in payroll, benefits, travel, and other employee related expenses; (ii) an increase of $2.9 million in collaboration expense due primarily to costs associated with our Ilypsa collaboration, which we entered into in the second quarter of 2006; (iii) an increase of $1.3 million in clinical study costs; (iv) an increase of $0.6 million in research grants; (v) an increase of $0.5 million in medical education expense; and (vi) an increase of $0.2 million in depreciation expense. These increases were offset by (i) a decrease of $1.2 million in process development costs primarily related to our lipopeptide program and our discontinued HepeX-B™ program; (ii) a decrease of $0.6 million in professional services and (iii) a decrease of $0.4 million in lab services.

Sales and Marketing Expense

Sales and marketing expense in the six months ended June 30, 2007 was $31.0 million as compared to $28.3 million in the six months ended June 30, 2006, an increase of $2.7 million or 9%. The increase in sales and marketing expense is primarily related to an increase of $1.3 million in payroll, benefits, travel, and other employee

related expenses, an increase of $1.0 million in marketing and promotional programs and an increase of $0.1 million in exhibits expense.

General and Administrative Expense

General and administrative expense in the six months ended June 30, 2007 was $15.5 million as compared to $13.3 million in the six months ended June 30, 2006, an increase of $2.2 million or 17%. This increase is primarily due to an increase of $1.0 million in payroll, benefits and other employee related expenses and an increase of $1.9 million in professional services. These increases were offset by a decrease of $0.6 million in IT-related expenses.

Other Income (Expense), net

The following table sets forth other income (expense), net for the six months ended June 30, 2007 and 2006:

	Six months ended
	June 30,
	2007			2006			% Change
	(in millions)
Interest income	$	8.3		$	3.1		168	%
Interest expense	(4.7		)	(11.1		)	-58	%
Other income (expense)	—			—			-157	%
Total other income (expense), net	$	3.6		$	(8.0	)	145	%

Interest income in the six months ended June 30, 2007 was $8.3 million as compared to $3.1 million in the six months ended June 30, 2006, an increase of $5.2 million or 168%. The increase in interest income is due primarily to a higher cash balance during the first half of 2007 compared to the first half of 2006 as well as higher rates of return on our investments. The higher average cash balance is due to the net proceeds of $339.1 million resulting from the closing of our $350.0 million aggregate principal amount of 2.25% convertible subordinated notes offering on June 6, 2006, offset by the repayment of the principal and outstanding interest of our $165.0 million aggregate principal amount of 5.5% convertible subordinated notes, plus a prepayment penalty.

Interest expense was $4.7 million for the six months ended June 30, 2007 as compared to $11.1 million for the six months ended June 30, 2006. The decrease in interest expense is primarily due to the early repayment of our $165.0 million aggregate principal amount of 5.5% convertible subordinated notes due in November 2008 on June 28, 2006. The early repayment of the $165.0 million aggregate principal amount of 5.5% convertible subordinated notes resulted in charges to interest expense of the prepayment penalty of $3.9 million as well as the write-off of the remaining unamortized balance of related debt issuance costs of $1.8 million.

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, interest and capital lease obligations. We fund our cash requirements through the following methods:

· sales of CUBICIN;

· payments from our strategic collaborators including license fees, royalties and milestone payments, sponsored research funding and research grants;

· equity and debt financings; and

· interest earned on invested capital.

Net cash provided by operating activities was $40.1 million in the six months ended June 30, 2007 as compared to net cash used in operating activities of $5.8 million in the six months ended June 30, 2006. Net cash

provided by operating activities in the six months ended June 30, 2007 includes our net income of $20.1 million offset by non-cash charges of $12.7 million that primarily consist of $5.8 million of depreciation and amortization expense, $5.4 million of stock based compensation expenses and $1.1 million in expense associated with our 401(k) company match that is made in the form of shares of Cubist common stock. Accounts receivable increased $4.1 million due to increased sales of CUBICIN. This use of cash was offset by a $5.7 million increase in deferred revenue primarily due to the receipt of a $6.0 million upfront payment from Merck, a $3.3 million increase in accounts payable and accrued liabilities due primarily to the timing of bonus and incentive compensation payouts as well as royalties paid to Eli Lilly related to sales of CUBICIN and a $1.9 million decrease in inventory due to increased sales of CUBICIN.

Net cash provided by investing activities in the six months ended June 30, 2007 was $21.0 million, compared to $12.2 million for the six months ended June 30, 2006. Cash provided by investing activities during the six months ended June 30, 2007 represents cash inflows from the maturity of securities, offset by purchases of securities as well as cash outflows for purchases of property and equipment. Purchases of property and equipment during the six months ended June 30, 2007, were $2.0 million compared to $3.7 million during the six months ended June 30, 2006. Property and equipment additions during the six months ended June 30, 2007 consisted primarily of lab equipment and computer software. Net cash used in investing activities may fluctuate significantly from period to period due to the timing of our capital expenditures and other investments.

Net cash of $5.2 million was provided by financing activities in the six months ended June 30, 2007 as compared to $179.5 million provided by financing activities during the six months ended June 30, 2006. Proceeds from financing activities for the six months ended June 30, 2007 primarily consisted of $5.4 million of cash received from employees’ exercise of stock options and purchases of common stock through our employee stock purchase plan.

Commitments

Contractual Obligations

Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent liabilities, such as royalties on future sales above the contractual minimums or known accrued royalty balances, for which we cannot reasonably predict future payment. The following summarizes our significant contractual obligations at June 30, 2007 and the effects such obligations are expected to have on our liquidity and cash flows in future periods.

	Payments due by period
	1 year or		2-3		4-5		More than
	less		Years		Years		5 Years		Total
	(in millions)
Subordinated convertible notes	$	—	$	—	$	—	$	350.0	$	350.0
Interest on subordinated convertible notes	7.9		15.8		15.8		7.9		47.4
Operating leases, net of sublease income	1.7		4.3		4.6		9.7		20.3
Inventory purchase obligations	24.6		20.8		22.8		34.1		102.3
External collaborations	15.3		—		—		—		15.3
Total contractual cash obligations	$	49.5	$	40.9	$	43.2	$	401.7	$	535.3

The subordinated convertible notes consist of $350.0 million aggregate principal amount of our 2.25% convertible subordinated notes, due June 2013. These notes require semi-annual interest payments through maturity.

Our operating leases consist of approximately 83,000 square feet of office and data center space at 45/55 Hayden Avenue in Lexington, Massachusetts pursuant to a term lease that expires in April 2016, 24,000 square feet of commercial space at 24 Emily Street in Cambridge, Massachusetts pursuant to a term lease that expires in September 2008 and 15,000 square feet of commercial space at 148 Sidney Street in Cambridge, Massachusetts pursuant to a term lease that expires in December 2010. We have subleased the space located at 24 Emily Street for a term that coincides with the September 2008 lease expiration. We have subleased the space located at 148 Sidney Street through October 2010.

The inventory purchase obligations listed above represent minimum volumes that we are required to purchase from our contract manufacturers. The external collaboration listed above represents minimum royalties owed on sales of CUBICIN product.

Critical Accounting Policies, Significant Judgments and Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements 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: revenue recognition; inventories; accrued clinical research costs; investments; long-lived assets; income taxes and accounting for stock-based compensation.

As noted earlier in the Notes to the Condensed Consolidated Financial Statements, Cubist adopted FIN 48 in the first quarter of 2007. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Other than the adoption of FIN 48, our critical accounting policies and the methodologies and assumptions we apply under them have not materially changed since the date of our 2006 Form 10-K. For more information on our other critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2006. Readers are encouraged to review these disclosures in conjunction with the review of this Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in information affecting our market risk since the end of the fiscal year ended December 31, 2006, as described in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 4. CONTROLS AND PROCEDURES

Cubist maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the Securities and Exchange Commission, or the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on their evaluation of Cubist’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2007, the Chief Executive and Chief Financial Officers 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 Company’s internal control over financial reporting during the three months ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Investing in our company involves a high degree of risk. You should consider carefully the risks described below, together with the other information in and incorporated by reference into this quarterly report. If any of the following risks actually occur, our business, operating results or financial condition could be materially adversely affected. This could cause the market price of our common stock to decline, and could cause you to lose all or part of your investment.

Risks Related to Our Business

We depend heavily on the success of our lead product CUBICIN, which may not continue to be widely accepted in the United States by physicians, patients, third-party payors, or the medical community in general for the treatment of cSSSI and may not be widely accepted for treatment of the new indication of S. aureus bacteremia, including right-sided endocarditis, caused by MRSA and MSSA.

We have invested a significant portion of our time and financial resources in the development of CUBICIN. We anticipate that for the foreseeable future our ability to generate revenues will depend solely on the commercial success of CUBICIN, which depends upon its continued acceptance by the medical community and the future market demand and medical need for CUBICIN. CUBICIN was approved by the FDA in September 2003 for the treatment of complicated skin and skin structure infections, or cSSSI, and launched in the United States in November 2003. On May 25, 2006, the FDA approved CUBICIN for the additional indication of S. aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis, caused by methicillin-susceptible and methicillin-resistant isolates.

As of June 30, 2007 we had less than four years experience as to the sales of this product, and one year of sales since the approval of the new indication. Because this is still a relatively new product, we cannot be sure that CUBICIN will continue to be accepted by purchasers in the pharmaceutical market for the treatment of cSSSI or that CUBICIN will be widely accepted for the treatment of S. aureus bacteremia, for which CUBICIN has been indicated for just over one year. Further, CUBICIN currently competes with a number of existing antiinfective drugs manufactured and marketed by major pharmaceutical companies and potentially will compete against new antiinfective drugs whose approval is anticipated in the near future and others that are in development at other companies.

The degree of continued market acceptance of CUBICIN, and our ability to grow revenues from the sale of CUBICIN, depends on a number of additional factors, including:

· the continued safety and efficacy of CUBICIN, including any unanticipated adverse reactions to the drug in patients;

· the advantages and disadvantages of CUBICIN compared to alternative therapies;

· our ability to educate the medical community about the safety and efficacy of CUBICIN;

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

· the level of access that our sales force has to physicians who are likely to prescribe CUBICIN;

· the market price of CUBICIN as compared to alternative therapies and physicians and third-party payors’ attitudes towards the relative value of CUBICIN versus other therapies; and

· the ability of target organisms to develop resistance to CUBICIN.

Even if the medical community accepts that CUBICIN is safe and efficacious for its approved indications and any future approved indications, physicians may choose to restrict the use of CUBICIN due to antibiotic resistance concerns, and both physicians and pharmacy departments may choose other currently-marketed or later-approved antibiotics on the basis of cost, availability of reimbursement, convenience, safety, efficacy, or other factors.

Because CUBICIN is the only product that we sell currently, any impediment to the success of this product would have a significant effect on our business and financial results.

If we are unable to maintain satisfactory sales and marketing capabilities, we may not succeed in commercializing CUBICIN.

Until our launch of CUBICIN in November 2003, we had not previously marketed or sold a drug product. In connection with our launch of CUBICIN, we developed our own sales and marketing capabilities in the United States, and we continue to develop those capabilities. We added 36 sales territories during 2006. Therefore, our expanded U.S. sales and marketing team has worked together for a limited period of time. We cannot guarantee that we will continue to be successful in marketing CUBICIN on our own in the United States. Our partner in Europe, Novartis AG, or Novartis, has significant pharmaceutical sales experience but limited experience marketing and selling CUBICIN. Novartis began its launch of CUBICIN in nine EU countries in 2006 and four more in the first half of 2007. Other than our partner in Israel, none of our other international partners have launched CUBICIN in their respective territories. Even if our international partners obtain additional approvals to market CUBICIN in their respective territories, we cannot guarantee that we or our partners will be successful in marketing CUBICIN in these markets.

We face significant competition from other biotechnology and pharmaceutical companies, particularly with respect to CUBICIN, and our operating results will suffer if we fail to compete effectively.

The biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the United States 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 and more experienced marketing and manufacturing organizations. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis technologies and drug products that are 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 acceptance of CUBICIN, if the reluctance of physicians to switch from existing drug products to CUBICIN inhibits the acceptance of CUBICIN, or if physicians switch to new drug products or choose to reserve CUBICIN for use in limited circumstances, we will not achieve our business plan. In addition, CUBICIN may face competition from drug candidates currently in clinical development and drug candidates that could receive regulatory approval before CUBICIN in countries outside the United States and the European Union.

The competition in the market for therapeutic products that address infectious diseases is intense. CUBICIN faces competition in the United States from commercially available drugs such as vancomycin, marketed generically by Abbott Laboratories, Shionogi & Co., Ltd. and others, Zyvox®, marketed by Pfizer, Inc., Synercid®, marketed by King Pharmaceuticals, Inc., and Tygacil®, marketed by Wyeth. 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. In addition, in 2007, Pfizer, Inc. could receive FDA approval to market Dalbavancin in the United States and Theravance, Inc. could receive FDA approval to market Telavancin, which Theravance developed with its partner, Astellas Pharma, Inc. Other antibiotics in clinical development could compete with CUBICIN, if approved by the appropriate regulatory agencies, in future years.

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

We are completely dependent on third parties to manufacture CUBICIN, and our commercialization of CUBICIN could be stopped, delayed, or made less profitable if those third parties fail to provide us with sufficient quantities of CUBICIN or fail to do so at acceptable prices.

We do not have the capability to manufacture our own CUBICIN active pharmaceutical ingredient, or API. We have entered into a manufacturing and supply agreement with ACS to manufacture and supply us with CUBICIN API for commercial purposes. ACS is our sole provider of our commercial supply of CUBICIN API. Pursuant to our agreement with ACS, ACS 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 held at ACS. 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.

In addition, we do not have the capability to manufacture our own CUBICIN finished drug product. We have entered into manufacturing and supply agreements with both Hospira Worldwide, Inc. or Hospira, and Catalent Pharma Solutions, LLC (formerly known as Cardinal Health PTS, LLC), or Catalent, to manufacture and supply to us finished product.

If Catalent, Hospira, or, in particular, ACS, experiences any significant difficulties in its respective manufacturing processes for CUBICIN API or finished product, we could experience significant interruptions in the supply of CUBICIN. Our inability to coordinate the efforts of our third party manufacturing partners, or the lack of capacity available at our third party manufacturing partners, could impair our ability to supply CUBICIN at required levels. Because of the significant regulatory requirements that we would need to satisfy in order to qualify a new bulk or finished product supplier, if we face these or other difficulties with our current suppliers, we could experience significant interruptions in the supply of CUBICIN if we decided to transfer the manufacture of CUBICIN to one or more other suppliers in an effort to deal with the difficulties.

Because the ACS manufacturing facilities are located in Italy, we must ship CUBICIN API to the United States for finishing, packaging and labeling. Each shipment of our API is of significant value, and while in transit, it could be lost or damaged. Moreover, at any time after shipment to the United States, our API could be lost or damaged as it is stored at our warehouser, Integrated Commercialization Solutions, Inc., or ICS, and moves through our finished product manufacturers. We have taken risk mitigation steps and have purchased insurance to protect against such loss or damage. However, depending on when in this process the API is lost or damaged, we may have limited recourse for recovery against our finished product manufacturers or insurers. As a result, our financial performance could be impacted by any such loss or damage to our API. We are also subject to financial risk from volatile fuel costs due to shipping CUBICIN API to the United States, as well as shipping of finished product within the United States and to our international distribution partners for packaging, labeling and distribution.

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 in Italy. In any such event, the supply of CUBICIN API stored at ACS could also be impacted.

While we have reduced the cost of producing CUBICIN in recent years, we cannot guarantee that we will be able to continue to reduce the costs of commercial scale manufacturing of CUBICIN over time. In order to continue to reduce costs, we may need to develop and implement process improvements. In order to implement such process improvements, we will need, from time to time, to notify or make submissions with regulatory authorities, and the improvements may be subject to approval by such regulatory authorities. We cannot be sure that such approvals will be granted or granted in a timely fashion. We cannot guarantee that we will be able to enhance and optimize output in our commercial manufacturing process. If we cannot enhance and optimize output, we may not be able to reduce our costs over time.

Our ability to grow revenues from the commercialization and sale of CUBICIN will be limited if we or our partners do not obtain approval to market CUBICIN for any additional indications in countries where CUBICIN is approved, or if our partners do not receive approvals to market CUBICIN at all in countries where CUBICIN is not yet approved, or if we fail to fulfill certain post-approval requirements of the FDA relating to CUBICIN.

We may seek regulatory approval for additional indications for CUBICIN. To do so, we would need to successfully conduct additional clinical trials and then apply for and obtain the appropriate regulatory approvals. Our revenues may not grow as expected and our business and operating results may be harmed if additional indications for CUBICIN are not approved in the United States.

In January 2006, the EMEA granted final approval for marketing CUBICIN in the EU for the treatment of cSSTI, where the presence of susceptible Gram-positive bacteria is confirmed or suspected. In July 2006, Novartis filed an additional MAA with the EMEA for an expanded label in the EU based on the results of our S. aureus bacteremia and endocarditis trial. In July 2007, the CHMP, the scientific committee of the EMEA issued a positive opinion recommending approval of an expanded Marketing Authorization for the CUBICIN label to include S. aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis or with cSSTI. The final decision regarding an expanded label for CUBICIN in the EU is expected in September 2007. CUBICIN is also approved in Korea, Taiwan and Israel for the same indications as our U.S. approval, in Argentina for cSSSI and in Switzerland for cSSTI and S. aureus bacteremia. Our international collaborators have submitted or plan on submitting applications for approvals to market CUBICIN in other territories, however, we cannot be sure that any regulatory authority will approve these or any future submissions on a timely basis or at all.

In connection with our United States marketing approvals for CUBICIN, the FDA has required us to do certain Phase 4 clinical studies. We are also working on a pediatric development plan as a follow-up to the single dose Phase 1 pharmacokinetic study in pediatric patients that we completed in 2006. We are working with the FDA to design and complete these studies. Our business would be seriously harmed if we do not complete these studies, and the FDA, as a result, requires us to change the marketing label for CUBICIN in respect to combination therapy or patients with renal impairment.

In addition, adverse medical events that occur during the Phase 4 clinical trials or during commercial marketing could result in the temporary or permanent withdrawal of CUBICIN from commercial marketing, which could seriously harm our business and cause our stock price to decline.

If we are unable to discover, in-license, or acquire drug candidates, we will not be able to implement our current business strategy.

Our approach to drug discovery is unproven. Notwithstanding the investment of significant resources to research and development over the years since Cubist was founded, we have not reached the stage of clinical testing in humans of any drug candidates developed from our drug discovery program. We cannot assure you that we will reach this stage for any internally developed drug candidates or that there will be clinical benefits associated with any drug candidates that we do develop. While we are researching other drug candidates for potential clinical development, most drug candidates never make it to the clinical development stage. Even those that do make it into clinical development have only a small chance of gaining regulatory approval and becoming a drug product.

Our drug product, CUBICIN, and most of our other current and former drug candidates are the result of in-licensing patents and technologies from third parties. These in-licensing activities represent a significant expense for Cubist and generally require us to pay royalties to other parties on product sales. Unless we are able to use our drug discovery approach to identify suitable drug candidates, acquisition or in-licensing will be our only source of drug candidates. However, there can be no assurance that we will be able to acquire or in-license additional desirable drug candidates on acceptable terms, or at all. In fact, we have faced and will continue to face significant competition for the acquisition or in-licensing of any promising drug candidates from a variety of other companies with interest in the antiinfective 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 Cubist. Because of the rising intensity of the level of competition for such products, the cost of acquiring or in-licensing such candidates

has grown dramatically in recent years, and candidates are often priced and sold at levels that we cannot afford or we believe are not justified by market potential. Such competition and higher prices are most pronounced for late-stage candidates and already-marketed products, which have the lowest risk and would have the most immediate impact on our business.

If we are unable to discover or acquire promising candidates, 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 to gain approval for use in humans. For example in February 2004, we discontinued, due to observed adverse events, clinical development of CAB-175, a parenteral cephalosporin antibiotic that we had in-licensed from Sandoz GmbH. Also, in April 2004, we discontinued, as a result of data from human clinical research studies, development of oral formulations of ceftriaxone, a broad-spectrum antibiotic for which we had licensed the underlying technology from International Health Management Associates and the University of Utah. More recently, we announced in the third quarter of 2006 that we have decided not to make any further investment in the development of HepeX-B while we evaluate our strategic options for this drug candidate. Failure to develop new drug candidates successfully could have a material adverse effect on our business, operating results and financial condition.

If pre-clinical or clinical trials for our drug candidates are unsuccessful or delayed, we will be unable to meet our anticipated development and commercialization timelines, which could harm our business.

Before we receive regulatory approvals for the commercial sale of any of our drug candidates, 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 often takes many years. Furthermore, we cannot be sure that pre-clinical testing or clinical trials of any drug candidates will demonstrate the safety and efficacy of our drug candidates at all or to the extent necessary to obtain regulatory approvals. Companies in the biotechnology and pharmaceutical industries, including companies with greater experience in pre-clinical testing and clinical trials than we have, have suffered significant setbacks in advanced clinical trials, even after demonstrating promising results in earlier trials. In our own case, clinical trials of CUBICIN for the treatment of community acquired pneumonia failed to demonstrate sufficient efficacy despite promising results in pre-clinical and early clinical trials.

Our clinical trials must be carried out under protocols that are acceptable to regulatory authorities and to the committees responsible for clinical studies at the sites at which the studies are conducted. There may be delays in preparing protocols or receiving approval for them that may delay either or both of the start and finish of our clinical trials. Feedback from regulatory authorities or results from earlier stage clinical studies might require modifications or delays in later stage clinical trials or could cause a termination or suspension of drug development. These types of delays or suspensions can result in increased development costs and delayed regulatory approvals. Our ability to secure clinical trial insurance at a reasonable cost could also cause delays.

Furthermore, there are a number of additional factors that may cause delays in our clinical trials. The rate of completion of our clinical trials is dependent in part on the rate of patient enrollment. There may be limited availability of patients who meet the criteria for certain clinical trials. For example, the limited number of patients each year who receive liver transplants for Hepatitis B, the target population for our drug candidate HepeX-B, in part led us to discontinue investment in clinical development of HepeX-B. Delays in planned patient enrollment can result in increased development costs and delays in regulatory approvals. For example, our clinical trial to determine the safety and efficacy of using CUBICIN to treat bacteremia with known or suspected endocarditis experienced delays attributable to slow enrollment. In addition, our clinical trials may be delayed by one or more of the following factors:

· inability to manufacture sufficient quantities of acceptable materials for use in clinical trials;

· inability to adequately follow patients after treatment;

· the failure of third-party clinical trial managers to perform their oversight of the trials;

· the failure of our clinical investigational sites and related facilities and records to be in compliance with the FDA’s Good Clinical Practices;

· inability to enroll study subjects;

· our inability to reach agreement with the FDA on a trial design that we are able to execute; or

· the FDA placing a trial on “clinical hold” or temporarily or permanently stopping a trial for a variety of reasons, principally for safety concerns.

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

We will need to obtain regulatory approvals for our other drug candidates, and our ability to generate revenues from the commercialization and sale of products resulting from our development efforts will be limited by any failure to obtain these approvals.

The FDA and comparable regulatory agencies in foreign countries impose substantial requirements for the development, production and commercial introduction of drug products. These include lengthy and detailed pre-clinical, laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. All of our drug candidates will require governmental approvals for commercialization. To date, we have not obtained government approval in the United States for any drug product other than CUBICIN for the indications of cSSSI and S. aureus bacteremia, including those with right-sided infective endocarditis. Our collaborator, Novartis, has received approval for marketing CUBICIN in the European Union for the indication of cSSTI, in Argentina for cSSSI and in Switzerland for cSSTI and S. aureus bacteremia, our collaborators, Kunhil Pharmaceutical Corp., TTY Biopharm Co. Ltd., and Medison Pharma, Ltd., have received approval for marketing CUBICIN in South Korea, Taiwan and Israel, respectively, for the same indications for which we have approval in the United States. We and our partners are pursuing approvals for CUBICIN in various other countries. Pre-clinical testing, clinical trials and manufacturing of our drug candidates will be subject to rigorous and extensive regulation by the FDA and corresponding foreign regulatory authorities. 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 regulatory agency requirements 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.

No product can receive FDA approval unless human clinical trials show both safety and efficacy for each target indication in accordance with FDA standards. The large majority of drug candidates that begin human clinical trials fail to demonstrate the desired safety and efficacy characteristics. Failure to demonstrate the safety and efficacy 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 cause them to be repeated or extended, or a program to 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. In addition, we cannot be sure that regulatory approval will be granted for drug candidates that we submit for regulatory review. Moreover, 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.

Our ability to generate revenues from the commercialization and sale of additional drug products will be limited by any failure to obtain these approvals.

The FDA may change its approval requirements or policies for antibiotics, or apply interpretations to its requirements or policies, in a manner that could delay or prevent commercialization of any new antibiotic product candidates or any additional indications for CUBICIN that we may seek in the United States.

Regulatory requirements for the approval of antibiotics in the United States may change in a manner that requires us to conduct additional large-scale clinical trials, which may delay or prevent commercialization of any new antibiotic product candidates or 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 have 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 approval studies of successfully completed non-inferiority studies as the basis for approval for certain types of antibiotics. Instead, the FDA is requiring for some antibiotic products, or other trials involving comparator antibiotics, placebo-controlled trials demonstrating the superiority of a drug candidate to placebo before considering approval. Conducting placebo-controlled trials for antibiotics can be time-consuming, expensive, and difficult to complete. Institutional review boards may not grant approval for placebo-controlled trials because of ethical concerns about denying some participating patients access to any antibiotic therapy during the course of the trial. Even if institutional review board approval is obtained, it may be difficult to enroll patients in placebo-controlled trials because certain patients would not receive antibiotic therapy. In addition, the FDA has not issued guidance articulating new standards or policies for demonstrating the safety and efficacy of antibiotics and has not indicated whether all antibiotics would require superiority studies for FDA approval. The lack of guidance from the FDA creates uncertainties about the standards for the approval of antibiotics in the United States. These factors could delay for several years or ultimately prevent commercialization of any new antibiotic product candidates or any additional indications for CUBICIN in the United States for which the FDA requires placebo-controlled trials. Even if we complete these trials, we may not be able to obtain adequate evidence of safety or efficacy to support approval.

Moreover, recent events, including complications arising from 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 based on safety, efficacy or other regulatory approvals. In particular, 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. Certain key members of Congress have asked the U.S. Government Accountability Office (GAO), an independent, nonpartisan arm of Congress, to investigate the FDA’s reliance on non-inferiority studies as a basis for approval. Congress may draft, introduce, and pass legislation that could significantly change the process for approval of antibiotics by the FDA.

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 on pharmaceutical products generally and particularly in our areas of focus. Any delay in obtaining, or an inability to obtain, applicable regulatory approvals could prevent us from successfully commercializing any new antibiotic product candidates, receiving any additional indications for CUBICIN, generating revenues, and sustaining profitability.

If we are unable to generate revenues from any drug products other than CUBICIN, our ability to create long-term shareholder value may be limited.

Apart from CUBICIN, we have no other drug products that have been approved by the FDA, and our current pipeline does not include any drug candidates that are in clinical development. Because of the long development time of drug candidates, even once they are in clinical development, none of the drug candidates that we are currently developing, even if one were to overcome the significant hurdles of a pre-clinical candidate ever making it to the commercial market, would generate revenues for many years. Unless and until we are able to

develop, in-license or acquire other successful drug products, we will continue to rely solely on CUBICIN for our sales revenues. If we are unable to bring any of our current or future drug candidates to market, or to acquire any marketed drug products, our ability to create long-term shareholder value may be limited.

We may not be able to obtain, maintain or protect certain proprietary rights necessary for the development and commercialization of CUBICIN, our other drug candidates and our research technologies.

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. We consider that in the aggregate our unpatented proprietary technology, patent applications, patents and licenses under patents owned by third parties are of material importance to our operations. 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. Legal standards relating to the validity and scope of patents covering pharmaceutical and biotechnological inventions are continually developing, both in the United States and in other important markets outside the United States. Our patent position is highly uncertain and involves complex legal and factual questions, and we cannot predict the scope and breadth of patent claims that may be afforded to our patents or to other companies’ patents. We cannot assure you that the patents we obtain or the unpatented proprietary technology we hold will afford us significant commercial protection.

The primary composition of matter patent covering CUBICIN in the United States 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 with respect to any of our pending patent applications for CUBICIN, our other drug candidates, or our research technologies or with respect to any patent applications filed by us in the future; nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting CUBICIN, our other drug candidates or our other technology.

The degree of future protection for our proprietary rights is uncertain. 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. Even if we have valid and enforceable patents, these patents still may not provide sufficient protection against competing products or processes.

Of particular concern for a company like ours, having one marketed product, is that third parties may seek to market generic versions of CUBICIN by filing an Abbreviated New Drug Application, or ANDA, with the FDA in which they claim that patents protecting CUBICIN owned or licensed by us are invalid, unenforceable and/or not infringed, a so-called Paragraph IV filing. From 1997 through 2002, about one third of all new chemical entities, such as daptomycin, the chemical ingredient in CUBICIN, have been the subject of a Paragraph IV filing. September 2007 will be the first opportunity under United States patent law for a generic company to make a Paragraph IV filing. If such a filing is made, we may need to defend and/or assert our patents, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find our patents invalid and/or unenforceable.

If our 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. Moreover, 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.

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 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 collaborative partners, employees and consultants. It is possible that these agreements could be breached and we might not have adequate remedies for any such breaches.

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 U.S. 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. We cannot assure you that the trademark protection that we have pursued or will pursue in the future will afford us significant commercial protection.

Beyond the specific concerns addressed above, intellectual property laws and regulations are constantly changing, and vary amongst different jurisdictions around the world, in ways that may affect our ability to protect or enforce our rights.

Third-party patent and intellectual property rights may interfere with our ability to commercialize drug products and research technologies.

Because the patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions, there can be no assurance that the patents owned and licensed by us, or any future patents, will ensure that others will not be issued patents in the United States and elsewhere that may prevent the sale of our drug products or require licensing and the payment of significant fees or royalties. Moreover, to the extent that any of our drug products or methods infringe the patents of a third party, or that our patents or future patents fail to give us an exclusive position in the subject matter claimed in those patents, we will be adversely affected. Patent disputes are frequent and can preclude the commercialization of products. If our drug candidates, drug products, or processes are found to infringe the patents of others or are found to impermissibly utilize the intellectual property of others, our development, manufacture and sale of any such infringing drug candidates or drug products could be severely restricted or prohibited. We may be unable to avoid infringement of a third-party patent and may have to obtain a license, defend an infringement action, or challenge the validity of a patent in a court of law or agency of competent jurisdiction. A license may be unavailable on terms and conditions acceptable to us, if at all. Intellectual property litigation can be expensive and time-consuming, and we may be unable to prevail in any such litigation or devote sufficient resources to pursue such litigation. If we do not obtain an appropriate license, if we are found liable for patent infringement or trade secret misappropriation, or if we are not able to have such patents declared invalid and/or unenforceable, we may be liable for significant monetary damages, may encounter significant delays in bringing products to market, and/or may be precluded from participating in the manufacture, use, or sale of products or methods of treatment requiring such licenses.

If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends in large part upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. Historically, we have been highly dependent on our management and scientific and medical personnel. In order to induce valuable employees to remain at Cubist, we have provided options that vest over time. The value to employees of these options is significantly affected by movements in our stock price that we cannot control and may at any time be insufficient to counteract more lucrative offers from other companies. We have also provided retention letters to a limited number of key employees. Despite our efforts to retain valuable employees, members of our management, scientific and medical teams may terminate their employment with us on short notice. The loss of

the services of any of our executive officers or other key employees could potentially harm our business or financial results. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level, and senior managers as well as junior, mid-level, and senior scientific and medical personnel. Other biotechnology and pharmaceutical companies with which we compete for qualified personnel have greater financial and other resources, different risk profiles, and a longer history in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than what we have to offer. If we are unable to grow our business according to our business plan, including by developing or acquiring additional drug products, we may become a less attractive place to work for our existing employees and for high quality candidates. If we are unable to continue to attract and retain high quality personnel, the rate and success at which we can discover, develop and commercialize drug candidates will be limited.

We have collaborative relationships that may expose us to a number of risks.

We have entered into, and anticipate continuing to enter into, collaborative arrangements with multiple third parties to discover, test, manufacture and market drug candidates and drug products. In October 2003, we entered into an international license and product supply agreement with a subsidiary of Chiron Corporation, or Chiron, to seek regulatory approvals and commercialize CUBICIN in Europe, Australia, New Zealand, India and certain Central American, South American and Middle Eastern countries. In April 2006, Novartis acquired Chiron. In December 2006, we entered into a license and product supply agreement with AstraZeneca to seek regulatory approvals and commercialize CUBICIN in China and other countries in Asia, Africa and the Middle East. In March 2007, we entered into a license agreement with Merck for the development and commercialization of CUBICIN in Japan. We have also entered into agreements with partners for the commercialization of CUBICIN in Israel, Taiwan, Canada and South Korea. In addition to commercial collaborations, we collaborate with a variety of other companies for manufacturing, clinical trials, clinical and preclinical testing, and research activities. Collaborations such as these are necessary for us to research, develop, and commercialize drug candidates. We cannot be sure that we will be able to establish any additional collaborative relationships on terms acceptable to us or that we will be able to work successfully with our existing collaborators or their successors.

Reliance on collaborative relationships poses a number of risks including the following:

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

· the focus of, amount and timing of resources dedicated by our collaborators to their respective collaborations with us is not under our control;

· some drug candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their own drug candidates or drug products;

· our collaborators may not elect to proceed with the development of drug candidates that we believe to be promising;

· disagreements with collaborators, including disagreements over proprietary rights, contract interpretation, or the preferred course of development, might cause delays or termination of the research, development or commercialization of drug candidates, might lead to additional responsibilities with respect to drug candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive; and

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

Collaborative arrangements with third parties are a critical part of our business strategy, and any inability on our part to establish collaborations on terms favorable to us or working successfully with our collaborators will have an adverse effect on our operations and financial performance.

A variety of risks associated with our international business relationships could materially adversely affect our business.

We have manufacturing, collaborative and clinical trial relationships outside the United States, and we expect CUBICIN to be marketed worldwide through licensees and distributors. Consequently, we are, and will continue to be, subject to additional risks related to operating in foreign countries. Associated risks of conducting operations in foreign countries include:

· differing regulatory requirements for drug approvals in foreign countries;

· the potential for so-called parallel importing;

· unexpected adverse events to CUBICIN that occur in foreign markets that we have not experienced in the United States;

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

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

· compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

· foreign taxes, including withholding of payroll taxes;

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

· workforce uncertainty in countries where labor unrest is more common than in the United States;

· production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

· business interruptions resulting from geo-political actions, including war and terrorism, and natural disasters in other countries.

These and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations.

We depend on third parties in the conduct of our clinical trials for CUBICIN and expect to do so with respect to other drug candidates, and any failure of those parties to fulfill their obligations could adversely affect our development and commercialization plans.

We depend on independent clinical investigators, contract research organizations and other third party service providers in the conduct of our clinical trials for CUBICIN and expect to do so with respect to other drug candidates. We rely heavily on these parties for successful execution of our clinical trials but do not control many aspects of their activities. For example, the investigators are not our employees. However, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations could delay or prevent the further development, approval and commercialization of CUBICIN and that of future drug candidates.

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

Since we began operations, we have incurred substantial net losses in every fiscal period until the third quarter of 2006. We generated net income of $14.5 million and $20.1 million for the three and six months ended June 30, 2007, respectively and incurred a net loss of $0.4 million for the year ended December 31, 2006. At June 30, 2007, we had an accumulated deficit of $464.1 million. These losses have resulted from costs associated with conducting research and development, conducting clinical trials, commercialization efforts and associated administrative costs.

We cannot be certain that we will not incur future operating losses related to the continued development and commercialization of CUBICIN, the development of our other drug candidates, as well as investments in other product opportunities. As a result, we cannot make specific predictions about our continued profitability. If we fail to maintain profitability, the market price of our common stock may decline.

We may require additional funds.

Until the third quarter of 2006, we were not a self-sustaining business, and we cannot guarantee that certain economic and strategic factors will not require us to seek additional funds. We believe that our existing cash, cash equivalents, investments and the anticipated cash flow from revenues will be sufficient to fund our operating expenses, debt obligations and capital requirements under our current business plan for the foreseeable future. We expect capital outlays and operating expenditures to increase over the next several years as we continue our commercialization of CUBICIN, actively seek to acquire or in-license additional products or product candidates, and expand our research and development activities and infrastructure. We may need to spend more money than currently expected because of unforeseen circumstances or circumstances beyond our control. We have no committed sources of capital and do not know whether additional financing will be available when needed, or, if available, that the terms will be favorable to our shareholders or us.

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 available on acceptable or affordable terms.

Our annual debt service obligations on our $350.0 million 2.25% subordinated convertible notes due in June 2013 are approximately $7.9 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.

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

Although we have limited experience in acquiring businesses and have completed only one business acquisition since our inception, we may acquire additional businesses that we believe will complement or augment our existing business. Acquisitions involve a number of 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; dealing with unfamiliar laws, customs and practices in foreign jurisdictions; and the effectiveness of the acquired company’s internal controls and procedures. The individual or combined effect of these risks could have a material adverse effect on our business. As well, in paying for an acquisition we may deplete our cash resources or dilute our shareholder base by issuing additional shares. Furthermore, there is the risk that our valuation assumptions and our models for an acquired product or business may be erroneous or inappropriate due to foreseen or unforeseen

circumstances and thereby cause us to overvalue an acquisition target. There is also the risk that the contemplated benefits of an acquisition may not materialize as planned or may not materialize within the time period or to the extent anticipated. If we acquire businesses with promising drug candidates or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to move one or more drug candidates through pre-clinical and/or clinical development to regulatory approval and commercialization. We cannot assure you that, following an acquisition, we will achieve revenues, specific net income or loss levels that justify the acquisition or that the acquisition will result in increased earnings, or reduced losses, for the combined company in any future period. Moreover, we may need to raise additional funds through public or private debt or equity financings to acquire any businesses, which would result in dilution for stockholders or the incurrence of indebtedness. We may not be able to operate acquired businesses profitably or otherwise implement our growth strategy successfully.

Our business may suffer if we fail to manage our growth effectively.

If our potential drug candidates progress in development or we are able to continue expanding the commercialization of CUBICIN, we will continue to build our organization and require significant additional investment in personnel, management systems and resources. Our ability to develop and grow the commercialization of our products, achieve our research and development objectives, and satisfy our commitments under our collaboration agreements depends on our ability to respond effectively to these demands and expand our internal organization to accommodate additional anticipated growth. If we are unable to manage our continued growth effectively, there could be a material adverse effect on our business.

Risks Related to Our Industry

We may become involved in patent litigation or other intellectual property proceedings relating to our products or processes that could result in liability for damage or stop our development and commercialization efforts.

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:

· 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 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;

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

· If third parties initiate litigation claiming that our brand names infringe their trademarks, we and our collaborators will need to defend against such proceedings; and

· 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.

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.

The cost of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the cost of such litigation and proceedings more effectively than we can because of their substantially greater resources. 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. Patent litigation and other proceedings may also absorb significant management time.

Competitors may develop drug products that make our drug products obsolete, less cost effective or otherwise less attractive to use.

Researchers are continually learning more about diseases, which may lead to new technologies for treatment. Even if we are successful in developing effective drug products, new drug products introduced after we commence marketing of any drug product may be safer, more effective, less expensive, or easier to administer than our drug products.

Revenues generated by products we currently market or that we successfully develop and for which we obtain regulatory approval depend on reimbursement from third-party payors such that if reimbursement for our products is reduced or is insufficient, there could be a negative impact on the utilization of our products.

Acceptable levels of reimbursement for costs of developing and manufacturing drug products and treatments related to those drug products by government authorities, private health insurers, and other organizations, such as HMOs, can have an affect on the successful commercialization of, and attracting collaborative partners to invest in the development of, our drug products and drug candidates. In both the United States and in foreign jurisdictions, legislative and regulatory actions can affect health care systems and reimbursement for our products.

For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and its implementing regulations, altered the manner in which Medicare sets payment levels for many prescription drugs, including CUBICIN. Under this legislation, beginning in 2005, Medicare reimbursement for CUBICIN was based on average sales price, or the ASP, rather than average wholesale price in both the physician office and hospital outpatient settings. This resulted in lower payment rates in 2005 as compared to 2004. Moreover, under this payment methodology the payment rate for CUBICIN is set on a quarterly basis based upon the ASP for previous quarters, and significant downward fluctuations in such reimbursement rate could negatively affect sales of CUBICIN. In addition, further changes to this methodology are possible. There have been a number of legislative and regulatory actions affecting health care systems. The current uncertainty and the potential for adoption of additional changes could affect the timing and amount of our product revenue, our ability to raise capital, obtain additional collaborators and market our products. Medicare payments for CUBICIN can influence pricing in the non-Medicare market as third party payors may base their reimbursement on the Medicare rate. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our drug products. Any reduction in demand would adversely affect our business. If reimbursement is not available or is available only at limited levels, we may not be able to obtain collaborators to manufacture and commercialize drug products, and may not be able to obtain a satisfactory financial return on our own manufacture and commercialization of any future drug products.

Third-party payors are increasingly challenging prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMOs, as well as possible legislative changes to reform health care or reduce government insurance programs, 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 effect of any health care reform, could materially adversely affect our ability to sell any drug products that are successfully developed by us and approved by regulators. Moreover, 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. Outside the United States, 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 sales revenue in those countries.

Our products will be subject to ongoing regulatory review.

Regulatory approvals in the United States and elsewhere can be conditioned on certain factors that may delay the marketing of drug products and increase the cost of developing, manufacturing, or marketing drug products. 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, or GMP, regulations, 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. Failure to comply with manufacturing and other post-approval regulations of the FDA and other regulatory agencies can, among other things, result in fines, 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 regulation may have a negative effect on our operating results and financial condition.

Our corporate compliance program cannot ensure that we are in compliance with all applicable “fraud and abuse” laws and regulations and other applicable laws and regulations in the jurisdictions in which we sell CUBICIN, and a failure to comply with such regulations or prevail in litigation related to noncompliance could harm our business.

Our general operations, and the research, development, manufacture, sale and marketing of our products, are subject to extensive 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 based upon what we believe are current best practices, 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.

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 risks 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 future. While we currently maintain product liability insurance coverage that we believe is adequate for our current operations, 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 maintain or obtain 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.

Our use of hazardous materials, chemicals, microorganisms and radioactive compounds exposes us to potential liabilities.

Our research and development involves the controlled use of hazardous materials, chemicals, viruses, bacteria and various radioactive compounds. We are subject to numerous environmental and safety laws and regulations. We are subject to periodic inspections for possible violations of these laws and regulations. Any such violation and the cost of compliance with any resulting order or fine could adversely effect our operations. Although we believe that our safety procedures for handling and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or a determination of non-compliance, we could be held liable for significant damages or fines.

If we are unable to adequately protect our confidential, electronically stored, transmitted and communicated information, it could significantly harm our business.

In our business, we electronically store large amounts of scientific, technical, employee, customer and other data. The amount of confidential, digital information that we store and that we transmit and communicate to third parties continues to grow as technology continues to evolve. If we have inadequate security to protect this information from a breach and/or if such a breach should occur, crucial confidential information about our research, development, employees, customers and future prospects could be unintentionally disclosed. In addition, our information could be improperly disclosed if we are unable to restrict what third parties with whom we share such information may do with the information, or how long they may access it. If our competitors were able to acquire our confidential information, our business and future prospects could be harmed.

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 the following:

· failure to meet or exceed revenue and financial projections we provide to the public;

· actual or anticipated variations in quarterly operating results;

· failure to meet or exceed the estimates and projections of the investment community;

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

· adverse results or delays in clinical trials;

· our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

· inability to obtain adequate product supply for any approved drug product or inability to do so at acceptable prices;

· the termination of a collaboration or the inability to establish additional collaborations;

· adverse regulatory decisions;

· unanticipated serious safety concerns related to the use of CUBICIN;

· introduction of new products or services offered by us or our competitors;

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

· expectations in the financial markets that Cubist may or may not be the target of potential acquirors;

· our failure to develop additional drug candidates and commercialize additional drug products;

· issuances of debt or equity securities;

· significant lawsuits, including stockholder litigation;

· the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;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 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 would harm our business.

If our officers, directors and certain stockholders choose to act together, they would be able to influence our management and operations, acting in their best interests and not necessarily those of other stockholders.

Our directors, executive officers and greater than 5% stockholders and their affiliates beneficially own a significant percentage of our issued and outstanding common stock. Accordingly, they collectively would have the ability to influence the election of all of our directors and to influence the outcome of corporate actions requiring stockholder approval. They may exercise this ability in a manner that advances their best interests and not necessarily those of other stockholders.

We have implemented anti-takeover provisions that could discourage, prevent or delay a takeover, even if the acquisition would be beneficial to our stockholders.

The existence of our stockholder rights plan and provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it difficult for a third party to acquire us, even if doing so would benefit our stockholders.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At our annual meeting of stockholders held on June 7, 2007, our stockholders voted on the following five items, as follows:

1. The stockholders re-elected Michael W. Bonney and Walter R. Maupay, Jr., and elected Sylvie Grégoire to the Board to serve as Class II Directors, each to hold office until 2010 and until their respective successors have been duly elected and qualified. The following votes were tabulated with respect to the election:

Director Elected	Number of Shares Voted For	Number of Shares Voted Against or Withheld
Michael W. Bonney	49,027,233	631,534
Walter R. Maupay, Jr., MBA	47,552,326	2,106,441
Sylvie Grégoire, Pharm. D.	49,022,530	636,237

In addition, following the annual meeting, the terms of the directorships of Gordon L. Archer, Kenneth M. Bate, David W. Martin, Jr., Martin Rosenberg, J. Matthew Singleton, Martin H. Soeters and Michael B. Wood continued.

2. The stockholders approved an amendment to our corporate charter to increase the number of authorized shares of common stock from 100,000,000 to 150,000,000 by the following votes:

For		Against		Abstain		Broker Non-Vote
48,419,797		1,207,982		30,988		0

3. The stockholders approved an amendment to our Amended and Restated 1997 Employee Stock Purchase Plan, or ESPP, to extend the ESPP for an additional ten years and to increase the number of shares issuable under the ESPP by 250,000 by the following votes:

For		Against		Abstain		Broker Non-Vote
39,532,456		1,225,722		68,858		8,831,731

4. The stockholders approved an amendment to our Amended and Restated 2002 Directors’ Equity Incentive Plan, or Directors’ Plan, to allow for the issuance of stock awards and to increase the number of shares issuable under the Directors’ Plan by 300,000 by the following votes:

For		Against		Abstain		Broker Non-Vote
25,317,382		15,424,322		85,332		8,831,731

5. The stockholders ratified the selection of PricewaterhouseCoopers LLP as our independent auditor for the fiscal year ending December 31, 2007 by the following votes:

For		Against		Abstain		Broker Non-Vote
48,738,287		907,048		13,432		0

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:

3.1 Certificate of Amendment to the Amended and Restated Certificate of Incorporation

10.1 Amended and Restated 1997 Employee Stock Purchase Plan (Appendix B, Definitive Proxy Statement on Form DEF-14A filed on April 26, 2007, File No. 000-21379)

10.2 Amended and Restated 2002 Directors’ Equity Incentive Plan (Appendix C, Definitive Proxy Statement on Form DEF-14A filed on April 26, 2007, File No. 000-21379)

† 10.3 Amendment No. 2, dated April 18, 2007, to the Processing Services Agreement entered into as of August 11, 2004 by and between Cardinal Health PTS, LLC and Cubist.

10.4 Third Amendment to Lease, dated June 28, 2007, by and between Cubist and The Realty Associates Fund VI LP, successor-in-interest to CALSTERS.

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

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

32.1 Certification pursuant to 18 U.S.C Section 1305, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification pursuant to 18 U.S.C Section 1305, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

† Confidential treatment requested

SIGNATURE

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

		CUBIST PHARMACEUTICALS, INC.


		August 3, 2007
		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)