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, 2008

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

Large accelerated filer	x	Accelerated filer	o	Non-accelerated filer	o

Smaller reporting company		o

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

Number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on July 28, 2008: 56,575,675.

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PART I. Financial Information

Item 1. Condensed Consolidated Financial Statements

CUBIST PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED
(in thousands, except share data)

	June 30,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	324,163		$	354,785
Accounts receivable, net	38,883			29,075
Inventory	16,999			18,733
Prepaid expenses and other current assets	8,606			6,686
Total current assets	388,651			409,279
Property and equipment, net	59,867			50,150
Intangible assets, net	21,228			22,698
Long-term investments	34,166			43,399
Other assets	7,422			8,989
Total assets	$	511,334		$	534,515

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	9,775		$	6,564
Accrued liabilities	61,482			58,735
Short-term deferred revenue	1,587			1,484
Total current liabilities	72,844			66,783

Long-term deferred revenue	16,761			16,332
Other long-term liabilities	3,764			2,698
Long-term debt	300,000			350,000
Total liabilities	393,369			435,813
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; 56,446,823 and 56,142,105 shares issued and outstanding as of June 30, 2008 and December 31, 2007, respectively	56			56
Additional paid-in capital	559,029			549,391
Accumulated other comprehensive loss	(23,934		)	(14,701		)
Accumulated deficit	(417,186		)	(436,044		)
Total stockholders’ equity	117,965			98,702
Total liabilities and stockholders’ equity	$	511,334		$	534,515

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

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CUBIST PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED
(in thousands, except share and per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Revenues:
U.S. product revenues, net	$	99,366		$	68,294		$	185,424		$	125,819
International product revenues	2,003			1,231			3,807			3,141
Other revenues	397			239			820			283
Total revenues, net	101,766			69,764			190,051			129,243

Costs and expenses:
Cost of product revenues	22,050			15,834			42,050			32,572
Research and development	45,193			17,145			67,557			33,015
Sales and marketing	22,187			15,993			42,170			30,987
General and administrative	10,521			7,787			21,954			15,507
Total costs and expenses	99,951			56,759			173,731			112,081

Operating income	1,815			13,005			16,320			17,162

Other income (expense):
Interest income	1,980			4,373			5,287			8,346
Interest expense	(1,985		)	(2,357		)	(5,302		)	(4,713		)
Other income (expense)	(18		)	(9		)	3,319			(16		)
Total other income (expense), net	(23		)	2,007			3,304			3,617

Income before income taxes	1,792			15,012			19,624			20,779

Provision for income taxes	160			522			766			688

Net income	$	1,632		$	14,490		$	18,858		$	20,091

Basic net income per common share	$	0.03		$	0.26		$	0.33		$	0.36
Diluted net income per common share	$	0.03		$	0.24		$	0.31		$	0.35

Shares used in calculating:
Basic net income per common share	56,391,804			55,406,882			56,306,256			55,263,940
Diluted net income per common share	57,743,860			68,754,256			67,767,704			57,180,092

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

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CUBIST PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(in thousands)

	Six months ended June 30,
	2008			2007

Cash flows from operating activities:
Net income	$	18,858		$	20,091
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on write-down of property and equipment	2,323			—
Net gain on repurchase of convertible subordinated debt	(1,979		)	—
Depreciation and amortization	4,178			5,838
Amortization of debt issuance costs (excluding write-off relating to debt repurchase)	684			776
Amortization of premium on investments	—			(414		)
Charge for 401k company common stock match	1,394			1,112
Stock-based compensation	5,834			5,383
Other non-cash	70			14
Changes in assets and liabilities:
Accounts receivable	(9,808		)	(4,116		)
Inventory	1,738			1,926
Prepaid expenses and other current assets	(1,920		)	339
Other assets	(293		)	1
Accounts payable and accrued liabilities	16,006			3,354
Deferred revenue	532			5,745
Other long-term liabilities	1,066			18
Total adjustments	19,825			19,976
Net cash provided by operating activities	38,683			40,067

Cash flows from investing activities:
Acquisition obligation payable to former Illumigen, Inc. shareholders	(10,191		)	—
Purchases of property and equipment	(14,747		)	(2,051		)
Purchases of investments	—			(2,622,704		)
Maturities of investments	—			2,645,713
Net cash provided by (used in) investing activities	(24,938		)	20,958

Cash flows from financing activities:
Issuance of common stock	2,525			5,413
Repurchase of convertible subordinated debt	(46,845		)	—
Repayment of capital lease obligation	—			(245		)
Net cash provided by (used in) financing activities	(44,320		)	5,168

Net increase (decrease) in cash and cash equivalents	(30,575		)	66,193
Effect of changes in foreign exchange rates on cash balances	(47		)	(2		)
Cash and cash equivalents, beginning of period	354,785			15,979
Cash and cash equivalents, end of period	$	324,163		$	82,170

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

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

(Unaudited)

A. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Cubist Pharmaceuticals, Inc. (“Cubist” or the “Company”) in accordance with accounting principles generally accepted in the United States of America 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 necessary for a fair statement of the financial position and results of operations for the interim periods ended June 30, 2008 and 2007.

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, 2007, which are contained in Cubist’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 29, 2008.

B. ACCOUNTING POLICIES

Investments

Cubist accounts for investments in accordance with the provisions of Statement of Financial Accounting Standards, or SFAS, No. 115,”Accounting for Certain Investments in Debt and Equity Securities.” Investments may consist of certificates of deposit, corporate bonds, government bonds and agencies, investment-grade commercial paper and auction rate securities. Investments which are considered held-to-maturity are stated at amortized cost, which approximates market value. Investments which are considered available-for-sale are carried at fair market value. Unrealized gains and losses are included in accumulated other comprehensive income as a separate component of stockholders’ equity. Realized gains and losses, dividends and interest income, including amortization of the premium and discount arising at purchase, are included in interest income. The Company currently holds $58.1 million in auction rate securities (private placement, synthetic collateralized debt obligations), which have experienced repeatedly failed auctions since August 2007. Historically, interest rates for these auction rate securities were reset at auctions with intervals of 7 to 35 days. While the auction rate securities have final maturity dates in 2017, because of the interest rate reset feature and the liquidity that the auctions provided, the Company has historically treated these securities as short term, available-for-sale investments. Given the failed auctions, the auction rate securities are no longer considered liquid and have been classified as long-term investments and the Company has recorded temporary losses of $23.9 million as of June 30, 2008 in other comprehensive income as a reduction of shareholders’ equity. The amount of the unrealized loss on the auction rate securities is based on routinely updated bids to purchase these notes received from the dealer and market maker for these instruments, corroborated through management’s analysis of the underlying collateral and credit default swap reference portfolios within the notes. Consistent with the Company’s investment policy guidelines, all five of the auction rate securities Cubist holds had AAA credit ratings at the time of purchase. During the month of July 2008, the auction rate securities we hold were downgraded by Fitch, but none are below A-. S&P ratings for these securities remain at AAA. Because the Company has the ability and intent to hold these investments until a recovery at fair value, which may be at maturity, the Company considers the unrealized loss to be temporary in nature at June 30, 2008. However, the credit and capital markets have continued to deteriorate in 2008 and the bids on the auction rate securities that Cubist holds have fluctuated during the first half of 2008. Certain conditions would cause Cubist to consider a change to the assessment of the notes. For example, if a certain concentration of the underlying entities in the reference portfolios default and if the average ratings of the underlying reference portfolio deteriorate significantly Cubist may adjust the carrying value of these investments through an other-than-temporary impairment charge in its Consolidated Statement of Operations. Investment classification detail can be found in Note E. “Investments” in the Notes to the condensed consolidated financial statements.

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Concentration of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, investments and accounts receivable. Cash, cash equivalents and investments can consist of certificates of deposit, commercial paper, corporate bonds, U.S. Government securities, money market funds and auction rate securities which are all held with three financial institutions in the U.S.

Amounts due from Cardinal Health Inc. represent approximately 30% and 28% of the Company’s accounts receivable balances at June 30, 2008 and December 31, 2007, respectively. Amounts due from Amerisource Bergen Drug Corporation represent approximately 30% and 32% of the Company’s accounts receivable balances at June 30, 2008 and December 31, 2007, respectively. Amounts due from McKesson Corporation represent approximately 22% and 20% of the Company’s accounts receivable balances at June 30, 2008 and December 31, 2007, respectively.

Revenues from Cardinal Health Inc. accounted for approximately 30% and 33% of total revenues for the three months ended June 30, 2008 and 2007, respectively. Revenues from Amerisource Bergen Drug Corporation accounted for approximately 29% and 30% of total revenues for the three months ended June 30, 2008 and 2007, respectively. Revenues from McKesson Corporation accounted for approximately 20% of total revenues for the three months ended June 30, 2008 and 2007.

Revenues from Cardinal Health Inc. accounted for approximately 30% and 33% of total revenues for the six months ended June 30, 2008 and 2007, respectively. Revenues from Amerisource Bergen Drug Corporation accounted for approximately 29% and 31% of total revenues for the six months ended June 30, 2008 and 2007, respectively. Revenues from McKesson Corporation accounted for approximately 20% of total revenues for the six months ended June 30, 2008 and 2007.

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) and license fees and milestone payments that are derived from collaboration, license and distribution agreements with other biopharmaceutical companies. 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 $0.9 million and $0.6 million at June 30, 2008 and December 31, 2007, respectively. The Company allows customers to return product within a specified period prior to and subsequent to the expiration date.

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Reserves for product returns are based upon many factors, including industry data of product return rates, historical experience of actual returns, analysis of the level of inventory in the distribution channel, if any, and reorder rates of end-users. Reserves for returns, discounts, chargebacks, customer rebates and wholesaler management fees are offset against accounts receivable and were $4.7 million and $3.9 million at June 30, 2008 and December 31, 2007, respectively. In the three months ended June 30, 2008 and 2007, provisions for sales returns, chargebacks, rebates, wholesaler management fees and prompt-pay discounts that were offset against product revenues totaled $7.6 million and $3.7 million, respectively. In the six months ended June 30, 2008 and 2007, provisions for sales returns, chargebacks, rebates, wholesaler management fees and prompt-pay discounts that were offset against product revenues totaled $13.7 million and $7.1 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 arrangement. The transfer price is generally established annually. 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 initial transfer price previously paid on such product. Under no circumstances would the subsequent adjustment result in a refund to the distribution partner of the initial transfer price. 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.

Basic and Diluted Net Income Per Share

Basic net income per share has been computed by dividing net income 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 per share has been computed assuming the conversion of convertible obligations and the elimination of the related interest expense, and the exercise of stock options, as well as their related income tax effects.

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

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	Three months ended				Six months ended
	June 30,				June 30,
	2008		2007		2008			2007

Net income basic	$	1,632	$	14,490	$	18,858		$	20,091

Effect of dilutive securities:

Interest on 2.25% convertible subordinated notes, net of tax	—		1,902		3,305			—
Debt issuance costs (excluding write-off relating to debt repurchase), net of tax	—		375		656			—
Net gain on debt repurchase, net of tax	—		—		(1,900		)	—

Net income diluted	$	1,632	$	16,767	$	20,919		$	20,091

Shares used in calculating basic net income per common share	56,391,804		55,406,882		56,306,256			55,263,940

Effect of dilutive securities:
Options to purchase shares of common stock	1,352,056		1,973,039		1,372,752			1,916,152
Notes payable convertible into shares of common stock	—		11,374,335		10,088,696			—

Shares used in calculating diluted net income per common share	57,743,860		68,754,256		67,767,704			57,180,092

Net income per share, basic	$	0.03	$	0.26	$	0.33		$	0.36
Net income per share, diluted	$	0.03	$	0.24	$	0.31		$	0.35

The calculation of diluted net income per common share has been adjusted to reflect the repurchase of $50.0 million of the 2.25% convertible subordinated notes in February 2008 (see Note G.).

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

	Three months ended		Six months ended
	June 30,		June 30,
	2008	2007	2008	2007

Options to purchase shares of common stock	4,175,827	1,752,404	4,222,703	2,730,632
Notes payable convertible into shares of common stock	9,749,430	—	—	11,374,335

Comprehensive Income

For the three and six months ended June 30, 2008, comprehensive income is comprised of net income for the period and unrealized losses recognized on available-for-sale marketable securities. For the three and six months ended June 30, 2007, comprehensive income is comprised of the Company’s net income, as there was no other comprehensive income for the three and six months ended June 30, 2007.

The following table sets forth the computation of comprehensive income for the three and six months ended June 30, 2008 and 2007:

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	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008			2007
	(in thousands)

Net income	$	1,632	$	14,490	$	18,858		$	20,091
(Increase) decrease in unrealized loss on investments	2,539		—		(9,233		)	—
Comprehensive income	$	4,171	$	14,490	$	9,625		$	20,091

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) superseded APB Opinion No. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows.” In March 2005, the SEC 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 F., “Employee Stock Benefit Plans” for additional information.

Recent Accounting Pronouncements

In June 2008, FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”, or FSP EITF 03-6-1. FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, “Earnings per Share”, or SFAS 128. The guidance applies to the calculation of EPS under SFAS 128 for share-based payment awards with rights to dividends or dividend equivalents. FSP EITF 03-6-1 clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings and selected financial data) to conform with the provisions of this FSP. Early adoption is not permitted. The Company is currently evaluating the effect that the adoption of FSP EITF 03-6-1 will have on its results of operations and financial condition.

In May 2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”, or SFAS 162. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company does not expect SFAS 162 to have a material impact on its results of operations and financial condition.

In May 2008, FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement)”, or FSP APB 14-1. FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are not considered debt instruments within the scope of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” or APB 14. FSP APB 14-1 also clarifies that issuers of such instruments should separately account for the liability and equity components of those instruments by allocating the proceeds from issuance of the instrument between the liability component and the embedded

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conversion option (the equity component). This allocation is done by first determining the carrying amount of the liability component based on the fair value of a similar liability excluding the embedded conversion option, and then allocating to the embedded conversion option the excess of the initial proceeds ascribed to the convertible debt instrument over the amount allocated to the liability component. That excess is reported as a debt discount and subsequently amortized as interest cost over the instrument’s expected life using the interest method. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and must be applied retrospectively to convertible debt instruments that are within the scope of this guidance and were outstanding during any period presented in the financial statements. A cumulative effect adjustment must be recognized as of the beginning of the first period presented. Early adoption is not permitted. The provisions of FSP APB 14-1 apply to Cubist’s outstanding debt. The Company is currently evaluating the effect that the adoption of FSP APB 14-1 will have on its results of operations and financial condition.

In April 2008, FASB issued FASB Staff Position No. FAS 142-3, “Determination of Useful Life of Intangible Assets,” or FSP 142-3. FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 “Goodwill and Other Intangible Assets,” or SFAS 142. FSP 142-3 is intended to improve the consistency between the useful life of an intangible asset determined under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (R), “Business Combinations,” or SFAS 141(R), and other U.S generally accepted accounting principles, or GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. The Company is currently evaluating the effect that the adoption of FSP 142-3 will have on its results of operations and financial condition.

In December 2007, FASB issued SFAS 141(R), which replaces SFAS 141, “Business Combinations”. SFAS 141(R) is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. Early adoption is not permitted. SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired in the business combination. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) will be applied prospectively. The Company is currently evaluating the effect that the adoption of SFAS 141(R) will have on its results of operations and financial condition.

In December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” or SFAS 160. SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component of equity. SFAS 160 also requires that entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is not permitted. SFAS 160 shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The Company is currently evaluating the effect that the adoption of SFAS 160 will have on its results of operations and financial condition.

In November 2007, the EITF reached a consensus on EITF Issue No. 07-01, “Accounting for Collaborative Arrangements,” or EITF 07-01. EITF 07-01 defines collaborative agreements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-01 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. EITF 07-01 shall be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The Company is currently evaluating the effect that the adoption of EITF 07-01 will have on its results of operations and financial condition.

C. BUSINESS AGREEMENTS

In April 2008, Cubist entered into a license and collaboration agreement with Dyax Corp., or Dyax, pursuant to which Cubist obtained an exclusive license for the development and commercialization of the

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intravenous formulation of Dyax’s ecallantide compound for the prevention of blood loss during surgery in North America and Europe. Pursuant to the terms of the agreement, Cubist paid Dyax a $15.0 million upfront payment which is included in research and development expense for the three and six months ended June 30, 2008. Cubist will make an additional $2.5 million payment on December 31, 2008, which is included in research and development expense for the three and six months ended June 30, 2008. Cubist may pay Dyax up to an additional $214.0 million in clinical, regulatory and sales-based milestone payments. The Company is also obligated to pay Dyax tiered royalties based on any future sales of ecallantide by Cubist. The agreement provides an option for Dyax to retain certain U.S. co-promotion rights. Cubist will be responsible for all further development costs associated with ecallantide in the licensed indications for the Cubist territory. Dyax retains exclusive rights to ecallantide in all other indications, including its hereditary angioedema program, as well as for the manufacturing of ecallantide. Except under certain circumstances, Dyax will supply Cubist with ecallantide for development and commercialization. The agreement may be terminated by Cubist without cause on prior notice to Dyax and by either party in the event of a breach of specified provisions of the agreement by the other party. Cubist recently terminated the ecallantide on-pump cardio thoracic surgery Phase 2 clinical trial known as Kalahari™ 1 and intends to initiate a dose-ranging Phase 2 clinical trial in the same indication later this year.

D. FAIR VALUE MEASUREMENTS

Cubist adopted the provisions of SFAS 157, “Fair Value Measurements,” or SFAS 157, and SFAS 159, “The Fair Value Option for Financial Assets and Liabilities Including an Amendment of the FASB Statement No. 115,” or SFAS 159, on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. In accordance with the FASB Staff Position No. FAS 157-2, “Effective Date of the FASB Statement No. 157,” or FSP 157-2, Cubist will defer the adoption of SFAS 157 for its nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more recurring basis, until January 1, 2009. The partial adoption of SFAS 157 did not have a material impact on the Company’s fair value measurements. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company did not elect to adopt the fair value option for eligible financial instruments under SFAS 159.

As defined in SFAS 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. SFAS 157 classifies these inputs into the following hierarchy:

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

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

Level 3 Inputs– Instruments with primarily unobservable value drivers.

The fair values of the Company’s financial assets carried at fair value as of June 30, 2008 are classified in the table below in one of the three categories described above:

	Fair Value Measurements Using						Assets at Fair
	Level 1		Level 2		Level 3		Value
	(in thousands)
Assets
Money market funds (included in cash and cash equivalents)	$	231,448	$	—	$	—	$	231,448
Auction rate securities	—		—		34,166		34,166
Total assets	$	231,448	$	—	$	34,166	$	265,614

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The Company currently holds $58.1 million in auction rate securities (private placement, synthetic collateralized debt obligations), which have experienced repeatedly failed auctions since August 2007. Historically, interest rates for these auction rate securities were reset at auctions with intervals of 7 to 35 days. While the auction rate securities have final maturity dates in 2017, because of the interest rate reset feature and the liquidity that the auctions provided, the Company has historically treated these securities as short term, available-for-sale investments. Given the failed auctions, the auction rate securities are not considered liquid and have been classified as long-term investments and the Company has recorded temporary losses of $23.9 million as of June 30, 2008 in other comprehensive income as a reduction of shareholders’ equity. The amount of the unrealized loss on the auction rate securities is based on routinely updated bids to purchase these securities received from the dealer and market maker for these instruments, corroborated through management’s analysis of the underlying collateral and credit default swap reference portfolios within the securities. Consistent with the Company’s investment policy guidelines, all five of the auction rate securities Cubist holds had AAA credit ratings at the time of purchase. In July 2008, these securities were downgraded by Fitch, but none are below A- S&P ratings for these securities remain at AAA. The Company considers the unrealized loss in the auction rate securities to be temporary in nature. The adoption of SFAS 157 had no effect on the valuation of the auction rate securities.

The table below provides a reconciliation of all assets measured at fair value on a recurring basis for which the Company used level three or significant unobservable inputs for the period of January 1, 2008 to June 30, 2008.

		Fair Value Measurement Using Significant Unobservable Inputs (Level 3 Inputs) Auction Rate Securities
		(in thousands)

Balance at January 1, 2008		$ 43,399
Total gains or losses (realized or unrealized)
Included in earnings (or changes in net assets)		—
Included in comprehensive net income		(9,233)
Purchases, issuances and settlements		—
Transfers in and/or out of Level 3		—
Balance at June 30, 2008		$ 34,166

E. INVESTMENTS

Investments classified as held-to-maturity are carried in Cubist’s Condensed Consolidated Balance Sheets at amortized cost. Investments classified as available-for-sale are carried at fair value. Included in long-term investments at June 30, 2008 and December 31, 2007 are $58.1 million of auction rate securities (private placement, synthetic collateralized debt obligations), which have experienced repeatedly failed auctions since August 2007. Historically, interest rates for these auction rate securities were reset at auctions with intervals of 7 to 35 days. While the auction rate securities have final maturity dates in 2017, because of the interest rate reset feature and the liquidity that the auctions provided, the Company has historically treated these securities as short-term, available-for-sale investments. Given the failed auctions, the auction rate securities are not considered liquid and have been classified as long-term investments. Additionally, as a result of the auction failures the Company has recorded unrealized losses on these securities since August 2007 in other comprehensive income as a reduction of shareholders’ equity. As of June 30, 2008, the Company has recorded $23.9 million of unrealized losses in other comprehensive income.

The amount of the unrealized loss on the auction rate securities is based on routinely updated bids to purchase the auction rate securities received from the dealer and market maker for these instruments, corroborated through management’s analysis of the underlying collateral and credit default swap reference portfolios within the securities. Consistent with the Company’s investment policy guidelines, all five of the auction rate securities Cubist holds had AAA credit ratings at the time of purchase. In July 2008, these securities were downgraded by Fitch, but none are below A-.

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S&P ratings for these securities remain at AAA. The cost basis, gross unrealized gains and losses and fair value for these securities are as of June 30, 2008 and December 31, 2007 are as follows:

	June 30, 2008									December 31, 2007
			Gross		Gross							Gross		Gross
	Cost		Unrealized		Unrealized					Carrying		Unrealized		Unrealized
	Basis		Gains		Losses			Fair Value		Value		Gains		Losses			Fair Value
	(in thousands)									(in thousands)
Auction rate securities	$	58,100	$	—	$	(23,934	)	$	34,166	$	58,100	$	—	$	(14,701	)	$	43,399
Total	$	58,100	$	—	$	(23,934	)	$	34,166	$	58,100	$	—	$	(14,701	)	$	43,399

Because the Company has the ability and intent to hold its investment in the auction rate securities until a recovery at fair value, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2008. The credit and capital markets have continued to deteriorate in 2008 and the bids on the auction rate securities that Cubist holds have fluctuated during the first half of 2008. Certain conditions would cause Cubist to consider a change to the assessment of the notes. For example, if a certain concentration of the underlying entities in the reference portfolios default and if the average ratings of the underlying reference portfolio deteriorate significantly Cubist may adjust the carrying value of these investments through an other-than-temporary impairment charge in its Consolidated Statement of Operations.

F. 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 available for grant to employees, directors, officers or consultants. The options were generally granted at fair market value on the grant date, vested ratably over a four-year period and expired ten years from the grant date. There are no shares available for future grant under this plan as it expired 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, 13,535,764 shares of common stock may be issued to employees, directors, officers or consultants. Options under this plan are granted with exercise prices of no less than the fair market value on the grant date, vest ratably over a four-year period and expire ten years from the grant date. At June 30, 2008, there were 4,842,946 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 with exercise prices of no less than the fair market value on the grant date, vest ratably over either a one-year or a three-year period and expire ten years from the grant date. At June 30, 2008, there were 353,750 shares available for future grant under this plan.

Summary of Employee Stock Purchase Plan

Eligible employees may participate in an employee stock purchase plan sponsored by the Company. Under this program, participants purchase Cubist common stock—at pre-determined six-month intervals—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, 2008, there were 309,386 shares available for future grant under this plan.

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Summary of SFAS 123(R) Expense

The effect of recording stock-based compensation in the Condensed Consolidated Statement of Operations for the three-month and six-month periods ended June 30, 2008 and 2007 was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
	(in thousands except per share data)

Stock-based compensation expense by type of award:
Employee stock options	$	2,974	$	2,624	$	5,638	$	5,181
Employee stock purchase plan	97		68		196		150
Total stock-based compensation	$	3,071	$	2,692	$	5,834	$	5,331

Effects on earnings per share:
Basic	$	0.05	$	0.05	$	0.10	$	0.10
Diluted	$	0.05	$	0.04	$	0.09	$	0.08

The carrying value of inventory in the Condensed Consolidated Balance Sheet for the six months ended June 30, 2008 and the year ended December 31, 2007 includes stock-based compensation costs of $0.2 million.

Valuation Assumptions

The fair value of each share-based award was estimated on the grant date 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,
	2008	2007	2008	2007

Stock option plans:
Expected stock price volatility	45%	45%	43%	49%
Risk free interest rate	3.2%	5.0%	2.9%	4.7%
Dividend yield	—	—	—	—
Expected life	4 years	4 years	4 years	4 years
Stock purchase plan:
Expected stock price volatility	30%	30%	30%	30%
Risk free interest rate	3.3%	4.7%	3.3%	4.7%
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 assumption represents the weighted average period of time that share-based awards are expected to be outstanding giving consideration to vesting schedules, historical exercise patterns and post-vesting cancellations for terminated employees that have been exhibited historically, adjusted for specific factors that may influence future exercise patterns. The Company estimates forfeitures of share-based awards based on its historical experience of share-based pre-vesting cancellations for terminated employees. The Company believes that its estimates are based

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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, 2008 is as follows:

	Number		Weighted Average Exercise Price

Outstanding at beginning of period	7,636,411		$	18.05
Granted	1,699,708		$	18.29
Exercised	(201,843	)	$	9.73
Canceled	(392,545	)	$	22.34
Outstanding at end of period	8,741,731		$	18.10

Options vested and exercisable as of June 30, 2008	4,944,183		$	17.28

Weighted average grant-date fair value of options granted during the period			$	7.14

The total intrinsic value of options exercised during the six months ended June 30, 2008 and 2007 was $2.0 million and $4.2 million, respectively. The aggregate intrinsic value of options outstanding as of June 30, 2008 was $22.2 million. These options have a weighted average remaining contractual life of 7.1 years.

As of June 30, 2008, there was $23.2 million of total gross unrecognized compensation cost related to outstanding unvested options granted under the Company’s equity incentive plans. That cost is expected to be recognized over a weighted-average period of 1.9 years. The aggregate intrinsic value of options vested and exercisable as of June 30, 2008 was $19.8 million. These options have a weighted average remaining contractual life of 5.7 years. The fair value of shares vested during the six months ended June 30, 2008 was approximately $7.5 million.

G. 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 all or a portion of the 2.25% Notes at 100% of the principal amount plus accrued and unpaid interest commencing in June 2011 if the closing price of Cubist’s common stock 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 February 2008, Cubist repurchased, in privately negotiated transactions, $50.0 million in original principal amount of its 2.25% Notes due June 15, 2013 at an average price of approximately $93.69 per $100 of debt. Following these repurchases, $300.0 million principal amount of the 2.25% Notes remain outstanding. These repurchases reduced Cubist’s fully-diluted shares of common stock outstanding by approximately 1,624,905 shares. Cubist repurchased the 2.25% Notes at prices below face value plus accrued interest and transaction fees of $0.1 million, resulting in a cash outflow of $46.8 million. The repurchase resulted in a net gain of $2.0 million. The gain is comprised of the $3.3 million difference between the purchase price of the notes and their face value recorded to

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other income (expense), offset by the write-off of debt issuance costs of $1.2 million, recorded as a non-cash charge to interest expense, and transaction expenses of $0.1 million recorded to general and administrative expense. The transaction was funded out of the Company’s working capital.

As of June 30, 2008, the fair market value of the 2.25% Notes amounted to $264.8 million. The estimated fair value of the 2.25% Notes was determined using quoted market rates.

H. 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.

I. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at:

	June 30,		December 31,
	2008		2007
	(in thousands)
Accrued payroll	$	939	$	1,115
Accrued incentive compensation	3,342		4,424
Accrued bonus	4,252		5,645
Accrued benefit costs	3,485		2,056
Accrued clinical trials	2,127		193
Accrued interest	281		350
Accrued Illumigen acquisition costs	—		10,191
Accrued manufacturing costs	6,636		2,672
Accrued royalty	24,964		23,729
Accrued property and equipment	3,985		—
Other accrued costs	11,471		8,360
Total	$	61,482	$	58,735

J. INVENTORY

Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out, 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 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,
	2008		2007
	(in thousands)
Raw materials	$	8,505	$	9,432
Work in process	2,330		2,858
Finished goods	6,164		6,443
	$	16,999	$	18,733

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K. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at:

	June 30,			December 31,
	2008			2007
	(in thousands)
Building	$	44,005		$	43,385
Leasehold improvements	14,111			10,042
Laboratory equipment	16,173			15,251
Furniture and fixtures	1,594			1,500
Computer equipment	12,998			11,060
Construction in progress	5,300			1,194
	94,181			82,432
Less accumulated depreciation and amortization	(34,314		)	(32,282		)
Property and equipment, net	$	59,867		$	50,150

Property and equipment additions during the three and six months ended June 30, 2008 consisted primarily of additions related to the construction of approximately 30,000 square feet of additional laboratory space at the Company’s main building at 65 Hayden Avenue as well as costs related to building out additional leased space at 55 and 45 Hayden Avenue. Additionally, during the six months ended June 30, 2008, Cubist wrote-off $2.3 million of property being demolished at 65 Hayden Avenue, consisting primarily of office space and other furniture and fixtures, in order to accommodate the construction of additional laboratory space.

Depreciation and amortization expense was $1.4 million and $1.1 million for the three months ended June 30, 2008 and 2007, respectively, and $2.7 million and $2.2 million for the six months ended June 30, 2008 and 2007, respectively.

L. INTANGIBLE ASSETS

Intangible assets consisted of the following at:

		June 30,			December 31,
		2008			2007
		(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	(2,161		)	(2,128		)
	accumulated amortization – manufacturing rights	(1,458		)	(1,250		)
	accumulated amortization – acquired technology rights	(8,838		)	(7,610		)
	accumulated amortization – intellectual property	(5,376		)	(5,375		)
Intangible assets, net		$	21,228		$	22,698

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

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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 each of the transactions. The amortization of the Eli Lilly intangible assets are included in cost of product revenues.

In November 2005, Cubist selected ACS Dobfar SpA, or ACS, as the single source supplier of active pharmaceutical ingredient, or API, for CUBICIN. Cubist terminated its manufacturing and supply agreement with DSM Capua SpA, or DSM, for API effective May 2006. The useful life of the DSM manufacturing rights was adjusted to coincide with the termination date of May 2006. As Cubist received no future benefit from the DSM manufacturing rights, their gross asset value and related allowance for amortization expense were eliminated from the manufacturing rights accounts in 2006 with no resulting gain or loss. The remaining balance of these assets was allocated to inventory and was expensed to cost of product revenues as the related inventory lots were sold. The DSM assets were fully expensed in 2007. The manufacturing rights associated with the ACS agreement are being amortized to inventory over a term of six years and expensed to cost of product revenues as the related inventory lots are sold.

Amortization expense was $0.7 million and $0.8 million for the three months ended June 30, 2008 and 2007, respectively. Amortization expense was $1.5 million and $3.6 million for the six months ended June 30, 2008 and 2007, respectively. Amortization expense for the three and six months ended June 30, 2007 includes amounts relating to the DSM manufacturing rights. The estimated aggregate amortization of intangible assets as of June 30, 2008 for each of the five succeeding years is as follows:

	(in thousands)
Remainder of 2008	$	1,471
2009	2,941
2010	2,941
2011	2,524
2012	2,524
2013 and thereafter	8,827
	$	21,228

M. 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. Prior to April 2008, the Company had concentrated exclusively on developing products for the anti-infective marketplace. On April 23, 2008, the Company entered into an exclusive license and collaboration agreement with Dyax related to the prevention of blood loss during surgery, a non-anti-infective indication. 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.

N. INCOME TAXES

The effective tax rates for the six months ended June 30, 2008 and 2007 were 3.9% and 3.4%, respectively. The effective tax rates for the six months ended June 30, 2008 and 2007 relate to federal alternative minimum tax expense and state tax expense. Changes in the effective tax rates from period to period may be significant as they depend on many factors including, but not limited to, changes in circumstances surrounding the need for a valuation allowance, size of the Company’s income or loss, and one time activities occurring during the period. 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. All of the Company’s deferred tax assets have a full valuation allowance recorded against them. Based on management’s review of the Company’s historical tax position and operational results, realization of Cubist’s deferred tax assets does not meet the “more likely than not” criteria under SFAS No. 109. Management will continue to monitor the available information in determining whether there is sufficient positive evidence to consider releasing the valuation allowance on the deferred tax assets. Should management determine the valuation

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allowance is no longer required, a tax benefit would be recorded in the financial period of the change in determination.

On January 1, 2007, the Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of the 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 research and development tax credit carryforwards, relating to issues that were identified in the context of a state tax examination. This adjustment to the credit carryforwards did not impact the Company’s retained earnings or Condensed Consolidated Statement of Operations, as there is a full valuation allowance recorded against the deferred tax asset. The Company is in the process of conducting a study of its research and development carryforwards. This study may result in additional changes to the Company’s research and development credit carryforwards. Since a full valuation allowance has been provided against these carryforwards, any adjustment to the credit carryforwards upon completion of this study would be offset by a corresponding adjustment to the valuation allowance. As a result, there would be no impact to the Condensed Consolidated Balance Sheet or Statement of Operations.

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 June 30, 2008 and December 31, 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.

O. SUBSEQUENT EVENT

Effective July 1, 2008, Cubist entered into exclusive agreement with AstraZeneca Pharmaceuticals LP, or AstraZeneca, to promote and provide other support in the U.S. for MERREM^® I.V. (meropenem for injection), an established broad spectrum (carbapenem class) I.V. antibiotic. Under the agreement, Cubist will promote and support MERREM I.V. using its existing U.S. acute care sales and medical affairs organizations. AstraZeneca will continue to provide marketing and commercial support for MERREM I.V. The agreement establishes a baseline annual payment by AstraZeneca to the Company of $20.0 million, to be adjusted up or down based on actual sales of MERREM I.V. The annual sales targets may be adjusted if certain events occur during the term of the agreement that could impact sales of MERREM I.V. The Company is obligated under the agreement to provide certain levels of support with respect to MERREM I.V., including requirements related to sales calls to physicians, specified priority of presentation of MERREM I.V. relative to other products, and a minimum number of sales representatives and clinical science directors. The term of the agreement extends through December 31, 2012, unless earlier terminated. The agreement includes standard termination provisions for material breaches by, and bankruptcy, insolvency or changes in control of, the other party. The agreement may also be terminated by AstraZeneca if sales fall below certain agreed-upon thresholds, by Cubist if AstraZeneca conducts certain activities competitive with MERREM I.V. in the United States, or by either party: (i) without cause effective no earlier than January 1, 2010, (ii) in the event that the Company ceases to promote CUBICIN, (iii) if AstraZeneca withdraws MERREM I.V. from the market or decides or is required to restrict approved indications for MERREM I.V., (iv) in the case of certain price controls on MERREM I.V. imposed by governmental entities, or (v) in the event of certain failures of supply of MERREM I.V. by AstraZeneca. The agreement also would terminate automatically upon a termination or reduction to non-exclusive of AstraZeneca’s right to market MERREM I.V. in the United States pursuant to an agreement between AstraZeneca’s affiliate, AstraZeneca UK Limited, and Sumitomo Pharmaceuticals Co., Limited. The agreement also includes certain restrictions on the Company from marketing, promoting, selling and engaging in certain other activities with respect to competing products during the term of the agreement and for three months thereafter.

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

FORWARD-LOOKING STATEMENTS

This document contains and incorporates by reference ‘‘forward-looking statements” 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 publishing clinical trials, development time lines and regulatory authority approval for and oversight of CUBICIN or other drug candidates;

· our expectations regarding payments to be received by us under our exclusive agreement with AstraZeneca for the promotion of MERREM I.V.;

· our expectations regarding our collaboration with Dyax including the development and commercial potential of ecallantide for the prevention of blood loss during surgery and the costs and expenses related thereto;

· our expected research and development investments and expenses and gross margins;

· our expectations regarding our personnel needs, including with respect to our sales force;

· our expectations regarding our acquisition of Illumigen Biosciences, Inc., or Illumigen;

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

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

· the impact of new accounting pronouncements;

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

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

· our expectations regarding the payment of dividends; and

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

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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. Prior to July 2008, we had marketed only our own 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, or RIE, caused by methicillin-susceptible and methicillin-resistant isolates. In the European Union, or EU, CUBICIN is approved for the treatment of complicated skin and soft tissue infections, or cSSTI, where the presence of susceptible Gram-positive bacteria is confirmed or suspected and for RIE due to S. aureus bacteremia and S. aureus bacteremia associated with RIE or cSSTI.

Cubist’s net product sales of CUBICIN for the three and six months ended June 30, 2008 were $101.4 million and $189.2 million, respectively, as compared to $69.5 million and $129.0 million in the three and six months ended June 30, 2007, respectively. Net income for the three and six months ended June 30, 2008 was $1.6 million or $0.03 per basic and diluted share and $18.9 million or $0.33 and $0.31 per basic and diluted share, respectively. Net income for the three and six months ended June 30, 2007 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.

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 active pharmaceutical ingredient, or 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.

Effective July 1, 2008, entered into an exclusive agreement with AstraZeneca to promote and provide other support in the U.S. for MERREM I.V., an established broad spectrum (carbapenem class) I.V. antibiotic. Under the agreement, we will promote and support MERREM I.V. using our existing U.S. acute care sales and medical affairs organizations. AstraZeneca will continue to provide marketing and commercial support for MERREM I.V. The agreement establishes a baseline annual payment by AstraZeneca to us of $20.0 million, to be adjusted up or down based on actual sales of MERREM I.V. The annual sales targets may be adjusted if certain events occur during the term of the agreement that could impact sales of MERREM I.V. We are obligated under the Agreement to provide certain levels of support with respect to MERREM I.V., including requirements related to sales calls to physicians, specified priority of presentation of MERREM I.V. relative to other products, and a minimum number of sales representatives and clinical science directors. The term of the agreement extends through December 31, 2012, unless earlier terminated. The agreement includes standard termination provisions for material breaches by, and bankruptcy, insolvency or changes in control of, the other party. The agreement may also be terminated by AstraZeneca if sales fall below certain agreed-upon thresholds, by us if AstraZeneca conducts certain activities competitive with MERREM I.V. in the United States, or by either party: (i) without cause effective no earlier than January 1, 2010, (ii) in the event that we cease to promote CUBICIN, (iii) if AstraZeneca withdraws MERREM I.V. from the market or decides or is required to restrict approved indications for MERREM I.V., (iv) in the case of certain price controls on MERREM I.V. imposed by governmental entities, or (v) in the event of certain failures of supply of MERREM I.V. by AstraZeneca. The agreement also would terminate automatically upon a termination or reduction to non-exclusive of AstraZeneca’s right to market MERREM I.V. in the United States pursuant to an agreement between AstraZeneca’s affiliate, AstraZeneca UK Limited, and Sumitomo Pharmaceuticals Co., Limited. The agreement also includes certain restrictions on our rights to market, promote, sell and engage in certain other activities with respect to competing products during the term of the agreement and for three months thereafter.

We have focused our pipeline building efforts on opportunities that leverage our anti-infective and acute-care discovery, development, regulatory, and commercialization expertise. In addition, we currently have multiple anti-infective programs approaching the Investigational New Drug Application, or IND, filing stage preparatory to clinical trials. In April 2008, we entered into a license and collaboration agreement with Dyax pursuant to which we

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obtained an exclusive license for the development and commercialization of the intravenous formulation of Dyax’s ecallantide compound for the prevention of blood loss during surgery in North America and Europe. Pursuant to the terms of the agreement, we paid Dyax a $15.0 million upfront payment which is included in research and development expense for the three and six months ended June 30, 2008. Additionally, we will make an additional $2.5 million payment on December 31, 2008, which is included in research and development expense for the three and six months ended June 30, 2008. We may pay Dyax up to an additional $214.0 million in clinical, regulatory and sales-based milestone payments. We are also obligated to pay Dyax tiered royalties based on any future sales of ecallantide by us. The agreement provides an option for Dyax to retain certain U.S. co-promotion rights. We will be responsible for all further development costs associated with ecallantide in the licensed indications for the Cubist territory. Dyax retains exclusive rights to ecallantide in all other indications, including its hereditary angioedema program, as well as for the manufacturing of ecallantide. Except under certain circumstances, Dyax will supply us with ecallantide for development and commercialization. The agreement may be terminated by us without cause on prior notice to Dyax and by either party in the event of a breach of specified provisions of the agreement by the other party. Cubist recently terminated the ecallantide on-pump cardio thoracic surgery Phase 2 clinical trial known as Kalahari™ 1 and intends to initiate a dose-ranging Phase 2 clinical trial in the same indication later this year.

Since our inception, we 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, 2008, we had an accumulated deficit of $417.2 million.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007

Revenues

The following table sets forth revenues for the three months ended June 30, 2008 and 2007:

	Three months ended
	June 30,
	2008	2007	% Change
	(in millions)
U.S. product revenues, net	$ 99.4	$ 68.3	45%
International product revenues	2.0	1.2	63%
Other revenues	0.4	0.3	66%
Total revenues, net	$ 101.8	$ 69.8	46%

Product Revenues, net

Cubist’s net revenues from sales of CUBICIN were $101.4 million and $69.5 million in the three months ended June 30, 2008 and 2007, respectively. Gross revenues from sales of CUBICIN totaled $109.0 million and $73.2 million for the three months ended June 30, 2008 and 2007, respectively, and are offset by $7.6 million and $3.7 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 an 8.0% price increase in January 2008. International revenues for the three months ended June 30, 2008 and 2007 consisted primarily of product sales to Novartis AG, or Novartis.

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, 2008 were $0.4 million as compared to $0.3 million for the three months ended June 30, 2007. Included in other revenues for the three months ended June 30, 2008 is

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revenue related to amortization of license fees received from our international distribution partners for CUBICIN, AstraZeneca AB, Merck & Co. and TTY BioPharm.

Costs and Expenses

The following table sets forth costs and expenses for the three months ended June 30, 2008 and 2007:

	Three months ended
	June 30,
	2008	2007	% Change
	(in millions)
Cost of product revenues	$ 22.0	$ 15.8	39%
Research and development	45.2	17.2	164%
Sales and marketing	22.2	16.0	39%
General and administrative	10.5	7.8	35%
Total costs and expenses	$ 99.9	$ 56.8	76%

Cost of Product Revenues

Cost of product revenues were $22.0 million and $15.8 million for the three months ended June 30, 2008 and 2007, respectively. Our gross margin for the three months ended June 30, 2008 was 78% as compared to 77% for the three months ended June 30, 2007. The increase in our gross margin is primarily due to an 8.0% CUBICIN price increase in January 2008, offset by a higher amount of royalty expense. 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 both of the three month periods ended June 30, 2008 and 2007.

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, 2008 was $45.2 million as compared to $17.2 million in the three months ended June 30, 2007, an increase of $28.0 million, or 164%. The increase in research and development expenses was due primarily to (i) an increase of $16.3 million in licenses and collaborations expense primarily due to our agreement with Dyax; (ii) an increase of $4.1 million in clinical and non-clinical studies due to the a higher number of studies underway; (iii) an increase of $3.8 million due to the cost of material to advance our programs currently under development and to perform testing and improve our current manufacturing processes; (iv) an increase of $1.9 million in payroll, benefits, travel, and other employee related expenses due to an increase in headcount; and (v) an increase of $1.8 million due to increased contract research organization, or CRO, activity to support our clinical programs.

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 ecallantide, our Hepatitis C Virus, or HCV, and Clostridium difficile associated diarrhea, or CDAD, preclinical compounds and our resistant Gram-positive and Gram-negative programs; (iii) regulatory matters; and (iv) medical affairs activities.

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Sales and Marketing Expense

Sales and marketing expense in the three months ended June 30, 2008 was $22.2 million as compared to $16.0 million in the three months ended June 30, 2007, an increase of $6.2 million, or 39%. The increase in sales and marketing expense is primarily related to (i) an increase of $5.0 million in payroll (including incentive compensation), benefits, travel, and other employee related expenses due to the hiring of additional field sales personnel in the first quarter of 2008; and (ii) an increase of $1.2 million in marketing expense to support the sale of CUBICIN.

General and Administrative Expense

General and administrative expense in the three months ended June 30, 2008 was $10.5 million as compared to $7.8 million in the three months ended June 30, 2007, an increase of $2.7 million, or 35%. This increase is primarily due to (i) an increase of $1.6 million in payroll, benefits, travel and other employee related expenses due to an increase in headcount; (ii) an increase of $0.7 million in professional services primarily as a result of business development activities; and (iii) an increase of $0.4 million in rent expense due to the leasing of additional space at 45 and 55 Hayden Avenue at our headquarters in Lexington, MA.

Other Income (Expense), net

The following table sets forth other income (expense), net for the three months ended June 30, 2008 and 2007:

	Three months ended
	June 30,
	2008	2007	% Change
	(in millions)
Interest income	$ 2.0	$ 4.4	-55%
Interest expense	(2.0)	(2.4)	-16%
Other income (expense)	—	—	0%
Total other income, net	$ —	$ 2.0	-101%

Interest income in the three months ended June 30, 2008 was $2.0 million as compared to $4.4 million in the three months ended June 30, 2007, a decrease of $2.4 million or 55%. The decrease in interest income is due primarily to lower rates of return on our investments caused by unsettled capital market conditions. Interest expense in the three months ended June 30, 2008 was $2.0 million as compared to $2.4 million in the three months ended June 30, 2007, a decrease of $0.4 million or 16%. The decrease in interest expense is due to a lower debt balance in the three months ended June 30, 2008 as a result of the repurchase of $50.0 million of our 2.25% convertible subordinated notes, or 2.25% Notes, in February 2008.

Provision for Income Taxes

Our effective tax rate for the three months ended June 30, 2008 and 2007 was 8.9% and 3.4%, respectively. The effective tax rate for the three months ended June 30, 2008 and 2007 relates to federal alternative minimum tax expense and state tax expense. We, along with our U.S. subsidiaries file income tax returns with the U.S. federal government and with multiple state and local jurisdictions in the U.S. All of our deferred tax assets have a full valuation allowance recorded against them. We continue to monitor the available information in determining whether there is sufficient positive evidence to consider releasing the valuation allowance on the deferred tax assets. Should we determine the valuation allowance is no longer required, a tax benefit would be recorded in the financial period of the change in determination.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007

Revenues

The following table sets forth revenues for the six months ended June 30, 2008 and 2007:

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	Six months ended
	June 30,
	2008	2007	% Change
	(in millions)
U.S. product revenues, net	$ 185.4	$ 125.8	47%
International product revenues	3.8	3.1	21%
Other revenues	0.8	0.3	190%
Total revenues, net	$ 190.0	$ 129.2	47%

Product Revenues, net

Cubist’s net revenues from sales of CUBICIN were $189.2 million and $129.0 million in the six months ended June 30, 2008 and 2007, respectively. Cubist’s gross revenues from sales of CUBICIN totaled $202.9 million and $136.1 million for the six months ended June 30, 2008 and 2007, respectively, and are offset by $13.7 million and $7.1 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 an 8.0% price increase in January 2008. International revenues for the six months ended June 30, 2008 and 2007 consisted primarily of product sales to Novartis.

Other Revenues

Other revenues for the six months ended June 30, 2008 were $0.8 million as compared to $0.3 million for the six months ended June 30, 2007. Included in other revenues for the six months ended June 30, 2008 is revenue related to amortization of license fees received from our international distribution partners for CUBICIN, AstraZeneca AB, Merck & Co. and TTY BioPharm. Other revenues for the six months ended June 30, 2007 primarily consist of revenue related to the amortization of license fees received from AstraZeneca AB.

Costs and Expenses

The following table sets forth costs and expenses for the six months ended June 30, 2008 and 2007:

	Six months ended
	June 30,
	2008	2007	% Change
	(in millions)
Cost of product revenues	$ 42.0	$ 32.6	29%
Research and development	67.6	33.0	105%
Sales and marketing	42.2	31.0	36%
General and administrative	21.9	15.5	42%
Total costs and expenses	$ 173.7	$ 112.1	55%

Cost of Product Revenues

Cost of product revenues were $42.0 million and $32.6 million for the six months ended June 30, 2008 and 2007, respectively. Our gross margin for the six months ended June 30, 2008 was 78% as compared to 75% for the six months ended June 30, 2007. The increase in our gross margin is primarily due to the use of a single source, lower-priced supplier of API as well as an 8.0% CUBICIN price increase in January 2008, offset by a higher amount of royalty expense. 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

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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 both of the six month periods ended June 30, 2008 and 2007. Also included in the cost of product revenues for the six months ended June 30, 2008 is a charge of $0.7 million related to the write off of three batches of CUBICIN inventory due to our current expectations of the likelihood that such batches will meet quality specifications.

Research and Development Expense

Total research and development expense in the six months ended June 30, 2008 was $67.6 million as compared to $33.0 million in the six months ended June 30, 2007, an increase of $34.5 million, or 105%. The increase in research and development expenses was due primarily to (i) an increase of $15.4 million in licenses and collaborations expense primarily due to our agreement with Dyax; (ii) an increase of $6.0 million in clinical and non-clinical studies due to the higher number of studies underway; (iii) an increase of $4.9 million due to the cost of material to advance our programs currently under development and to perform testing and improve our current manufacturing processes; (iv) an increase of $3.6 million in CRO activity and laboratory supplies and equipment expense as we support a higher number of programs; (v) an increase of $2.1 million in payroll, benefits, travel, and other employee related expenses due to an increase in headcount; and (vi) a one-time charge of $1.8 million in expense related to the write-off of property being demolished at our main building at 65 Hayden Avenue to support the build-out of new laboratory space.

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 ecallantide, our HCV and CDAD preclinical compounds and our resistant Gram-positive and Gram-negative programs; (iii) regulatory matters; and (iv) medical affairs activities.

Sales and Marketing Expense

Sales and marketing expense in the six months ended June 30, 2008 was $42.2 million as compared to $31.0 million in the six months ended June 30, 2007, an increase of $11.2 million, or 36%. The increase in sales and marketing expense is primarily related to (i) an increase of $8.8 million in payroll (including incentive compensation), benefits, travel, and other employee related expenses due to the hiring of additional field sales personnel in the first quarter of 2008; and (ii) an increase of $1.4 million and $0.7 million in marketing expense and medical education expense, respectively, to support sales of CUBICIN.

General and Administrative Expense

General and administrative expense in the six months ended June 30, 2008 was $21.9 million as compared to $15.5 million in the six months ended June 30, 2007, an increase of $6.4 million, or 42%. This increase is primarily due to (i) an increase of $3.6 million in payroll, benefits, travel and other employee related expenses due to an increase in headcount; (ii) an increase of $1.3 million in professional services due to higher business development activities; (iii) an increase of $0.9 million in rent expense due to the leasing of additional space at 45 and 55 Hayden Avenue and (iv) a one-time charge of $0.5 million in facilities expense due to the write-off of property being demolished at 65 Hayden Avenue to support the build-out of new laboratory space.

Other Income (Expense), net

The following table sets forth other income (expense), net for the six months ended June 30, 2008 and 2007:

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	Six months ended
	June 30,
	2008	2007	% Change
	(in millions)
Interest income	$ 5.3	$ 8.3	-37%
Interest expense	(5.3)	(4.7)	12%
Other income (expense)	3.3	—	N/A
Total other income, net	$ 3.3	$ 3.6	-9%

Interest income in the six months ended June 30, 2008 was $5.3 million as compared to $8.3 million in the six months ended June 30, 2007, a decrease of $3.1 million or 37%. The decrease in interest income is due primarily to lower rates of return on our investments caused by unsettled capital market conditions. Interest expense in the six months ended June 30, 2008 was $5.3 million as compared to $4.7 million, an increase of $0.6 million or 12%. The increase in interest expense is primarily due to the write-off of approximately $1.2 million of debt issuance costs related to the repurchase of $50 million of the 2.25% Notes in February 2008, offset by a lower amount of interest expense as a result of a lower debt balance following the debt repurchase.

Other income for the six months ended June 30, 2008 was $3.3 million and consists of the difference between the purchase price and face value of the $50.0 million of 2.25% Notes that we repurchased in privately negotiated transactions in February 2008. The 2.25% Notes were repurchased at prices below face value plus accrued interest and transaction fees of $0.1 million. The repurchase resulted in a net gain of $2.0 million. The gain is comprised of the $3.3 million, recorded to other income (expense), offset by the write-off of debt issuance costs of $1.2 million, recorded as a non-cash charge to interest expense, and transaction expenses of $0.1 million, recorded to general and administrative expense.

Provision for Income Taxes

Our effective tax rate for the six months ended June 30, 2008 and 2007 was 3.9% and 3.4%, respectively. The effective tax rate for the six months ended June 30, 2008 and 2007 relates to federal alternative minimum tax expense and state tax expense. We, along with our U.S. subsidiaries file income tax returns with the U.S. federal government and with multiple state and local jurisdictions in the U.S. All of our deferred tax assets have a full valuation allowance recorded against them. We continue to monitor the available information in determining whether there is sufficient positive evidence to consider releasing the valuation allowance on the deferred tax assets. Should we determine the valuation allowance is no longer required, a tax benefit would be recorded in the financial period of the change in determination.

Liquidity and Capital Resources

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

· sales of CUBICIN;

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

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

· equity and debt financings; and

· interest earned on invested capital.

We have incurred net losses since our inception until the third quarter of 2006, principally as a result of research and development efforts including pre-clinical testing and clinical trials. As of June 30, 2008, we had an accumulated deficit of $417.2 million. We expect to incur significant expenses in the future for the continued development and commercialization of CUBICIN, the development of our other drug candidates, as well as

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investments in other product opportunities. Our total cash, cash equivalents and investments at June 30, 2008 were $358.3 million as compared to $398.2 million at December 31, 2007. Based on our current business plan, including payments that we anticipate receiving from AstraZeneca for the promotion of MERREM I.V., we believe that our available cash, cash equivalents, investments and projected cash flows from revenues will be sufficient to fund our operating expenses, debt obligation and capital requirements for the foreseeable future. Certain economic or strategic factors may require that we seek to raise additional cash by selling debt or equity securities. However, such funds may not be available when needed, or, we may not be able to obtain funding on favorable terms, or at all.

Net cash provided by operating activities was $38.7 million in the six months ended June 30, 2008 as compared to cash provided by operations of $40.1 million in the six months ended June 30, 2007. Net cash provided by operating activities in the six months ended June 30, 2008 includes our net income of $18.9 million increased by non-cash charges of $12.5 million. These non-cash charges primarily consist of a $2.3 million write-off of property being demolished at 65 Hayden Avenue, a $2.0 million net gain on the repurchase of our 2.25% Notes, $4.2 million of depreciation and amortization expense, $5.8 million of stock based compensation expenses and $1.4 million in expense associated with our 401(k) company match that is made in the form of shares of our common stock. Uses of cash in the six months ended June 30, 2008 compared to the six months ended June 30, 2007 consisted of an increase of $9.8 million in accounts receivable due to increased sales of CUBICIN as well as an increase of $1.9 million in prepaid expenses and other current liabilities. These uses of cash were offset by an increase of $16.0 million in accounts payable and accrued expenses. The increase in accounts payable and accrued expenses is primarily related to the timing of bonus and incentive compensation payouts and the timing of royalties paid to Eli Lilly related to sales of CUBICIN.

Net cash used in investing activities in the six months ended June 30, 2008 was $24.9 million, compared to cash provided by investing activities of $21.0 million for the six months ended June 30, 2007. Cash used in investing activities during the six months ended June 30, 2008 consists of cash outflows for purchases of property and equipment as well as the payment of $10.2 million to former shareholders of Illumigen. 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 flows for purchases of property and equipment. Purchases of property and equipment during the six months ended June 30, 2008, were $14.7 million compared to $2.0 million during the six months ended June 30, 2007. Property and equipment additions during the six months ended June 30, 2008 consisted primarily of fixed asset additions related to the construction of approximately 30,000 square feet of additional laboratory space at our main building at 65 Hayden Avenue as well as expenses related to building out additional leased space at 55 and 45 Hayden Avenue. 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. We anticipate that our capital expenditures for 2008 will total approximately $27.6 million, primarily driven by the items mentioned above.

Net cash of $44.3 million was used in financing activities in the six months ended June 30, 2008 as compared to $5.2 million provided by financing activities during the six months ended June 30, 2007. Cash used in financing activities for the six months ended June 30, 2008 primarily consisted of $46.8 million of cash used to repurchase $50.0 million of our 2.25% Notes, offset by $2.5 million of cash received from employees’ exercise of stock options and purchases of common stock through our employee stock purchase plan. Cash provided by financing activities during 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.

We currently hold $58.1 million in auction rate securities (private placement, synthetic collateralized debt obligations), which have experienced repeatedly failed auctions since August 2007. Historically, interest rates for these auction rate securities were reset at auctions with intervals of 7 to 35 days. While the auction rate securities have final maturity dates in 2017, because of the interest rate reset feature and the liquidity that the auctions provided, we have historically treated these securities as short term, available-for-sale investments. Given the failed auctions, the auction rate securities are no longer considered liquid and have been classified as long-term investments and we have recorded temporary losses of $23.9 million as of June 30, 2008 in other comprehensive income as a reduction of shareholders’ equity. In the event that we need to access these funds, we do not expect to be able to do so until a future auction on these investments is successful or until they reach their underlying

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maturity. Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and other sources of cash, we do not anticipate the lack of liquidity on these investments will affect our ability to execute our current business plan.

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

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, 2008 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	$	—	$	—	$	300.0	$	—	$	300.0
Interest on subordinated convertible notes	6.7		13.5		13.5		—		33.7
Operating leases, net of sublease income	4.1		8.1		8.0		11.2		31.4
Inventory purchase obligations	29.6		40.6		44.7		27.1		142.0
Capital purchase obligations	6.5		—		—		—		6.5
Royalty payments due	25.0		—		—		—		25.0
Payment due to Dyax	2.5		—		—		—		2.5
Other purchase obligations	4.1		0.1		—		—		4.2
Total contractual cash obligations	$	78.5	$	62.3	$	366.2	$	38.3	$	545.3

The subordinated convertible notes consist of $300.0 million aggregate principal amount of the 2.25% Notes. These notes require semi-annual interest payments through maturity.

Our operating leases consist of approximately 140,000 square feet of office and data center space at 45 and 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 capital purchase obligations listed above represent capital purchase commitments related to building out additional leased space at 45 and 55 Hayden Avenue as well as the construction of approximately 30,000 square feet of laboratory space at our main building in 65 Hayden Avenue. The royalty payments listed above represent royalties owed to Eli Lilly on sales of CUBICIN product. The payment due to Dyax listed above represents the $2.5 million payment we will make to Dyax in December 2008. The other purchase obligations listed above represent payments related to the development of the preclinical program for the compound we acquired from Illumigen, as well as clinical trial expenses.

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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 the provisions of SFAS 157 for its financial assets and financial liabilities in the first quarter of 2008. The Company did not elect to adopt the fair value option for eligible financial instruments under SFAS 159. Other than the partial adoption of SFAS 157, our critical accounting policies and the methodologies and assumptions we apply under them have not materially changed since February 29, 2008, the date we filed our Annual Report on Form 10-K for the year ended December 31, 2007. For more information on our other critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2007. There have been no changes to these policies since December 31, 2007. 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

We invest our cash in a variety of financial instruments; principally money market instruments, securities issued by the U.S. government and its agencies, investment grade corporate bonds and notes and auction rate securities. These investments are denominated in U.S. dollars. All of our interest-bearing securities are subject to interest rate risk, and could decline in value if interest rates fluctuate.

We currently own financial instruments that are sensitive to market risks as part of our investment portfolio. The investment portfolio is used to preserve capital until it is required to fund operations. None of these market-risk sensitive instruments are held for trading purposes. Included in our investments are $58.1 million in auction rate securities (private placement, synthetic collateralized debt obligations), which have experienced repeatedly failed auctions since August 2007. Historically, interest rates for these auction rate securities were reset at auctions with intervals of 7 to 35 days. While the auction rate securities have final maturity dates in 2017, because of the interest rate reset feature and the liquidity that the auctions provided, the Company has historically treated these securities as short term, available-for-sale investments. Given the failed auctions, the auction rate securities are no longer considered liquid and have been classified as long-term investments and we have recorded temporary losses of $23.9 million as of June 30, 2008 in other comprehensive income as a reduction of shareholders’ equity. The amount of the unrealized loss on the auction rate securities is based on routinely updated bids to purchase these securities received from the dealer and market maker for these instruments, corroborated through management’s analysis of the underlying collateral and credit default swap reference portfolios within the auction rate securities. Consistent with our investment policy guidelines, all five of the auction rate securities that we hold had AAA credit ratings at the time of purchase. In July 2008, these securities were downgraded by Fitch, but none are below A-. S&P ratings for these securities remain at AAA. We consider the unrealized loss to be temporary in nature. However, the credit and capital markets have continued to deteriorate in 2008 and the bids on the auction rate securities that we hold have fluctuated during the first half of 2008. Certain conditions would cause us to consider a change to the assessment of the notes. For example, if a certain concentration of the underlying entities in the reference portfolios default and if the average ratings of the underlying reference portfolio deteriorates significantly, we may adjust the carrying value of these investments through an other-than-temporary impairment charge in our Consolidated Statement of Operations. Investment classification detail can be found in Note E. “Investments” in the Notes to the condensed consolidated financial statements.

As of June 30, 2008, the fair market value of the 2.25% Notes amounted to $264.8 million. The estimated fair value of the 2.25% Notes was determined using quoted market rates. The interest rates on the 2.25% Notes are fixed and are therefore not subject to interest rate risk.

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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 marketed 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 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 and commercialization of CUBICIN. For the foreseeable future, our ability to generate revenues will depend primarily 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. In May 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.

Although we have been successful in our commercialization of CUBICIN to date, we cannot be sure that CUBICIN will continue to be accepted by purchasers in the pharmaceutical market for the treatment of cSSSI and S. aureus bacteremia. Further, CUBICIN currently competes with a number of existing anti-infective drugs manufactured and marketed by major pharmaceutical companies and potentially will compete against new anti-infective drugs whose approval is anticipated to be imminent 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 those set forth below and the other CUBICIN-related risk factors described in this “Risk Factors” section:

· the continued safety and efficacy of CUBICIN;

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

· risks of any unanticipated adverse reactions to CUBICIN in patients;

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

· our ability to educate the medical community about the safety and efficacy of CUBICIN in compliance with FDA and other government rules and regulations;

· 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;

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· 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;

· our ability to continue to successfully sell CUBICIN in the U.S. as we begin promoting MERREM I.V. in the U.S. using the same sales force; and

· our international partners’ efforts and their success in selling CUBICIN in their respective territories.

Because our primary source of revenues is CUBICIN any impediment to the success of CUBICIN would have a significant effect on our business and financial results.

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. In addition, third parties from which we license proprietary rights or obtain other types of rights to develop and/or commercialize marketed products, including AstraZeneca, in the case of MERREM I.V., our drug candidates and our research technologies may not be able to obtain, maintain or protect such proprietary rights.

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 and the patent positions of our licensors are highly uncertain and involve 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, including AstraZeneca’s patents covering MERREM I.V. in the U.S. We cannot assure you that the patents we or our licensors obtain or the unpatented proprietary technology we or our licensors hold will afford us 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 to us or to our licensors with respect to any of ours or their 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. We also cannot be sure that any of our existing or our licensors’ patents or any patents that may be granted to us or our licensors 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, that is primarily dependent upon 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 and listed with the FDA in what is called “the Orange Book” are invalid, unenforceable and/or not infringed. This type of ANDA is referred to as a 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 was the first opportunity under United States patent law for a generic company to make a Paragraph IV filing. To date, Cubist has not received notice of a Paragraph IV filing. If such a filing is made, we may need to

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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, not infringed and/or unenforceable. During the period in which such litigation is pending, the uncertainty of its outcome may cause investors to disfavor our stock and our stock price could decline.

In September 2007, we asked the FDA to de-list one of the CUBICIN patents listed in the Orange Book, US Patent No. RE39,071. We sought this de-listing so that we could correct a technical error in the patent, originally issued to Eli Lilly and recently assigned to Cubist. The United States Patent and Trademark Office, or USPTO, issued a certificate of correction for this patent, and the patent has been re-listed in the Orange Book. While this patent was de-listed, an ANDA filer that is seeking to market generic versions of CUBICIN would not have needed to address that patent as part of its ANDA filing.

If our collaborators, licensors or other third parties with which we have similar arrangements, which we refer to as 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 collaborators, 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 USPTO 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 commercial protection.

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

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 continued acceptance of CUBICIN, if physicians prefer other existing drug products over CUBICIN, or

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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 where CUBICIN is not yet approved.

The competition in the market for therapeutic products that address serious Gram-positive bacterial infections 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, the FDA is reviewing an NDA for the Gram-positive agent telavancin (submitted by Theravance, Inc., or Theravance, whose partner for telavancin is Astellas Pharma US, Inc.). Telavancin received an approvable letter in October 2007. The FDA accepted Theravance’s response to the telavancin approvable letter in March 2008, setting a Prescription Drug User Fee Act, or PDUFA, date of July 21, 2008. On July 21, Theravance announced that the FDA has not yet made a decision regarding the telavancin NDA. The FDA also is reviewing ceftobiprole, a broad spectrum agent with MRSA activity (NDA submitted in May 2007 by a division of Johnson & Johnson). Ceftobiprole received an approvable letter in March 2008. Another Gram-positive agent under review is dalbavancin from Pfizer, Inc. Pfizer received its first approvable letter for dalbavancin in September 2005, and has received multiple approvable letters from the FDA since, citing the need for additional data, among other requests. In February 2008, Targanta Therapeutics Corporation announced that it had submitted an NDA to the FDA for oritivancin to be used for the treatment of cSSSI caused by Gram-positive bacteria, including MRSA. In March 2008, Arpida Ltd. announced that it had filed an NDA with the FDA seeking approval of iclaprim, a broad-spectrum agent with MRSA activity in cSSSI. Accordingly, some or all of these agents may be approved and marketed in the near future and could compete with CUBICIN. Other antibiotics in clinical development could compete with CUBICIN, if approved by the appropriate regulatory agencies, in future years.

MERREM faces competition in the United States from commercially available drugs such as Primaxin^® I.V., marketed by Merck as well as Doribax^®, marketed by Ortho-McNeil, a Johnson & Johnson company. In particular, Primaxin I.V. has been a widely used and well known antibiotic for over 20 years (approved in 1986). Doribax was recently approved by the FDA in October 2007 for two indications (complicated intra-abdominal infections and complicated urinary tract infections, including pyelonephritis). The FDA is currently reviewing a supplemental NDA for use of Doribax in patients with nosocomial pneumonia, including ventilator-associated pneumonia.

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 MERREM I.V. As a result, 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, and our revenues from the promotion of MERREM I.V. could be stopped, delayed or impeded if AstraZeneca fails to supply to the market sufficient quantities of MERREM I.V.

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 Oso

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Biopharmaceuticals Manufacturing, LLC (successor-in-interest to Catalent Pharma Solutions, LLC), or Oso, to manufacture and supply to us finished drug product.

If Hospira, Oso, or, in particular, ACS, experiences any significant difficulties in its respective manufacturing processes for CUBICIN API or finished drug product, including any difficulties with their raw materials, 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, 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 these or other difficulties with our current suppliers.

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 any such event in Italy, 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 further reduce our costs over time.

Under our agreement with AstraZeneca with respect to the promotion of MERREM I.V., AstraZeneca is responsible for all activities related to the manufacture and supply of MERREM I.V. We do not have the capability to manufacture and supply MERREM I.V. nor do we have the contractual right to do so should AstraZeneca fail to supply adequate quantities of MERREM I.V. to meet demand in the U.S. Any interruption in supply of MERREM I.V. would likely cause us to fail to generate the revenues that we expect from our promotion of MERREM I.V.

If we are unable to maintain satisfactory sales and marketing capabilities, we may not continue to succeed in commercializing CUBICIN or succeed in our promotion activities with respect to MERREM I.V..

We cannot guarantee that we will continue to be successful in marketing CUBICIN or will be successful in marketing MERREM I.V. or that the marketing of MERREM I.V. will not detract from our marketing efforts for 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 only began promoting MERREM I.V. in July 2008 and have never promoted any drug product other than CUBICIN, and our sales force does not have experience selling two drug products simultaneously.

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We completed a sales force expansion in the first quarter of 2008. However, we cannot guarantee that this expansion will generate sufficient additional revenues to justify the expenses related to hiring, training and compensating these additional representatives.

In addition, our partner in Europe, 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 six more in 2007. To date, sales of CUBICIN by Novartis have been similar to other IV antibiotics previously launched in Europe, but lower overall MRSA rates in the hospital and community have caused European sales to grow much more slowly than in the U.S. Other than in the EU, our international partners have launched CUBICIN only in Israel, Canada, Macau and Argentina. Except for Israel, these launches have all taken place in the last year. We cannot guarantee that our partners will be successful in launching or marketing CUBICIN in their markets.

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 in 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 commercial product. We have made a significant investment in our research and development capabilities by increasing our research and development workforce. However, we cannot guarantee that this expansion will lead to greater success, so this investment may not be a useful expenditure of our limited resources.

Our drug products, CUBICIN, the drug candidate that we recently in-licensed from Dyax, ecallantide, and our other former drug candidates that reached the stage of clinical trials in humans were the result of in-licensing patents and technologies from third parties. These in-licensing activities represent a significant expense for Cubist and would 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 new 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 anti-infective and acute care marketplace, many of which have significantly more experience than we have in pharmaceutical development and sales and significantly more financial resources than we have. In particular, in recent years, very large pharmaceutical companies with significant resources have refocused their attention on opportunities in the anti-infective marketplace. 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 that 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. 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

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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.

Other than ecallantide, all of the drug candidates that we are developing are in the pre-clinical stage. In order for a drug candidate to move from this stage to human clinical trials, the FDA must approve an IND. The FDA will approve the IND if it is established that a potential drug candidate will not expose humans to unreasonable risks and that the compound has pharmacological activity that justifies commercial development. It takes significant time and expense to generate the data to support an IND filing. In many cases, companies spend the time and resources only to discover that the data is not sufficient to support a filing or gain IND approval. This has happened to us in the past, and likely will happen again in the future. In fact, most compounds that are discovered never make it into human clinical trials.

Once a drug candidate enters human clinical trials, the trials must be carried out under protocols that are acceptable to regulatory authorities and to the 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 the 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. Delays in planned patient enrollment can result in increased development costs and delays in regulatory approvals. In addition, our clinical trials may be delayed by one or more of the following factors:

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

· inability to adequately follow patients after treatment;

· the impact of the results of other clinical trials on the drug candidates that we are developing, including by other parties who have rights to develop drug candidates being developed by us in other indications such as clinical trials of ecallantide that are conducted by Dyax or its other licensors, if any;

· 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. In the case of ecallantide, Cubist recently terminated the ecallantide on-pump cardio thoracic surgery Phase 2 clinical trial known as Kalahari™ 1 and intends to initiate a dose-ranging Phase 2 clinical trial in the same indication later this year. If the dose-ranging trial is delayed or unsuccessful, this could significantly delay or force us to stop development and commercialization of ecallantide.

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We, and/or our partners, will need to obtain regulatory approvals for CUBICIN in international jurisdictions in which CUBICIN has not yet received approvals, ecallantide and any other drug candidates in order to commercialize them as products, and our ability to generate revenues from the commercialization and sale of products resulting from our development efforts is contingent upon obtaining 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. Any drug candidate 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 EU and other non-EU European countries for the indications of cSSTI, RIE due to S. aureus bacteremia, and S. aureus bacteremia associated with RIE or cSSTI, in Argentina, Colombia, Chile and Ecuador for cSSSI, SAB and RIE, in Switzerland for cSSTI, S. aureus bacteremia and RIE and in India for cSSSI and S. aureus bacteremia. Our collaborator, AstraZeneca AB, received an approval in the Philippines and an import license for Macau for CUBICIN for cSSSI, SAB and RIE. Our collaborators Oryx Pharmaceuticals Inc., Kuhnil Pharmaceutical Corp., TTY Biopharm Co. Ltd., and Medison Pharma, Ltd., have received approval for marketing CUBICIN in Canada, South Korea, Taiwan and Israel, respectively, for the same, or very similar, indications for which we have approval in the United States. We and our collaborators 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 regulators typically takes a significant number of years and can vary substantially based upon the type, complexity and novelty of the drug candidate. The approval procedure and the time required to obtain approval also varies among countries. Regulatory agencies may have varying interpretations of the same data, and approval by one regulatory authority does not ensure approval by regulatory authorities in other jurisdictions.

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 any drug candidates for each target indication in clinical trials would prevent us from obtaining required approvals from regulatory authorities, which would prevent us from commercializing those drug candidates. The results of our clinical testing of a drug candidate may cause us to suspend, terminate or redesign our clinical testing program for that drug candidate. We cannot be sure when we, independently or with our collaborators, might be in a position to submit additional drug candidates for regulatory review. Negative or inconclusive results from the clinical trials or adverse medical events during the trials could lead to requirements that trials be repeated or extended, or that a program be terminated, even if other studies or trials relating to the program are successful. In addition, data obtained from clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval and could even affect the commercial success of a product that is already on the market based on earlier trials, such as CUBICIN. 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.

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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 has relied on non-inferiority studies. In a non-inferiority study, a drug candidate is compared with an approved antibiotic treatment, and it must be shown that the product candidate is not less effective than the approved treatment by a defined margin.

In 2006, the FDA refused to accept approval studies of successfully completed non-inferiority studies as the basis for approval for certain types of antibiotics. In October 2007, the FDA issued draft guidance on the use of non-inferiority studies to support approval of antibiotics. Under this draft guidance, the FDA recommends that for some antibiotic indications, sponsor companies carefully consider study designs other than non-inferiority, such as placebo-controlled trials demonstrating the superiority of a drug candidate to placebo. 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. While the indications called out by the FDA in the draft guidance are not indications currently being pursued by Cubist for CUBICIN, the draft guidance does not articulate clear standards or policies for demonstrating the safety and efficacy of antibiotics generally and reserves until a later date the FDA’s guidance on the use of non-inferiority studies in all therapeutic areas. The lack of clear 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 the revenues we expect from MERREM I.V. or from any of our other drug candidates, our ability to create long-term shareholder value may be limited.

CUBICIN and MERREM I.V. are the only drug products that we are currently selling and, except for ecallantide, our current pipeline does not include any drug candidates that are in clinical development. Because of the long development time of drug candidates, none of the drug candidates that we are currently developing, including ecallantide, 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 primarily on CUBICIN and, to a lesser extent, on MERREM I.V. for our sales revenues. In the case of MERREM I.V., our agreement with AstraZeneca contains several provisions pursuant to which our rights to promote MERREM I.V. in the U.S. could terminate prior to the December 31, 2012 expiration date in the agreement. If the agreement terminated prior to its expiration date, we would not be able to realize the fully expected value from the promotion of MERREM I.V. If we are unable to realize the full expected value from the promotion of MERREM I.V., bring any of our current or future drug

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candidates to market, or to acquire or obtain other rights to any additional marketed drug products, our ability to create long-term shareholder value may be limited.

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 stock 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 our executive officers. Despite our efforts to retain valuable employees, members of our management, scientific and medical teams have in the past and may in the future terminate their employment with us. The loss of the services of any of our executive officers or other key employees could potentially harm our business or financial results if we are unable to effectively compensate for these losses.

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

We acquired Illumigen in December 2007, which was only the second business acquisition we have made since our inception. Although we have limited experience in acquiring businesses, 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 turn out to be erroneous or inappropriate due to foreseen or unforeseen circumstances and thereby cause us to have overvalued an acquisition target. There also is 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. Because our acquisition of Illumigen occurred so recently, many of these risks still exist with respect to this transaction.

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 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.

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

We invest our cash in a variety of financial instruments; principally securities issued by the U.S. government and its agencies, investment grade corporate bonds and notes, auction rate securities and money market instruments. These investments are subject to credit, liquidity, market and interest rate risk. Such risks, including the failure of future auctions for the auction rate securities described below, may result in a loss of liquidity, substantial impairment to our investments, realization of substantial future losses, or a complete loss of the investment in the long-term, which may have a material adverse effect on our business, results of operations, liquidity and financial condition. We currently hold $58.1 million of auction rate securities (private placement, synthetic collateralized debt obligations), which have experienced repeatedly failed auctions since August 2007. Historically, interest rates for these auction rate securities were reset at auctions with intervals of 7 to 35 days. While the auction rate securities have final maturity dates in 2017, because of the interest rate reset feature and the liquidity that the auctions provided, we have historically treated these securities as short term, available-for-sale investments. Given the failed auctions, the auction rate securities are no longer considered liquid and have been classified as long-term investments and we have recorded temporary losses of $23.9 million as of June 30, 2008 in other comprehensive income as a reduction of shareholders’ equity. The amount of the unrealized loss on the auction rate securities is based on routinely updated bids to purchase these notes received from the dealer and market maker for these instruments, corroborated through management’s analysis of the underlying collateral and credit default swap reference portfolios within the auction rate securities. Consistent with our investment policy guidelines, all five of the auction rate securities that we hold had AAA credit ratings at the time of purchase. In July 2008, these securities were downgraded by Fitch, but none are below A-. S&P ratings remain at AAA for all of the auction rate securities that we hold. We consider the unrealized loss to be temporary in nature. However, the credit and capital markets have continued to deteriorate in 2008 and the bids on the auction rate securities that we hold have fluctuated during the first half of 2008. Certain conditions would cause us to consider a change to the assessment of the securities. For example, if a certain concentration of the underlying entities in the reference portfolios default and if the average ratings of the underlying reference portfolio deteriorate significantly we may adjust the carrying value of these investments through an other-than-temporary impairment charge in our Consolidated Statement of Operations.

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 must 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 August 2007, the EMEA granted final approval for marketing CUBICIN in the EU for the additional indications of RIE due to S. aureus bacteremia and for S. aureus bacteremia associated with RIE or cSSTI. CUBICIN is also approved in Canada, Korea, Taiwan, India, Colombia, the Philippines, Chile, Ecuador and Israel for the same, or very similar, indications as our U.S. approval, in other non-EU European countries for the same indications as the EU approval, in Switzerland for cSSTI, S. aureus bacteremia and RIE and in Argentina for cSSSI, SAB and RIE. An import license for Macau was also received for CUBICIN for cSSSI, SAB and RIE. 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, we have made certain Phase 4 clinical study commitments to the FDA, including for studies of renal-compromised patients, pediatric patients, and those with RIE. We worked with the FDA to design these studies and have initiated one study of renal-compromised patients, which we expect to complete this year and then engage in further discussions with the FDA regarding our commitment with respect to these patients. We are in the process of initiating studies of pediatric patients and those

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with RIE this year. 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 addition, adverse medical events that occur during clinical trials or during commercial marketing could result in claims against Cubist and the temporary or permanent withdrawal of CUBICIN from commercial marketing, which could seriously harm our business and cause our stock price to decline. In particular, our planned pediatric trial exposes us to more uncertain and potentially greater risk because of the age of the subjects.

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

We have entered into, and anticipate continuing to enter into, collaborative and other similar types of arrangements, which we refer to as collaborations, with multiple third parties to discover, test, develop, 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 AB 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 & Co., Inc., or Merck, for the development and commercialization of CUBICIN in Japan. We also have entered into agreements with partners for the commercialization of CUBICIN in Israel, Taiwan, Canada and South Korea. In April 2008, we entered into an exclusive license and collaboration agreement with Dyax for the development and commercialization in North America and Europe of the intravenous formulation of ecallantide for the prevention of blood loss during surgery. Under this collaboration, we have licensed the rights to develop and commercialize ecallantide within a specified field with Dyax retaining rights to develop ecallantide itself or with other partners outside of our field. In July 2008, we entered into an exclusive agreement with AstraZeneca to promote MERREM I.V. in the U.S. Under the agreement, AstraZeneca will continue to provide marketing and commercial support for MERREM I.V. and is responsible for manufacturing and supplying MERREM I.V.

In addition to the types of collaborations described above, we collaborate with a variety of other companies on the development of drug product candidates which involve the licensing of some or all of the rights of a company’s drug product candidate and for the 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 collaborations poses a number of risks including the following:

· the focus, direction, amount and timing of resources dedicated by our CUBICIN collaborators to their respective collaborations with us is not under our control, which may result in less successful commercialization of CUBICIN in our partners’ territories than if we had control over the CUBICIN franchise in these territories;

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

· AstraZeneca may not provide the level of support that they are required to under our agreement with respect to MERREM I.V. or may not support our promotion of MERREM I.V. to the degree that we would like, leading us to receive lower than expected revenues from this collaboration;

· the failure of AstraZeneca to manufacture and supply adequate quantities of MERREM I.V. in the U.S. would likely cause us to receive lower then expected revenues from this collaboration;

· similar to our dependence on AstraZeneca to manufacture and supply MERREM I.V. in the U.S., we may be dependent upon other collaborators to manufacture and supply drug product to us in order to develop or commercialize the drug product that is the subject of the collaboration and our

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collaborators may encounter unexpected issues or delays in manufacturing and/or supplying such drug product;

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

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

· In situations, such as with ecallantide, where our collaborator retains rights to develop and commercialize the product, we and our collaborator may not agree on decisions that could affect the development, regulatory approval, manufacture or commercial viability of the product;

· 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 or commercialization strategy, might cause delays or termination of the research, development or commercialization of drug candidates or products that we are marketing, such as MERREM I.V., lead to additional responsibilities with respect to drug candidates or marketed products, or result in litigation or arbitration, any of which would be time-consuming and expensive; and

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

Collaborations with third parties are a critical part of our business strategy, and any inability on our part to establish such arrangements on terms favorable to us or working successfully with our collaborators or third parties with whom we have similar arrangements 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 CUBICIN is marketed internationally 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;

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

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

· the potential for so-called parallel importing;

· 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;

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· foreign taxes, including withholding of payroll taxes;

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

· violations of laws by our licensees and distributors, including violations of the U.S. Foreign Corrupt Practices Act;

· production shortages resulting from 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 maintain profitability.

We depend on third parties in the conduct of our clinical trials for CUBICIN and ecallantide 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, CROs and other third party service providers in the conduct of our clinical trials for CUBICIN and ecallantide. 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, ecallantide and other future drug candidates.

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

Since we began operations, we incurred substantial net losses in every fiscal period until the third quarter of 2006. We generated income of $1.6 million and $18.9 million for the three and six months ended June 30, 2008, respectively, and generated income of $48.1 million for the year ended December 31, 2007. At June 30, 2008, we had an accumulated deficit of $417.2 million. These losses have resulted from costs associated with conducting research and development, conducting clinical trials, commercialization efforts and associated administrative costs.

We may incur future operating losses related to the continued development and commercialization of CUBICIN, the development of our other drug candidates or 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 and we do not know if additional funds would be available to us at all, or on terms that we find acceptable.

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, promote MERREM I.V., develop ecallantide and other drug candidates, actively seek to acquire companies with marketed products or product candidates and 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

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our control. We have no committed sources of capital and do not know whether additional financing will be available when and if needed, or, if available, that the terms will be favorable to our shareholders or us.

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

Our annual debt service obligations on our 2.25% subordinated convertible notes due in June 2013 are approximately $6.8 million per year in interest payments. We may add additional lease lines to finance capital expenditures and may obtain additional long-term debt and lines of credit. If we issue other debt securities in the future, our debt service obligations will increase further. If we are unable to generate sufficient cash to meet these obligations and need to use existing cash or liquidate investments in order to fund our debt service obligations or to repay our debt, we may be forced to delay or terminate clinical trials or curtail operations. We may also be forced to obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights or potential markets or grant licenses on terms that are not favorable to us. If we fail to obtain additional capital, if needed, we will not be able to execute our current business plan successfully.

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

As we begin to promote MERREM I.V. in addition to CUBICIN and if ecallantide and our potential drug candidates progress in development or we are able to continue expanding the commercialization of CUBICIN or secure the rights to promote other marketed products, we will need to 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 achieve or 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;

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·		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 the products that we market.

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 effect 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 products that we market.

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 ASP, rather than average wholesale price in both the physician office and hospital outpatient settings. This resulted in lower payment rates for CUBICIN. 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.

Another action that may affect reimbursement related to our products involves a statutory requirement, and its implementing regulations, that Medicare may not make a higher payment for inpatient services that are caused by medical conditions arising after a patient is admitted to the hospital. Medicare pays for inpatient hospital services under a prospective payment system in which cases are grouped into Medicare Severity Diagnosis Related Groups, or MS-DRGs, and the amount of the single Medicare payment depends upon the applicable MS-DRG. That can vary based on the condition of the patient. Under the statute, effective October 1, 2008, if a case would be assigned to a higher paying MS-DRG because of a specified condition that arose after admission to the hospital, so-called hospital acquired conditions, or HACs, the Medicare payment would remain at the lower paying MS-DRG that would have applied in the absence of such condition. The Centers for Medicare and Medicaid Services, or CMS, is responsible for specifying the HACs to which this lower payment policy would apply. In July 2008, CMS issued a final rule which failed to establish MRSA as a HAC but stated that MRSA is addressed by the rule in situations where MRSA triggers another condition that is itself a HAC.

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Other conditions may be added as HAC in the future, including MRSA. As a result of this policy, in certain circumstances, hospitals may receive less reimbursement for Medicare patients that obtain an HAC which may be treated with CUBICIN.

There have been a number of other 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 a satisfactory financial return on our commercialization of CUBICIN or 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 industry is highly regulated and our products are subject to ongoing regulatory review.

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.

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

Failure to comply with manufacturing and other post-approval state or federal law, regulations of the FDA and other regulatory agencies can, among other things, result in fines, increased compliance expense, denial or withdrawal of regulatory approvals, product recalls or seizures, forced discontinuance of or changes to important promotion and marketing campaigns, operating restrictions and criminal prosecution. Later discovery of previously unknown problems with a drug product, manufacturer or facility may result in restrictions on the drug product, us or our manufacturing facilities, including withdrawal of the drug product from the market. The cost of compliance with pre- and post-approval regulation may have a negative effect on our operating results and financial condition.

New accounting pronouncements or guidance may require us to change the way in which we account for our operational or business activities.

The Financial Accounting Standards Board, or FASB, the SEC and other bodies that have jurisdiction over the form and content of our accounts are constantly discussing and interpreting proposals and existing pronouncements designed to ensure that companies best display relevant and transparent information relating to

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their respective businesses. The pronouncements and interpretations of pronouncements by FASB, the SEC and other bodies may have the effect of requiring us to make changes in our accounting policies, including how we account for revenues and/or expenses, which could have a material adverse impact on our financial results.

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 MERREM I.V., and a failure by us or AstraZeneca 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 and complex laws and regulation, including but not limited to, health care “fraud and abuse” laws, such as the federal false claims act, the federal anti-kickback statute, and other state and federal laws and regulations. While we have developed and implemented a corporate compliance program designed to ensure that we are in compliance with all applicable U.S. laws and regulations, we cannot guarantee that this program will protect us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions. AstraZeneca has retained certain rights related to the commercialization of MERREM I.V., including pricing, distribution and contracting, and maintains a U.S. compliance program that is entirely independent of our compliance program. Any governmental or other actions brought against AstraZeneca with respect to the commercialization of MERREM I.V. could have a significant impact on our ability to successfully promote MERREM I.V. and could cause us to become subject to a similar action as the one brought against AstraZeneca.

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, we cannot be sure that such coverage will be adequate to cover any incident or all incidents. In addition, we cannot be sure that we will be able to obtain or maintain insurance coverage at acceptable costs or in a sufficient amount, that our insurer will not disclaim coverage as to a future claim or that a product liability claim would not otherwise adversely affect our business, operating results or financial condition.

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

Our research and development efforts involve the controlled use of hazardous materials, chemicals, viruses, bacteria and various radioactive compounds. We are subject to numerous environmental and safety laws and regulations and 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. 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

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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:

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

· actual or anticipated variations in our quarterly operating results;

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

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

· adverse results or delays in our clinical trials;

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

· our inability to obtain adequate product supply for clinical trials or for commercial supply of any drug candidate or approved drug product or inability to do so at acceptable prices;

· termination of a collaboration by us or our collaborator or our inability to establish additional collaborations;

· regulatory decisions that are adverse to us and/or our products;

· safety concerns related to the use of CUBICIN or MERREM I.V.;

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

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

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

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

· our issuance of additional debt or equity securities;

· litigation, including stockholder or patent 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.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

At our annual meeting of stockholders held on June 11, 2008, our stockholders voted on the following three items, as follows:

1. The stockholders re-elected J. Matthew Singleton, Martin Rosenberg and Michael B. Wood to serve as Class III Directors, each to hold office until 2011 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
J. Matthew Singleton, MBA, CPA	50,369,109	875,375
Martin Rosenberg, Ph.D.	50,603,657	640,827
Michael B. Wood, M.D.	48,526,603	2,717,881

In addition, following the annual meeting, the terms of the directorships of Michael W. Bonney, Kenneth M. Bate, Sylvie Grégoire, David W. Martin, Jr. Walter R. Maupay and Martin H. Soeters continued.

2. The stockholders approved an amendment to our Amended and Restated 2000 Equity Incentive Plan to increase the number of shares reserved for issuance under the Plan by 2,000,000 shares from 11,535,764 to 13,535,764 by the following votes:

For		Against		Abstain		Broker Non-Vote
27,685,115		17,014,553		19,802		6,525,014

3. The stockholders ratified the selection of PricewaterhouseCoopers LLP as our independent auditor for the fiscal year ending December 31, 2008 by the following votes:

For		Against		Abstain		Broker Non-Vote
50,135,963		1,074,648		33,873		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:

10.1* License and Collaboration Agreement dated as of April 23, 2008 by and between Cubist and Dyax Corp.

10.2* Second Amendment, dated as of June 26, 2008, to the April 3, 2000 Development and Supply Agreement by and between Cubist and Hospira Worldwide, Inc.

10.3 Amended and Restated 2000 Equity Incentive Plan (Appendix A, Definitive Proxy Statement on Schedule 14A, filed on April 28, 2008, File No. 000-21379)

	CUBIST PHARMACEUTICALS, INC.


	August 4, 2008
	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)

Item		Page

PART I. Financial information

1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at June 30, 2008 and December 31, 2007	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007	5
	Notes to the Condensed Consolidated Financial Statements	6
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
3.	Quantitative and Qualitative Disclosures About Market Risk	31
4.	Controls and Procedures	32

PART II. Other Information

1.	Legal Proceedings	33
1A.	Risk Factors	33
2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
3.	Defaults Upon Senior Securities	53
4.	Submission of Matters to a Vote of Security Holders	53
5.	Other Information	53
6.	Exhibits	53
	Signatures	55