-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BzGubi1qY0EdNr2qjVHWHyw+9xz83OAUvWuMCwRXuwr++mlrZZ56b9yUj2GwalOm PvqS4JPy4GMYN/CZtPgWtw== 0001047469-98-010647.txt : 19980323 0001047469-98-010647.hdr.sgml : 19980323 ACCESSION NUMBER: 0001047469-98-010647 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUBIST PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000912183 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 223192085 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21379 FILM NUMBER: 98569427 BUSINESS ADDRESS: STREET 1: 24 EMILY ST CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6075761999 MAIL ADDRESS: STREET 1: 24 EMILY ST CITY: CAMBRIDGE STATE: MA ZIP: 02139 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 1997 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: _________________ to _________________ 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.) 24 Emily Street, Cambridge, MA 02139 (Address of principal executive offices and Zip Code) (617) 576-1999 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of Class) 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-X is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the registrant's common stock, $.001 par value per share ("Common Stock"), held by non-affiliates of the registrant as of March 3, 1998 was approximately $30,956,565 based on 5,759,361 shares held by such non-affiliates at the closing price of a share of Common Stock of $5.375 as reported on the Nasdaq National Market on such date. Affiliates of the Company (defined as officers, directors and owners of 10 percent or more of the outstanding share of Common Stock) owned 4,821,541 shares of Common Stock outstanding on such date. The number of outstanding shares of Common Stock of the Company on March 3, 1998 was 10,580,902. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on May 21, 1998 are incorporated by reference into Part III hereof. With the exception of the portions of such Proxy Statement expressly incorporated into this Annual Report on Form 10-K by reference, such Proxy Statement shall not be deemed filed as part of this Annual Report on Form 10-K. CUBIST PHARMACEUTICALS, INC. ANNUAL REPORT ON FORM 10-K Table of Contents
Item Page - ------ ---- Part I 1 Business......................................................................................... 3 2 Description of Property .........................................................................24 3 Legal Proceedings................................................................................24 4 Submission of Matters to a Vote of Security Holders..............................................24 Part II 5 Market For Registrant's Common Stock and Related Stockholder Matters.............................24 6 Selected Financial Data..........................................................................25 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................................................26 7A Quantitative and Qualitative Disclosures About Market Risk.......................................32 8 Financial Statements and Supplementary Data.......................................................32 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........................................................................................47 Part III 10 Directors and Executive Officers of the Registrant...............................................48 11 Executive Compensation...........................................................................48 12 Security Ownership of Certain Beneficial Owners and Management...................................48 13 Certain Relationships and Related Transactions...................................................48 Part IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................48 Signatures.......................................................................................51
2 Except for the historical information contained herein, this Annual Report on Form 10-K may contain "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, including, but not limited to, (i) statements about the adequacy of the Company's cash, cash equivalents, other capital resources, interest income, other income and future revenues due under the Company's collaborative agreements to fund its operating expenses and capital requirements as currently planned through mid-1999, (ii) statements about the amount of capital expenditures that the Company expects to incur in 1998, (iii) statements about the Company's plans to begin clinical trials of daptomycin in the fourth quarter of 1998 or the first quarter of 1999, and (iv) certain statements identified or qualified by words such as "likely", "will", "suggests", "may", "would", "could", "should", "expects", "anticipates", "estimates", "plans", "projects", "believes", or similar expressions (and variants of such words or expressions). Investors are cautioned that forward-looking statements 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, but not limited to, the risks and uncertainties described or discussed in the section "Risk Factors" in this Annual Report on Form 10-K. The forward-looking statements contained herein represent the Company's judgment as of the date of this Annual Report on Form 10K, and the Company cautions readers not to place undue reliance on such statements. PART I ITEM 1. BUSINESS The Company Cubist Pharmaceuticals, Inc. ("Cubist" or the "Company") is a biopharmaceutical company focused on the discovery, development and commercialization of novel small molecule antiinfectives to treat drug resistant pathogens. The acceleration of the Company's process to discover and develop novel compounds is executed by screening novel genomic target assays to identify new lead compounds and optimizing these compounds into development candidates, developing in-licensed drug candidates and balancing risk with pharmaceutical and technology collaborations. Overview of Infectious Disease and Drug Resistance Infectious diseases are caused by bacteria and fungi present in the environment that enter the body through the skin or mucous membranes of the lungs, nasal passages or gastrointestinal tract, and overwhelm the body's immune system. These pathogens then establish themselves in various tissues and organs throughout the body and cause a number of serious and, in some cases, lethal infections, including those of the bloodstream, heart, lung, liver and urinary tract. Antiinfective drugs have, in many cases, proven highly successful in controlling the serious morbidity and mortality that accompany these infections. These drugs work by chemically binding to specific targets in a bacterial or fungal pathogen, thereby inhibiting a 3 cell function essential to its survival. Currently available antiinfective drugs can be divided into the following four broad categories, according to the type of essential cell function they inhibit: (i) protein synthesis (e.g., tetracyclines, macrolides and aminoglycosides), (ii) cell wall and membrane synthesis (e.g., penicillins, cephalosporins, carbapenems, glycopeptides and polyenes), (iii) nucleic acid synthesis (e.g., fluoroquinolones) and (iv) cell metabolism (e.g., trimethoprim, sulfonamides, azoles and allylamines). Recently, there has been a rise in the incidence of infectious diseases caused by bacteria and fungi that have developed resistance to existing antiinfective drugs. This phenomenon has been well documented in the medical literature. A number of serious pathogens such as Staphylococcus aureus, Streptococcus pneumoniae, Enterococcus faecalis, Enterococcus faecium, Escherichia coli, Haemophilus influenzae, Pseudomonas aeruginosa, Mycobacterium tuberculosis, Candida albicans, Aspergillus fumigatus and Aspergillus flavus have shown significant evidence of drug resistance. The increasing prevalence of antiinfective drug resistance is a natural outcome of the use and overuse of antiinfective drugs. When bacteria or fungi are exposed to an antiinfective drug, the drug kills or attenuates the growth of the susceptible pathogen. However, any variant in the bacterial population that has spontaneously undergone a genetic change that confers drug resistance will have a selective growth advantage, which is known in evolutionary terms as natural selection. Thus, the antiinfective drug does not technically cause the resistance but creates a situation in which the resistant pathogen can multiply in the presence of the drug, increasing the population approximately a millionfold in a day and quickly becoming the predominant microorganism. These resistant bacteria can then spread rapidly from the infected patient to healthy individuals. Bacteria and fungi have evolved multiple resistance mechanisms against currently available categories of antiinfective drugs. These mechanisms include: (i) utilization of an enzyme to alter the drug's structure by creating or destroying chemical bonds, (ii) modification of the cell membrane to block entry of the drug, (iii) utilization of a protein to pump the drug out of their cells before the drug binds to the target and (iv) alteration of the target to significantly limit the ability of the antiinfective drug to bind to the target. Bacteria and fungi change the target by mutation of the target's protein sequence, by chemical modification of the target structure or by the acquisition of a new gene from another pathogen that substitutes for the target function. Traditional drug discovery approaches have not met the challenge posed by drug-resistant pathogens. To date, biology-based approaches have attempted to identify compounds that kill or attenuate the growth of the pathogen using whole-cell screening assays. This approach is limited because compounds that could effectively inhibit a target function inside the cell, but are unable to penetrate cell membranes, are not identified by whole-cell screening assays. Thus, entire classes of effective inhibitors of intracellular targets, which could be modified by medicinal chemistry to penetrate cell membranes, have potentially been overlooked. Chemistry-based approaches have focused on chemically modifying the molecular structure of existing antiinfective drugs or combining existing antiinfective drugs with another agent (an antibiotic potentiator) to circumvent established drug resistance mechanisms. Despite the introduction of second and third generation 4 antiinfective drugs, certain pathogens have developed resistance to all currently available drugs. Examples include: Methicillin resistant Staphylococcus aureus ("MRSA"): S. aureus is a common bacterial pathogen causing skin infections and colonization of the nares (entrance to the nose). It is also a frequent hospital-borne pathogen, and routinely acquires characteristics of drug resistance, virulence and toxicity through bacterial genetic transfer. MRSA strains can cause severe tissue damage to existing wounds and bacteremia (blood-borne infections), which has a 42% mortality rate. Vancomycin resistant enterococci ("VRE"): Vancomycin is regarded by many medical practitioners as the "last line of defense" against virulent Gram-positive bacteria species. The emergence of VRE strains in the 1990's has led to infections for which no approved therapy exists. Vancomycin resistance is found in both Enterococcus faecium and Enterococcus faecalis. Resulting VRE bacteremia has a 55% mortality rate. Vancomycin intermediate susceptible Staphyloccus aureus ("VISA"): The first reports of S. aureus infections with decreased susceptibility to vancomycin therapy occurred in 1997. Such bacterial strains have been found in a wide geographical area throughout Japan and North America. Resistance progression from VISA is expected to be the emergence of fully drug resistant S. aureus strains that the medical community has long feared. Cubist Development Program Daptomycin Daptomycin, the Company's lead product, is a novel antiinfective agent with bactericidal activity against all major Gram-positive bacteria. The compound has already demonstrated safety and efficacy in Phase II clinical trials, and is currently being developed in both intravenous ("IV") and oral formulations to treat infections and colonizations, respectively, in hospitalized patients. Cubist plans to initiate Phase III clinical trials of IV daptomycin for the treatment of skin and skin structure and urinary tract infections in late 1998 or early 1999, subject to Food and Drug Administration ("FDA") approval. Early clinical trials with the oral formulation of daptomycin for the eradication of VRE from the gastrointestinal tract are planned for 1999. Daptomycin is an antiinfective agent believed to bind to lipoteichoic acid and disrupt the cell membrane. Because daptomycin utilizes a novel target for its antimicrobial activity, there is no "built-in" resistance mechanism in existing bacterial populations. Daptomycin has already been shown to be effective against pathogens that have developed resistance to conventional antibiotics. In February of 1998, the Company contracted with ACS Dobfar of Milan, Italy to manufacture daptomycin. The Company estimates initial delivery of GMP daptomycin for clinical trial use in the fourth quarter and plans to begin clinical trials soon thereafter. Intravenous Product: In Phase II clinical studies conducted to date, IV daptomycin has demonstrated safety and efficacy for the treatment of skin and skin structure infections caused by Gram-positive 5 bacteria such as S. aureus and Streptococcus pyogenes. Approximately 300 subjects have received various doses of IV daptomycin in Phase I and II trials. Approximately 70% of the multiple dose regimens administered were at a dose of 2 mg/kg per day or higher. No toxicity was experienced at doses between 2 mg/kg per day and 6 mg/kg per day. Daptomycin was associated with minimal, reversible muscle toxicity at dose levels of 8 mg/kg per day in 2 of 5 volunteers. All signs of muscle toxicity subsided within several days of discontinuation of treatment. Daptomycin has shown promising in vitro activity against life-threatening drug resistant pathogens, including MRSA, VRE and VISA. At a dose of 2 mg/kg per day, daptomycin was comparable to conventional therapy in the treatment of Gram positive infections, particularly skin and skin structure infections with a 96.8% favorable response and may exhibit greater efficacy than conventional therapy against resistant bacterial infections. The Company plans to commence Phase III clinical trials in late 1998 or early 1999 to treat skin and skin structure infections and urinary tract infections, subject to FDA approval. Oral Product: A growing problem in healthcare is the spread of drug resistant infections from patient to patient within the hospital environment. Transmission of VRE often leads to bacterial colonization of the gastrointestinal tract in medical and surgical patients, and can lead to subsequent systemic infections with high mortality rates. The Company is developing oral daptomycin to eradicate VRE from the gastrointestinal tract prior to the occurrence of a potential systemic infection. The gastrointestinal tract is one of the sources of VRE that can cause skin, soft tissue and urinary tract infections which can lead to bacteremia. Cubist plans to enter early clinical trials in 1999, subject to FDA approval. The Company estimates between 40,000 and 200,000 hospitalized patients in the United States require isolation due to VRE colonization each year. The Cubist Discovery Program Cubist is identifying novel chemical classes of compounds that inhibit new targets in bacteria or fungi resulting in impaired cell growth or pathogen killing. The Company expects that drugs inhibiting these new targets would be immediately effective against currently drug-resistant bacteria and fungi since these pathogens have not had an opportunity to evolve resistance specific to these new drugs. In addition, the Company is developing and implementing novel technologies to accelerate this process of drug discovery. To discover novel antiinfectives for clinical development, the Cubist discovery platform integrates the scientific disciplines and technologies required for target validation and assay development, high-throughput screening and medicinal chemistry. 6 Target Validation and Assay Development The genomics explosion has resulted in the identification of a wealth of novel targets for drug discovery. There is a great need, at the earliest point in the discovery process to select the best targets from among the many available. The Company utilizes its proprietary CubeBiotools(TM) bioinformatics software to process and analyze microbial genomics information for target identification. Targets are chosen for further development based upon an evaluation of genetic, biochemical and microbial physiology data. The Company has developed VITATm, a technology to expeditiously validate targets for antiinfective drug therapy by analyzing the inhibition of a target during an established infection in a mouse model system using a method that has analogies to how an antibiotic inhibits it's target during an infection. The Company is currently focusing on implementing the technology to validate targets from clinically relevant pathogens such as Staphylococcus aureus. To date, the Company has developed over 100 proprietary antiinfective target assays that are currently being utilized in the discovery and characterization of lead compounds. The Company has broadened its target pipeline beyond its initial program based upon the aminoacyl-tRNA synthetase enzymes to include targets from a variety of functional areas. Some of the essential functions these targets play a role in include tRNA processing, protein synthesis, protein secretion, DNA replication, protein targeting and protein translocation. These assays were developed from organisms including Staphylococcus aureus, Enterococcus faecalis, Escherichia coli, Streptococcus pneumoniae, Haemophilus influenzae, Mycobacterium tuberculosis and Helicobacter pylori bacteria, Candida albicans and Pneumocystis carinii fungi and cultured human cells. A series of secondary and tertiary screens have also been developed to analyze compounds for whole cell activity and intracellular mechanism of action. High Throughput Screening Cubist utilizes state of the art technologies in automation, robotics and assay technologies to perform high-throughput screening of compound libraries to identify novel inhibitors. Thousands of compounds a day are screened in these assays. Inhibitors are further characterized using Cubist's secondary screening assays where increasingly stringent selection criteria are applied to identify drug candidates with the greatest potential for successful development. Molecules used in the Cubist screening program currently originate from four sources: (i) Cubist's proprietary rational design chemistry programs, (ii) Cubist's proprietary combinatorial chemistry programs, (iii) academic and industrial collaborations and (iv) commercial sources. Selection of these compounds was intended to provide broad chemical diversity and include compound classes which have traditionally yielded antibacterial and antifungal compounds. The Cubist combinatorial chemistry program generates two types of libraries, general and lead-specific. The general libraries are designed to provide Cubist with a diversity of molecular structures which can be used in conjunction with high-throughput screening to identify novel lead compounds which inhibit selected targets. Cubist constructs lead-specific libraries based on principles of rational drug design using structural templates demonstrated to interact with the target enzymes. A relational database is utilized to manage and analyze the high-throughput screening data and chemical compound structure information. 7 Medicinal Chemistry Cubist optimizes the pharmaceutical properties of lead compounds, which have been identified by its high-throughput screening through the iterative use of medicinal chemistry and in vitro biological assays. The Company's medicinal chemistry efforts are directed towards increasing the throughput of synthesis of optimized analogues of specific lead compounds utilizing chemical technologies including focused arrays, combinatorial libraries and computational chemistry. Lead compounds enter a high-speed chemical analoging program which generates large numbers of structurally-related compounds. Analogs are evaluated for numerous biological properties including (i) spectrum of inhibitory potency against a given enzyme from a variety of pathogens, (ii) selectivity for the pathogen target versus the human homolog, (iii) inhibitory potency against multiple targets from a single pathogen and (iv) spectrum of activity against whole cells, including drug-resistant strains, to determine potential clinical indication. Cubist subsequently evaluates, in animal models, drug candidates exhibiting suitable potency, spectrum and selectivity to determine their pharmacological and toxicological properties. Novel chemical classes of leads with potent and selective enzyme activity and whole cell activity have been selected for focused optimization utilizing these technologies and are the basis of current medicinal chemistry programs. The breadth and depth of the target validation and assay development program in combination with the high throughput screening capacity and medicinal chemistry optimization technologies provide multiple opportunities to discover novel chemical classes of antiinfectives. Collaborative Agreements The Company has entered into drug discovery and development collaboration agreements with Bristol-Myers Squibb Company ("Bristol-Myers Squibb") and Merck & Co., Inc. ("Merck") to discover and develop novel antiinfectives. In these collaborations, the collaborators' respective compound libraries are screened against certain Cubist aminoacyl-tRNA synthetase targets. Chemical compound structures are optimized into pre-clinical and clinical development candidates. These collaborations have provided the Company with funding, research and development resources, and access to libraries of diverse compounds and clinical development, manufacturing and commercialization capabilities. Through December 31, 1997, these collaborative partners and others have provided the Company with $8.1 million of funding in the form of research support payments, technology licensing fees and milestone payments and with a $4.0 million equity investment. Bristol-Myers Squibb In June 1996, Cubist and Bristol-Myers Squibb entered into a Collaborative Research and License Agreement (the "Bristol-Myers Squibb Agreement") pursuant to which they agreed to collaborate to discover and develop novel antiinfective drugs from leads obtained 8 by screening six of Cubist's aminoacyl-tRNA synthetase targets against Bristol-Myers Squibb's compound library. In connection with the collaboration, Bristol-Myers Squibb has made a $4.0 million equity investment in Cubist, has made $1.5 million in milestone payments and has made research support payments to Cubist. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." Under the terms of the Bristol-Myers Squibb Agreement, Cubist is entitled to receive additional research support payments and, if certain milestones are achieved, additional milestone payments from Bristol-Myers Squibb. Cubist has granted to Bristol-Myers Squibb an exclusive worldwide license to commercialize drugs resulting from this collaboration. The development, manufacture and worldwide sale of drugs resulting from the collaboration will be conducted by Bristol-Myers Squibb, and Cubist will be entitled to receive royalties on the worldwide sales of any drug developed and commercialized from this collaboration. Merck In June 1996, the Company and Merck entered into a Collaborative Research and License Agreement (the "Merck Agreement") pursuant to which they agreed to collaborate to discover and develop novel antiinfective drugs from leads obtained by screening three of Cubist's aminoacyl-tRNA synthetase targets against Merck's compound library. In connection with the collaboration, Merck has made research support payments and has paid technology licensing fees to Cubist. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." Under the terms of the Merck Agreement, Cubist is entitled to receive additional research support payments and, if certain milestones are achieved, milestone payments from Merck. Cubist has granted Merck an exclusive worldwide license to commercialize drugs resulting from this collaboration. The development, manufacture and worldwide sale of drugs resulting from the collaboration will be conducted by Merck, and the Company will be entitled to receive royalties on the worldwide sales of any drug developed and commercialized from this collaboration. Other Collaborations To obtain access to a diversity of chemical compounds for the Company's internal drug discovery programs, Cubist has entered into screening agreements with ArQule, Inc., Genzyme Corporation and Pharmacopeia, Inc. pursuant to which Cubist screens such party's compound libraries against Cubist's proprietary targets. Cubist has also entered into a Collaborative Research Agreement with Novalon Pharmaceutical Corporation, a drug discovery company focused on the development and application of novel technologies to screen genomics targets and accelerate lead discovery. The agreement focuses on collaborative research by Cubist and Novalon to develop and execute specific screens for antiinfective drug discovery. Cubist will pay Novalon a percent of revenue received by Cubist that relates to the use of the technology and currently pays a monthly payment for research funding, salaries and supplies. 9 Patents and Proprietary Technology The Company seeks to protect its cloned targets, assays, organic synthetic processes, lead compounds, screening technology and certain other technology by, among other things, filing, or causing to be filed on its behalf, patent applications. Cubist has three issued U.S. patents, 18 pending U.S. patent applications and one pending international patent application. To date, the Company has received a notice of allowance for nine of these U.S. applications. Cubist has also licensed three U.S. patents. There can be no assurance that patents will be granted with respect to any of the Company's pending patent applications or with respect to any patent applications filed by the Company in the future. The commercial success of the Company will depend in part on not infringing patents or proprietary rights of others. There can be no assurance that the Company will be able to obtain a license to any third-party technology it may require to conduct its business or that if obtainable, such technology can be licensed at reasonable cost. Failure by the Company to obtain a license to technology that it may require to utilize its technologies or commercialize its products may have a material adverse effect on the Company's business, operating results and financial condition. In some cases, litigation or other proceedings may be necessary to defend against or assert claims of infringement, to enforce patents issued to the Company, to protect trade secrets, know-how or other intellectual property rights owned by the Company, or to determine the scope and validity of the proprietary rights of third parties. Any potential litigation could result in substantial costs to and diversion of resources by the Company and could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that any of the Company's issued or licensed patents would ultimately be held valid or that efforts to defend any of its patents, trade secrets, know-how or other intellectual property rights would be successful. An adverse outcome in any such litigation or proceeding could subject the Company to significant liabilities, require the Company to cease using the subject technology or require the Company to license the subject technology from the third party, all of which could have a material adverse effect on the Company's business, operating results and financial condition. Much of the know-how of importance to the Company's technology and many of its processes are dependent upon the knowledge, experience and skills, which are not patentable, of key scientific and technical personnel. To protect its rights to and to maintain the confidentiality of trade secrets and proprietary information, the Company requires employees, Scientific Advisory Board members, consultants and collaborators to execute confidentiality and invention assignment agreements upon commencement of a relationship with the Company. These agreements prohibit the disclosure of confidential information to anyone outside the Company and require disclosure and assignment to the Company of ideas, developments, discoveries and inventions made by employees, advisors, consultants and collaborators. There can be no assurance, however, that these agreements will not be breached or that the Company's trade secrets or proprietary information will not otherwise become known or developed independently by others. 10 Government Regulation Overview The development, manufacture and marketing of drugs (including antibiotics) developed by the Company or its collaborative partners are subject to regulation by numerous governmental agencies in the United States, principally the FDA, by state and local governments, and in some instances by foreign governments. Pursuant to the Federal Food, Drug, and Cosmetic Act and the regulations promulgated thereunder (the "FDC Act"), the FDA regulates the pre-clinical and clinical trials, safety, effectiveness, manufacture, labeling, storage, distribution, and promotion of drugs. Product development and approval within the FDA regulatory framework usually takes a significant number of years, involves the expenditure of substantial capital resources and is uncertain. U.S. Regulatory Process Before testing in the United States of any compounds with potential therapeutic value in human test subjects may begin, stringent government requirements for preclinical data must be satisfied. Pre-clinical testing includes both in vitro and in vivo laboratory evaluation and characterization of the safety and efficacy of a drug and its formulation. Pre-clinical testing results obtained from studies in several animal species, as well as from in vitro studies, are submitted to the FDA as part of an investigational new drug application ("IND") and are reviewed by the FDA prior to the commencement of human clinical trials. These pre-clinical data must provide an adequate basis for evaluating both the safety and the scientific rationale for the initial (Phase I) studies in human volunteers. Unless the FDA objects to an IND, the IND becomes effective 30 days following its receipt by the FDA. Once trials have commenced, the FDA may stop the trials by placing them on "clinical hold" because of concerns about, for example, the safety of the product being tested. Clinical trials involve the administration of the drug to healthy human volunteers or to patients under the supervision of a qualified investigator, usually a physician, pursuant to an FDA-reviewed protocol. Human clinical trials are typically conducted in three sequential phases, although the phases may overlap with one another. Clinical trials must be conducted under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Phase I clinical trials represent the initial administration of the investigational drug to a small group of healthy human subjects or, more rarely, to a group of selected patients with the targeted disease or disorder. The goal of Phase I clinical trials is typically to test for safety (adverse effects), dose tolerance, absorption, biodistribution, metabolism, excretion and clinical pharmacology and, if possible, to gain early evidence regarding efficacy. Phase II clinical trials involve a small sample of the actual intended patient population and seek to assess the efficacy of the drug for specific targeted indications, to 11 determine dose tolerance and the optimal dose range and to gather additional information relating to safety and potential adverse effects. Once an investigational drug is found to have some efficacy and an acceptable safety profile in the targeted patient population, Phase III clinical trials are initiated to establish further clinical safety and efficacy of the investigational drug in a broader sample of the general patient population at geographically dispersed study sites in order to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for product labeling. The Phase III clinical development program consists of expanded, large-scale studies of patients with the target disease or disorder, to obtain definitive statistical evidence of the efficacy and safety of the proposed product and dosage regimen. All of the phases of clinical studies must be conducted in conformance with the FDA's bioresearch monitoring regulations. All data obtained from a comprehensive development program including research and product development, manufacturing, pre-clinical and clinical trials and related information are submitted in a new drug application ("NDA") to the FDA and the corresponding agencies in other countries for review and approval. In addition to reports of the trials conducted under the IND application, the NDA includes information pertaining to the preparation of the new drug or antibiotic, analytical methods, details of the manufacture of finished products and proposed product packaging and labeling. Although the FDC Act requires the FDA to review NDAs within 180 days of their filing, in practice longer times may be required. The FDA also frequently requests that additional information be submitted, requiring significant additional review time. Any proposed product of the Company likely would be subject to demanding and time-consuming NDA approval procedures in virtually all countries where marketing of the products is intended. These regulations define not only the form and content of safety and efficacy data regarding the proposed product but also impose specific requirements regarding manufacture of the product, quality assurance, packaging, storage, documentation and recordkeeping, labeling, advertising and marketing procedures. The FDA has developed two "fast track" policies for certain new drugs, one policy for expedited development and review, and one policy for accelerated approval. The expedited review policy applies to new drug therapies, including antibiotics, that are intended to treat persons with life-threatening and severely-debilitating illnesses, especially where no satisfactory alternative therapy exists. The FDA has defined "severely-debilitating" to mean diseases or conditions that cause major irreversible morbidity. During the developmental stage of drugs that qualify, the FDA expedites consultation and review of these experimental therapies. The FDA's accelerated approval policy applies to certain new drug or antibiotic products that have been studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide "meaningful therapeutic benefit to patients over existing treatments." This accelerated approval, or fast track approach, is generally limited to new drugs or antibiotics that treat patients that are unresponsive to, or intolerant of, available therapy, or when there is improved patient response over currently available therapy. The accelerated approval policy is further limited to drugs for which the predictive value of the surrogate endpoint, in terms of clinical outcome, has not been established. At 12 the time of approval, the FDA may grant approval on a surrogate endpoint or an effect on a clinical endpoint other than survival or irreversible morbidity. The FDA may impose certain restrictions on distribution, limiting its use to certain facilities or specialty-trained physicians or making its use contingent on the performance of certain specified medical procedures. Postmarketing studies (Phase IV trials) are usually required to further affirm safety and/or efficacy. However, if an acceptable clinical endpoint has been established, the drug must be evaluated for approval under the traditional (non-fast track) approach. The Company is also subject to regulation under other federal laws and regulation under state and local laws, including laws relating to occupational safety, laboratory practices, the use, handling and disposition of radioactive materials, environmental protection and hazardous substance control. Although the Company believes that its safety procedures for handling and disposing of radioactive compounds and other hazardous materials used in its research and development activities comply with the standards prescribed by federal, state and local regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of any such accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. Competition The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Competitors of the Company in the United States and elsewhere are numerous and include, among others, major, multinational pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions. Many of these competitors employ greater financial and other resources, including larger research and development staffs and more effective marketing and manufacturing organizations, than the Company or its collaborative partners. Acquisitions of competing companies and potential competitors by large pharmaceutical companies or others could enhance financial, marketing and other resources available to such competitors. As a result of academic and government institutions becoming increasingly aware of the commercial value of their research findings, such institutions are more likely to enter into exclusive licensing agreements with commercial enterprises, including competitors of the Company, to market commercial products. There can be no assurance that the Company's competitors will not succeed in developing technologies and drugs that are more effective or less costly than any which are being developed by the Company or which would render the Company's technology and future drugs obsolete and noncompetitive. In addition, some of the Company's competitors have greater experience than the Company in conducting pre-clinical and clinical trials and obtaining FDA and other regulatory approvals. Accordingly, the Company's competitors may succeed in obtaining FDA or other regulatory approvals for drug candidates more rapidly than the Company. Companies that complete clinical trials, obtain required regulatory agency approvals and commence commercial sale of their drugs before their competitors may achieve a significant competitive advantage, including certain patent and FDA marketing exclusivity rights that would delay the Company's ability to market certain products. There can be no assurance 13 that drugs resulting from the Company's research and development efforts, or from the joint efforts of the Company and its collaborative partners, will be able to compete successfully with competitors' existing products or products under development or that they will obtain regulatory approval in the United States or elsewhere. Employees As of February 20, 1998, the Company had 66 full-time employees, 50 of whom were engaged in research and development and 16 of whom were engaged in management, administration and finance. Doctorates are held by 26 of the Company's employees. The Company's employees are not covered by a collective bargaining agreement. The Company has never experienced an employment-related work stoppage and considers its employee relations to be good. Executive Officers of the Registrant The executive officers of the Company are as follows:
Name Age Position - ------------------------------- ----- ------------------------------------ Scott M. Rocklage, Ph.D. 43 President, Chief Executive Officer and Director Francis P. Tally, M.D. 57 Executive Vice President, Scientific Affairs Mark P. Carthy 37 Vice President and Chief Business Officer Dennis D. Keith, Ph.D. 54 Vice President, Drug Discovery
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Name Age Position - ------------------------------- ----- ------------------------------------ Frederick B. Oleson, Jr., D.Sc. 49 Vice President, Drug Development Thomas A. Shea 38 Senior Director of Finance & Administration, Treasurer
Dr. Rocklage has served as President and Chief Executive Officer and as a member of the Board of Directors of the Company since July 1994. From 1990 to 1994, Dr. Rocklage served as President and Chief Executive Officer of Nycomed Salutar, Inc., a diagnostic imaging company. From 1992 to 1994, he also served as President and Chief Executive Officer and Chairman of Nycomed Interventional, Inc., a medical device company. From 1986 to 1990, he served in various positions at Salutar, Inc., a diagnostic imaging company and was responsible for designing and implementing research and development programs that resulted in three drug products in human clinical trials, including the approved drugs Omniscan and Teslascan. Dr. Rocklage received his B.S. in Chemistry from the University of California, Berkeley and his Ph.D. in Chemistry from the Massachusetts Institute of Technology. Mr. Carthy has served as Vice President and Chief Business Officer since April 1997. Mr. Carthy joined Cubist from Vertex Pharmaceuticals Inc., a biotechnology company, where he served most recently as Senior Director of Business Development. Prior to joining Vertex, Mr. Carthy managed the chemical filtration business for Millipore and was a member of the Mergers and Acquisitions Department at Shearson Lehman Hutton. Mr. Carthy holds a Masters Degree in Chemical Engineering from the University of Missouri and a Masters in Business Administration from Harvard Business School. Dr. Tally has served as Executive Vice President, Scientific Affairs since January 1997. From March 1995 to January 1997, he served the Company as Vice President of Research and Development. From 1986 to 1995, Dr. Tally served as Executive Director of Infectious Disease, Molecular Biology and Natural Products Research at the Lederle Laboratories of American Cyanamid/American Home Products, where he was responsible for worldwide clinical studies for piperacillin/tazobactam which was registered for sales in Europe in 1992, approved by the FDA in 1993 and marketed as Zosyn. From 1975 to 1986, he served as Senior Physician in Infectious Disease at the New England Medical Center and Associate Professor of Medicine at Tufts Medical Center. Dr. Tally received his A.B. in Biology from Providence College and his M.D. from George Washington University School of Medicine. Dr. Keith has served as Vice President, Drug Discovery since October 1997. Dr. Keith joined Cubist from Hoffman-La Roche Inc. where he served in various positions from 1971-1997, the most recent of which was Director of Antiinfective Chemistry. Dr. Keith received his B.S. in Chemistry from Bates College and his Ph.D. in Organic Chemistry from Yale University. 15 Dr. Oleson has served as Vice President, Drug Development since November 1997. Prior to joining Cubist, Dr. Oleson served as an independent consultant from June 1997 to November 1997; Director of Preclinical Research at AutoImmune, Inc., a biotechnology company, from January 1997 to June 1997; Director, Toxicology and Preclinical Pharmacology at Biogen, Inc., a biotechnology company, from 1992 to 1997 and in various positions at Bristol-Myers Squibb from 1983 to 1992. Dr. Oleson was a key contributor in the development of the Biogen drug AVONEX and a key consultant in the development of Hirulog for The Medicines Company. Dr. Oleson received his B.S. in Biochemistry from Princeton University and a Doctor of Science in Physiology/Radiation Biology from Harvard University School of Public Health. Mr. Shea has served as Treasurer and Chief Accounting Officer since June 1996 and has served as Senior Director of Finance and Administration since December 1997. Previous to that he was Director of Finance and Administration. From 1987 to 1993, he served as Manager of Accounting/MIS and Budget and Financial Analyst at ImmuLogic Pharmaceutical Corporation, a biotechnology company. Mr. Shea received his B.S. in Accounting/Law from Babson College and his Masters in Business Administration from Suffolk University. Risk Factors Stockholders and prospective purchasers of the Company's Common Stock should carefully consider the following risk factors, in addition to the other information appearing in this Annual Report on Form 10-K. Early Stage of Product Development; No Assurance of Successful Commercialization. Since inception, the Company has generated no revenue from product sales. The Company's research and development programs are at an early stage, and the Company does not expect that any drugs resulting from its research and development efforts, or from the joint efforts of the Company and its collaborative partners, will be commercially available for a significant number of years, if at all. The Company has one drug candidate in preclinical development and is currently in the process of optimizing lead candidates to select other drug candidates for preclinical development. To date, the Company has not, independently or with its collaborative partners, completed the optimization of any lead candidates. Any drug candidates developed by the Company will require significant additional research and development efforts, including extensive preclinical (animal and in vitro data) and clinical testing and regulatory approval, prior to commercial sale. Only one of the Company's drug candidates has advanced to any phase of preclinical or clinical trials. There can be no assurance that the Company's approach to drug discovery, acting independently or with the efforts of any collaborative partner of the Company, will be 16 effective or will result in the development of any drug. The Company's drug candidates will be subject to the risks of failure inherent in the development of pharmaceutical products based on new technologies. These risks include the possibilities that any or all of the Company's drug candidates will be found to be unsafe, ineffective or toxic or otherwise fail to meet applicable regulatory standards or receive necessary regulatory clearances; that these drug candidates, if safe and effective, will be difficult to develop into commercially viable drugs or to manufacture on a large scale or will be uneconomical to market; that proprietary rights of third parties will preclude the Company from marketing such drugs; or that third parties will market superior or equivalent drugs. The failure to develop safe, commercially viable drugs would have a material adverse effect on the Company's business, operating results and financial condition. Uncertainty Due to Unproven Technology. The Company's drug discovery approach faces technical issues which have not been resolved and requires the development of multiple novel technologies to create a successful drug candidate. While the Company has demonstrated that certain compounds have the ability to inhibit the activity of certain molecular targets, the Company has not proven that this activity can be utilized clinically as a therapeutic. Furthermore, there can be no assurance that the inhibitory activity already demonstrated in primary screening will continue to be encouraging in further screening or drug discovery studies. The Company has not tested any drug candidates developed from the Company's drug discovery program in humans, and there can be no assurance that there will be clinical benefits associated with any such drug candidates. Furthermore, there can be no assurance that the Company will successfully address these technological challenges or others that may arise in the course of development. Any failure of the Company to anticipate or respond adequately to technological developments will have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to employ its drug discovery approach successfully. Dependence on Collaborative Partners and Others. A key element of the Company's strategy is to enhance certain of its drug discovery and development programs and to fund its capital requirements, in part, by entering into collaborative agreements with major pharmaceutical companies. The Company is a party to collaborative agreements with Bristol-Myers Squibb and Merck (collectively, the "Collaborative Agreements"). Under the Collaborative Agreements, each of Bristol-Myers Squibb and Merck is responsible for (i) providing libraries of compounds for screening against certain of the Company's aminoacyl-tRNA synthetase targets, (ii) selecting, in collaboration with Cubist, compounds determined to be leads in the screening for subsequent development, (iii) conducting preclinical and clinical trials and obtaining required regulatory approvals of drug candidates, and (iv) manufacturing and commercializing resulting drugs. As a result, the Company's receipt of revenues (whether in the form of continued research funding, drug development milestones or royalties on sales) under the Collaborative Agreements is dependent upon the decisions made by the manufacturing and marketing resources of its collaborative partners. The Company's collaborative partners are not obligated to develop or commercialize any drug candidates resulting from the Collaborative Agreements. The amount and timing of resources dedicated by the Company's collaborative partners to their respective collaborations with the Company is not within the Company's control. Moreover, certain drug candidates discovered by the Company may be viewed by the Company's collaborative partners as competitive with such partners' drugs or drug candidates. Accordingly, there can 17 be no assurance that the Company's collaborative partners will elect to proceed with the development of drug candidates which the Company believes to be promising or that they will not pursue their existing or alternative technologies in preference to such drug candidates. There can be no assurance that the interests of the Company will continue to coincide with those of its collaborative partners, that some of the Company's collaborative partners will not develop independently, or with third parties, drugs that could compete with drugs of the types contemplated by the Collaborative Agreements, or that disagreements over rights or technology or other proprietary interests will not occur. If any of the Company's collaborative partners breaches or terminates its agreement with the Company, or otherwise fails to conduct its collaborative activities in a timely manner, the development or commercialization of any drug candidate or research program under these Collaborative Agreements may be delayed, the Company may be required to undertake unforeseen additional responsibilities or to devote unforeseen additional resources to such development or commercialization, or such development or commercialization could be terminated. Any such event could materially adversely affect the Company's financial condition, intellectual property position and operations. In addition, there have been a significant number of recent consolidations among pharmaceutical companies. Such consolidations among the companies with which the Company is collaborating could result in the diminution or termination of, or delays in, the development or commercialization of drug candidates or research programs under one or more of the Collaborative Agreements. Additional Financing Requirements; Uncertainty of Available Funding. The Company will require substantial additional funds for its drug discovery and development programs, for operating expenses, for pursuing regulatory clearances, for the development of manufacturing, marketing and sales capabilities and for prosecuting and defending its intellectual property rights before it can expect to realize significant revenues from commercial sales. The Company intends to seek such additional funding through public or private financing or collaborative or other arrangements with corporate partners. If additional funds are raised by issuing equity securities, further dilution to existing stockholders may result and future investors may be granted rights superior to those of existing stockholders. There can be no assurance, however, that additional financing will be available from any of these sources or, if available, will be available on acceptable or affordable terms. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its research and development programs or to obtain funds by entering into arrangements with collaborative partners or others that require the Company to issue additional equity securities or to relinquish rights to certain technologies or drug candidates that the Company would not otherwise issue or relinquish in order to continue independent operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." History of Losses and Expectation of Future Losses; Uncertainty of Future Profitability. The Company has incurred a cumulative operating loss of approximately $23.0 million through December 31, 1997. Losses have resulted principally from costs incurred in research and development activities related to the Company's efforts to develop target assays, acquisition and chemical optimization of compounds, automated high throughput screening and from the associated administrative costs. The Company expects to incur significant additional operating losses over the next several years and expects 18 cumulative losses to increase substantially due to expanded research and development efforts, preclinical and clinical trials and development of manufacturing, marketing and sales capabilities. In the next few years, the Company's revenues may be limited to research support payments under the Collaborative Agreements and any amounts received under other research or drug development collaborations that the Company has established or will establish. There can be no assurance, however, that the Company will be able to establish any additional collaborative relationships on terms acceptable to the Company or maintain in effect the current Collaborative Agreements. The Company's ability to achieve significant revenue or profitability is dependent on its or its collaborative partners' ability to successfully complete the development of drug candidates, to develop and obtain patent protection and regulatory approvals for the drug candidates and to manufacture and commercialize the resulting drugs. The Company will not receive revenues or royalties from commercial sales for a significant number of years, if at all. Failure to receive significant revenues or achieve profitable operations would impair the Company's ability to sustain operations. There can be no assurance that the Company will ever successfully develop, commercialize, patent, manufacture and market any products, obtain required regulatory approvals or achieve profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Uncertainty of Patents and Proprietary Rights. The Company's success will depend in part on its ability to obtain U.S. and foreign patent protection for its drug candidates and processes, preserve its trade secrets and operate without infringing the proprietary rights of third parties. Because of the length of time and expense associated with bringing new drug candidates through the development and regulatory approval process to the marketplace, the pharmaceutical industry has traditionally placed considerable importance on obtaining patent and trade secret protection for significant new technologies, products and processes. There can be no assurance that any additional patents will issue from any of the patent applications owned by, or licensed to, the Company. Further, there can be no assurance that any rights the Company may have under issued patents will provide the Company with significant protection against competitive products or otherwise be commercially viable. Legal standards relating to the validity of patents covering pharmaceutical and biotechnological inventions and the scope of claims made under such patents are still developing. There is no consistent policy regarding the breadth of claims allowed in biotechnology patents. The patent position of a biotechnology firm is highly uncertain and involves complex legal and factual questions. There can be no assurance that any existing or future patents issued to, or licensed by, the Company will not subsequently be challenged, infringed upon, invalidated or circumvented by others. In addition, patents may have been granted, or may be granted, covering products or processes that are necessary or useful to the development of the Company's drug candidates. If the Company's drug candidates or processes are found to infringe upon the patents, or otherwise impermissibly utilize the intellectual property of others, the Company's development, manufacture and sale of such drug candidates could be severely restricted or prohibited. In such event, the Company may be required to obtain licenses from third parties to utilize the patents or proprietary rights of others. There can be no assurance that the Company will be able to obtain such licenses on acceptable terms, or at all. There has been significant litigation in the industry regarding patents and other proprietary rights. If the Company becomes involved in litigation regarding its intellectual property rights or the intellectual property rights of others, the 19 potential cost of such litigation and the potential damages that the Company could be required to pay could be substantial. In addition to patent protection, the Company relies on trade secrets, proprietary know-how and technological advances which it seeks to protect, in part, by confidentiality agreements with its collaborative partners, employees and consultants. There can be no assurance that these confidentiality agreements will not be breached, that the Company would have adequate remedies for any such breach, or that the Company's trade secrets, proprietary know-how and technological advances will not otherwise become known or be independently discovered by others. Uncertainty Associated with Preclinical and Clinical Testing. Before obtaining regulatory approvals for the commercial sale of any of the Company's potential drugs, the drug candidates will be subject to extensive preclinical and clinical trials to demonstrate their safety and efficacy in humans. The Company is dependent on its collaborative partners to conduct clinical trials for the drug candidates resulting from the Collaborative Agreements and may become dependent on other third parties to conduct future clinical trials of its internally developed drug candidates. The Company has no experience in conducting preclinical or clinical trials, and preclinical or clinical trials have been commenced with respect to only one of the Company's drug candidates and none of the drug candidates being developed jointly by the Company and its collaborative partners. Furthermore, there can be no assurance that preclinical or clinical trials of any drug candidates will demonstrate the safety and efficacy of such drug candidates at all or to the extent necessary to obtain regulatory approvals. Companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after demonstrating promising results in earlier trials. The failure to adequately demonstrate the safety and efficacy of a drug candidate under development could delay or prevent regulatory approval of the drug candidate and would have a material adverse effect on the Company's business, operating results and financial condition. No Assurance of Market Acceptance. There can be no assurance that any drugs successfully developed by the Company, independently or with its collaborative partners, if approved for marketing, will achieve market acceptance. The antiinfective drugs which the Company is attempting to develop will compete with a number of well-established antiinfective drugs manufactured and marketed by major pharmaceutical companies. The degree of market acceptance of any drugs developed by the Company will depend on a number of factors, including the establishment and demonstration of the clinical efficacy and safety of the Company's drug candidates, their potential advantage over existing therapies and reimbursement policies of government and third-party payors. There is no assurance that physicians, patients or the medical community in general will accept and utilize any drugs that may be developed by the Company independently or with its collaborative partners. Intense Competition. The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Competitors of the Company in the United States and elsewhere are numerous and include, among others, major multinational pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions. Many of these competitors employ greater financial and other resources, including larger research and development staffs and more 20 effective marketing and manufacturing organizations, than the Company or its collaborative partners. Acquisitions of competing companies and potential competitors by large pharmaceutical companies or others could enhance financial, marketing and other resources available to such competitors. As a result of academic and government institutions becoming increasingly aware of the commercial value of their research findings, such institutions are more likely to enter into exclusive licensing agreements with commercial enterprises, including competitors of the Company, to market commercial products. There can be no assurance that the Company's competitors will not succeed in developing technologies and drugs that are more effective or less costly than any which are being developed by the Company or which would render the Company's technology and future drugs obsolete and noncompetitive. In addition, some of the Company's competitors have greater experience than the Company in conducting preclinical trials and obtaining U.S. FDA and other regulatory approvals. Accordingly, the Company's competitors may succeed in obtaining FDA or other regulatory approvals for drug candidates more rapidly than the Company. Companies that complete clinical trails, obtain required regulatory agency approvals and commence commercial sale of their drugs before their competitors may achieve a significant competitive advantage, including certain patent and FDA marketing exclusivity rights that would delay the Company's ability to market certain products. There can be no assurance that drugs resulting from the Company's research and development efforts, or from the joint efforts of the Company and its collaborative partners, will be able to compete successfully with competitors' existing products or products under development or that they will obtain regulatory approval in the United States or elsewhere. Impact of Extensive Government Regulation. The FDA and comparable agencies in foreign countries impose substantial requirements upon the introduction of pharmaceutical products through lengthy and detailed preclinical, laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures to establish their safety and efficacy. All of the Company's drug candidates will require governmental approvals for commercialization, none of which have been obtained. Preclinical and clinical trials and manufacturing of the Company's drug candidates will be subject to the rigorous testing and approval processes of the FDA and corresponding foreign regulatory authorities. Satisfaction of these requirements typically take a significant number of years and can vary substantially based upon the type, complexity and novelty of the product. There can be no assurance as to when Cubist, independently or with its collaborative partners, might first submit an IND for FDA or other regulatory review. Government regulation also affects the manufacturing and marketing of pharmaceutical products. The effect of government regulation may be to delay marketing of the Company's potential drugs for a considerable or indefinite period of time, impose costly procedural requirements upon the Company's activities and furnish a competitive advantage to larger companies or companies more experienced in regulatory affairs. Delays in obtaining governmental regulatory approval could adversely affect the Company's marketing as well as the Company's ability to generate significant revenues from commercial sales. There can be no assurance that FDA or other regulatory approvals for any drug candidates developed by the Company will be granted on a timely basis or at all. Moreover, if regulatory approval of a drug candidate is granted, such approval may impose limitations on the indicated use 21 for which such drug may be marketed. Even if initial regulatory approvals for the Company's drug candidates are obtained, the Company, its drugs and its manufacturing facilities would be subject to continual review and periodic inspection, and later discovery of previously unknown problems with a drug, manufacturer or facility may result in restrictions on such drug or manufacturer, including withdrawal of the drug from the market. The regulatory standards are applied stringently by the FDA and other regulatory authorities and failure to comply can, among other things, result in fines, denial or withdrawal of regulatory approvals, product recalls or seizures, operating restrictions and criminal prosecution. The FDA has developed two "fast track" policies for certain new drugs (including antibiotics), one policy for expedited development and review and one policy for accelerated approval. The expedited development and review policy applies to new drug therapies that are intended to treat persons with life-threatening and severely debilitating illnesses, especially where no satisfactory alternative therapy exists. The accelerated approval policy applies to certain new drugs that are intended to treat persons with serious or life-threatening illnesses that provide a meaningful therapeutic benefit to patients over existing treatments. There can be no assurance that any drug candidate contemplated by the Company will qualify for the FDA's various fast track or priority approval policies. Nor can there be any assurance that such policies will remain as currently implemented by the FDA. As with many biotechnology and pharmaceutical companies, the Company is subject to numerous environmental and safety laws and regulations. Any violation of, and the cost of compliance with, these regulations could materially adversely affect the Company's business, operating results and financial condition. The Company is subject to periodic inspections and has not received notice of any material violations of any environmental or safety law or regulation. Dependence on Key Personnel. The Company is highly dependent upon the efforts of its senior management and scientific team, including its President and Chief Executive Officer. Although Dr. Rocklage has entered into an employment agreement with the Company, the terms of the employment agreement provide that Dr. Rocklage may terminate his employment with the Company at any time upon thirty days' written notice. None of the Company's other executive officers or key employees has entered into an employment agreement with the Company. The loss of the services of one or more of these individuals might impede the achievement of the Company's development objectives. Because of the specialized scientific nature of the Company's business, the Company is highly dependent upon its ability to attract and retain qualified scientific and technical personnel. There is intense competition among major pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions for qualified personnel in the areas of the Company's activities. There can be no assurance that the Company will be able to continue to attract and retain the qualified personnel necessary for the development of its business. Loss of the services of, or failure to recruit, key scientific and technical personnel could adversely affect the Company's business, operating results and financial condition. Lack of Manufacturing, Marketing and Sales Capability and Experience. Cubist has not yet made any significant investment in the development of manufacturing, marketing or sales capabilities. The Company has no experience in manufacturing of products in accordance with Good Manufacturing Practices ("GMP") as prescribed by the FDA or to 22 produce an adequate supply of compounds to meet future requirements for clinical trials. If the Company is unable to develop or contract for manufacturing capabilities on acceptable terms, the Company's ability to conduct preclinical and clinical trials with the Company's drug candidates will be adversely affected, resulting in delays in the submission of drug candidates for regulatory approvals and in the initiation of new development programs, which in turn could materially impair Cubist's competitive position and the possibility of achieving profitability. The Company has no experience in marketing drugs. The Company has granted marketing rights to its collaborative partners with respect to drugs developed through the Collaborative Agreements. The Company may seek to collaborate with a third party to market those drugs for which it has retained or licensed marketing rights or may seek to market and sell such drugs directly. If the Company seeks to collaborate with a third party, there can be no assurance that a collaborative agreement can be reached on acceptable terms. If the Company seeks to market and sell such drugs directly, the Company will need to hire additional personnel skilled in marketing and sales as it develops drugs with commercial potential. There can be no assurance that the Company will be able to acquire, or establish third-party relationships to provide, any or all of these capabilities. Reimbursement and Drug Pricing Uncertainty. The successful commercialization of, and the interest of potential collaborative partners to invest in, the development of the Company's drug candidates will depend substantially on reimbursement of the costs of the resulting drugs and related treatments at acceptable levels from government authorities, private health insurers and other organizations, such as health maintenance organizations ("HMOs"). There can be no assurance that reimbursement in the United States or elsewhere will be available for any drugs the Company may develop or, if available, will not be decreased in the future, or that reimbursement amounts will not reduce the demand for, or the price of, the Company's drugs, thereby adversely affecting the Company's business. If reimbursement is not available or is available only to limited levels, there can be no assurance that the Company will be able to obtain collaborative partners to manufacture and commercialize drugs, or would be able to obtain a sufficient financial return on its own manufacture and commercialization of any future drugs. Third-party payors are increasingly challenging the 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, which can control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may result in lower prices for pharmaceutical products. The cost containment measures that health care providers are instituting, including practice protocols and guidelines and clinical pathways, and the effect of any health care reform, could materially adversely affect the Company's ability to sell any of its drugs if successfully developed and approved. Moreover, the Company is 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 the Company's business. Potential Product Liability and Availability of Insurance. The Company's business exposes it to potential liability risks that are inherent in the testing, manufacturing and 23 marketing of pharmaceutical products. The use of the Company's drug candidates in clinical trials may expose the Company to product liability claims and possible adverse publicity. These risks will expand with respect to the Company's drug candidates, if any, that receive regulatory approval for commercial sale. Product liability insurance for the biotechnology industry is generally expensive, if available at all. The Company does not have product liability insurance but intends to obtain such coverage if and when its drug candidates are tested in clinical trials. However, such coverage is becoming increasingly expensive and there can be no assurance that the Company will be able to obtain insurance coverage at acceptable costs or in a sufficient amount, at all, or that a product liability claim would not adversely affect the Company's business, operating results or financial condition. ITEM 2. DESCRIPTION OF PROPERTY The Company's headquarters and research and development facilities are located in a 24,000 square foot facility leased by the Company in Cambridge, Massachusetts at 24 Emily Street. The Company believes that this space will be adequate for its research and drug development activities for at least the next year. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the last quarter of the fiscal year ended December 31, 1997. PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Since October 25, 1996, the effective date of the Company's initial public offering, the Company's common stock has been traded on the Nasdaq National Market under the symbol "CBST". Prior to such date, no established public trading market existed for the Company's common stock. The following table sets forth, for the period indicated, the high and low sale prices per share of the Company's common stock as reported by the Nasdaq National Market.
High Low ------- ------- 1996 Fourth Quarter (commencing on October 25, 1996) . . . . $ 7.00 $ 5.50 1997
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High Low ------- ------- First Quarter $13.00 $ 6.00 Second Quarter $10.25 $ 6.00 Third Quarter $ 7.50 $ 5.00 Fourth Quarter $ 8.25 $ 4.88
Holders As of March 3, 1998, the Company had approximately 150 stockholders of record. This does not reflect persons or entitles who hold their stock in nominee or "street" name through various brokerage firms. Dividends The Company has not paid dividends on its Common Stock. The Company anticipates it will continue to reinvest earnings to finance future growth, and therefore does not intend to pay dividends in the foreseeable future. Recent Sales of Unregistered Securities Described below is information regarding all securities of the Company sold by the Company during the fiscal year ended December 31, 1997, which were not registered under the Securities Act of 1933, as amended (the "Securities Act"). In July 1997, the Company issued and sold an aggregate of 979,591 shares of Common Stock to International Biotechnology Trust plc ("IBT") and H&Q Capital Management ("H&Q") at a purchase price of $6.125 per share. The issuance and sale of such shares of Common Stock were made in reliance on Section 4(2) of the Securities Act. ITEM. 6. SELECTED FINANCIAL DATA
Years ended December 31, (in thousands, except per share data) ------------------------------------------------------- 1997 1996 1995 1994 1993 --------- -------- -------- -------- -------- Statement of Operations Data: Total revenues.................................. $ 2,733 $ 4,985 $ 1,271 $ -- $ -- Research and development expenses ....................................... 9,341 6,871 4,965 3,309 1,169 General and administrative expenses ............. 3,292 1,989 1,708 1,449 547 Other income .................................... 1,833 -- -- -- -- Net loss ........................................ (7,265) (3,799) (5,396) (4,813) (1,688) Basic and diluted net loss per share ...................................... $ (0.73) $ (1.49) $ (5.47) $ (7.61) $ (3.50) Weighted average number of common shares outstanding ............................. 9,995 2,554 986 633 482
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Years ended December 31, (in thousands) ------------------------------------------------------- 1997 1996 1995 1994 1993 --------- -------- -------- -------- -------- Balance Sheet Data: Cash and cash equivalents and short and long-term investments ..................... $ 18,116 $ 19,329 $ 3,056 $ 1,221 $ 4,457 Total assets ................................... 21,673 23,452 7,048 4,250 7,241 Long-term obligations .......................... 1,105 1,053 1,257 2,032 1,164 Stockholder's equity ........................... 19,063 20,299 4,895 823 5,488
ITEM. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Since its incorporation on May 1, 1992 and commencement of operations in February 1993, Cubist has been engaged in the research, development and commercialization of novel antiinfective drugs to treat infectious diseases caused by bacteria and fungi, primarily those resistant to existing antiinfective drugs. The Company has a limited history of operations and has experienced significant operating losses since inception. The Company expects to incur significant additional operating losses over the next several years and expects cumulative losses to increase substantially due to expanded research and development efforts, pre-clinical and clinical trials and development of manufacturing, marketing and sales capabilities. A key element of the Company's strategy is to enhance certain of its drug discovery and development programs and to fund its capital requirements, in part, by entering into collaborative agreements with major pharmaceutical companies. The Company is a party to collaborative agreements based specifically on its aminoacyl-tRNA synthetase program with Bristol-Myers Squibb Company ("Bristol-Myers Squibb") and Merck & Co., Inc. ("Merck"). Under these collaborative agreements, the Company is entitled to receive research support payments and, if certain drug development milestones are achieved, milestone payments. In addition, the Company will be entitled to receive royalties on worldwide sales of any drug developed and commercialized from these collaborations. On June 20, 1997, the Company's collaborative agreement with Pfizer expired pursuant to its own terms. Prior to such expiration, the Company had received all of the research support payments and technology licensing fees that the Company was entitled to receive under that collaborative agreement. In accordance with the terms of that collaborative agreement, the Company selected and licensed from Pfizer one of the chemical compounds that was identified and characterized during the Company's collaboration with Pfizer. Pursuant to the terms of that license, the Company may develop and commercialize such licensed compound without further obligation to Pfizer. 26 On November 7, 1997, the Company entered into a license agreement with Eli Lilly and Company ("Eli Lilly") pursuant to which the Company acquired exclusive worldwide rights to develop, manufacture and market daptomycin. In exchange for such license, the Company has paid to Eli Lilly an upfront license fee in cash, and if certain drug development milestones are achieved, has agreed to pay milestone payments by issuing shares of Common Stock to Eli Lilly. In addition, the Company will be required to pay royalties to Eli Lilly on worldwide sales of daptomycin. Daptomycin is a novel, natural product being developed for the treatment of Staphylococcus aureus and enterococcus infections in humans. The Company anticipates that it will begin clinical trials of daptomycin in the fourth quarter of 1998 or the first quarter of 1999. The Company and Novalon Pharmaceutical Corporation ("Novalon") entered into a collaborative research agreement on May 5, 1997 to accelerate and broaden the development of technologies to screen genomic targets. On September 29, 1997, the Company extended its collaboration with Novalon through February 2001. The extended collaboration will focus on utilizing these targets to identify lead compounds active against the Company's antibacterial and antifungal targets. In addition, the Company agreed to terminate its option to acquire Novalon and sold its existing equity position back to Novalon for $2.0 million resulting in a gain of $1.8 million included in other income. In connection with such transaction, the Company was granted an option to purchase up to twenty percent of the outstanding shares of Novalon from existing shareholders. This option is at a price of $6.00 per share expiring in August of 1998. The Company will pay Novalon a percent of revenues received by the Company that relates to the use of the technology and currently pays a monthly fee for research funding to Novalon. On September 25, 1997, the Company expanded its research collaboration with Merck, adding additional aminoacyl-tRNA synthetase targets that are proprietary to the Company and Merck's natural products compound library to the drug discovery program. Under the terms of this expansion, Merck will pay the Company for additional research support beyond the original agreement. The Company has considered the impact of the year 2000 as it relates to the programming within the Company's computer and operating systems and does not believe there is a significant risk to the Company. Results of Operations Years Ended December 31, 1997 and 1996 Revenues. Total revenues in the year ended December 31, 1997 were $2,733,000 compared to $4,985,000 in the year ended December 31, 1996, a decrease of $2,252,000 or 45.2%. The revenue earned in the year ended December 31, 1997 consisted of $2,025,000 in research support funding from the Bristol-Myers Squibb, Merck and Pfizer collaborations; a $500,000 milestone payment from the Bristol-Myers Squibb collaboration; and $208,000 in SBIR funding. The revenue earned in the year ended December 31, 1996 primarily consisted of a $1,500,000 technology licensing fee from the Merck collaboration; $2,116,000 in research support funding from the Bristol-Myers Squibb, Merck and Pfizer collaborations; $1,000,000 in milestone payments from the Bristol-Myers Squibb collaboration; and $369,000 in SBIR funding. The decrease in revenues in the year ended December 31, 1997 as compared to the year 27 ended December 31, 1996 was primarily due to the one-time technology license fee from Merck in the amount of $1,500,000 in 1996; the decrease of research support funding primarily due to the termination of the Pfizer collaboration in 1997; and reduced milestone payments from the Bristol-Myers Squibb collaboration during 1997. Research and Development Expenses. Total research and development expenses in the year ended December 31, 1997 were $9,341,000 compared to $6,871,000 in the year ended December 31, 1996, an increase of $2,470,000 or 35.9%. The increase was largely due to (i) amortization of the Company's purchase option in Novalon, (ii) purchases of laboratory research supplies associated with additional equipment, and (iii) a license fee associated with worldwide rights to develop, manufacture and market daptomycin and expenses associated with the development and manufacture of daptomycin from Eli Lilly, and (iv) increased personnel and related supplies engaged in the research and development programs. General and Administrative Expenses. General and administrative expenses in the year ended December 31, 1997 were $3,292,000 compared to $1,989,000 in the year ended December 31, 1996, an increase of $1,303,000 or 65.5%. The increase was largely due to (i) increased costs related to additional executive staff personnel and recruiting, (ii) increased costs of premiums for directors' and officers' insurance, (iii) increased investor and public relation expenses and (iv) increased legal expenses primarily associated with licensing and patent activities. Interest Income and Expense. Interest income in the year ended December 31, 1997 was $1,039,000 compared to $306,000 in year ended December 31, 1996, an increase of $733,000 or 239.5%. The increase in interest income was due primarily to higher average cash, cash equivalent and investment balances during the year ended December 31, 1997 as compared to the year ended December 31, 1996. Interest expense in the year ended December 31, 1997 was $237,000 as compared to $229,000 during the year ended December 31, 1996. Other Income. Other income in the year ended December 31, 1997 was $1,833,000 and consisted entirely of gain on the sale of the Company's equity position in Novalon. Net Loss. The net loss for the year ended December 31, 1997 was $7,265,000 compared to $3,799,000 during the year ended December 31, 1996, an increase of $3,466,000 or 91.2%. The increase, which was offset in part by the gain on the sale of the Company's equity position in Novalon, was primarily due to (i) a decrease in revenues during the year ended December 31, 1997, as described above, (ii) an increase in expenses incurred by the Company to support the advancement of the Company's internal research programs, (iii) an increase in expenses incurred associated with the licensing of daptomycin from Eli Lilly, (iv) amortization expense incurred by the Company associated with its investment in Novalon and (v) increased costs associated with the Company's investor and public relations program. 28 Results of Operations Years ended December 31, 1996 and 1995 Revenues. Total revenues in the year ended December 31, 1996 were $4,985,000 compared to $1,271,000 in the year ended December 31, 1995, an increase of $3,714,000 or 292.2%. The revenue earned in the year ended December 31, 1996 primarily consisted of $1,500,000 in technology licensing fees from the Merck collaboration; $2,116,000 in research support funding from the Bristol-Myers Squibb, Merck and Pfizer collaborations; $1,000,000 in milestone payments from the Bristol-Myers Squibb collaboration; and $369,000 in SBIR grants. In the year ended December 31, 1995, revenues consisted of $500,000 in technology licensing fees and $488,000 in research support funding from the Pfizer collaboration and $283,000 from SBIR Phase I grant funding. Research and Development Expenses. Total research and development expenses in the year ended December 31, 1996 were $6,871,000 compared to $4,965,000 in the year ended December 31, 1995, an increase of $1,906,000 or 38.4%. The increase was largely due to increased costs related to additional personnel, purchases of compounds to expand the Company's compound collection and purchases of laboratory research supplies that are utilized by such additional personnel. General and Administrative Expenses. General and administrative expenses in the year ended December 31, 1996 were $1,989,000 compared to $1,709,000 in the year ended December 31, 1995, an increase of $280,000 or 16.4%. The increase was primarily due to costs relating to additional personnel and recruiting, relocation, and legal expenses. Interest Income and Expense. Interest income in the year ended December 31, 1996 was $306,000 compared to $239,000 in the year ended December 31, 1995, an increase of $67,000 or 28.0%. The increase in interest income was due to an increase in the average cash, cash equivalent and investment balance during the year ended December 31, 1996 as compared to the year ended December 31, 1995. Interest expense was $229,000 in the year ended December 31, 1996 as compared to $233,000 during the year ended December 31, 1995. Net Loss. The net loss for the year ended December 31, 1996 was $3,799,000 compared to $5,396,000 for the year ended December 31, 1995, a decrease of $1,597,000 or 29.6%. The decrease was primarily due to the increased revenues associated with the Bristol-Myers Squibb, Merck and Pfizer collaborations, which were offset only in part by additional expenses incurred to support the advancement of the Company's internal research programs. Liquidity and Capital Resources Since inception, the Company has financed its operations through the sale of equity securities, equipment financing, sponsored research revenues, license revenues and interest 29 earned on invested capital. The Company's total cash, cash equivalent and investments balance at December 31, 1997 was $18,116,000 compared to $19,329,000 at December 31, 1996. On July 18, 1997, the Company completed a private equity financing in which the Company raised $6.0 million before offering expenses of $96,161 by issuing 979,591 common shares at $6.125 per share. On September 29, 1997, the Company received a cash payment of $2.0 million from Novalon in connection with the sale of the Company's equity position in Novalon. Through December 31, 1997, the Company had invested an aggregate of $5,893,000 (of which $995,000 was invested during the year then ended) in property and equipment, primarily in facility renovations an laboratory equipment under capital leases. The obligations under capital leases at December 31, 1997 were $1,553,000. Minimum annual principal payments due under capital leases total $559,000 in 1998. Principal payments are scheduled to decline each year thereafter until expiration in 2001. The Company made principal payments under its capital lease obligations of $695,000 in the year ended December 31, 1997. The Company expects its capital expenditures in 1998 to be approximately $1,000,000, consisting of laboratory and other equipment purchases. The Company believes that its existing capital resources, interest income and future revenues due under the Bristol-Myers Squibb and Merck collaborative agreements will be sufficient to fund its operating expenses and capital requirements as currently planned through mid-1999. The Company's actual cash requirements may vary materially from those now planned and will depend on numerous factors. There can be no assurance that the Company's existing cash, cash equivalents, other capital resources, interest income and future revenues due under the Bristol-Myers Squibb and Merck collaborative agreements will be sufficient to fund its operating expenses and capital requirements during such period. Thereafter, the Company will need to raise substantial additional capital to fund its operations. The Company intends to seek such additional funding through public or private financing or collaborative or other arrangements with corporate partners. Earnings Per Share Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards 128 (SFAS 128) "Earnings per Share", which requires the disclosure of Basic Earnings per Common Share and Diluted Earnings per Common Share for all periods presented. At December 31, 1997, the Company had 802,468 options and 86,619 warrants outstanding. Adoption of this statement has not affected the amounts presented in any period because the effect of including these equity instruments would be anti-dilutive. Prior to the adoption of this statement, all common and common equivalent shares issued during the twelve month period prior to the filing of the initial public offering ("cheap stock") were included in the calculation of basic and diluted earnings per share as if they were outstanding for all periods presented. Adoption of this statement, and the related guidance set 30 out in Securities and Exchange Commission Staff Bulletin No. 98, has eliminated the inclusion of cheap stock from the calculation of basic and diluted earnings per share prior to issuance of the securities. Accordingly, basic and diluted earnings per share in 1996 and 1995 have been restated from $(1.39) and $(3.99), respectively. Recent Pronouncements The FASB recently issued Statement of Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income". This statement requires changes in comprehensive income to be shown in a financial statement that is displayed with the same prominence as other financial statements. The Company believes the implementation of this statement will not have a material impact on the financial statements. 31 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. ITEM 8. FINANCIAL STATEMENTS CUBIST PHARMACEUTICALS, INC. INDEX TO FINANCIAL STATEMENTS
Page ------ Report of Independent Accountants............................................................................. 33 Balance Sheets as of December 31, 1997 and 1996............................................................... 34 Statements of Operations for the years ended December 31, 1997, 1996 and 1995................................. 35 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................................. 36 Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995............ 37 Notes to Financial Statements................................................................................. 40
32 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Cubist Pharmaceuticals, Inc.: We have audited the accompanying balance sheets of Cubist Pharmaceuticals, Inc. as of December 31, 1997 and 1996, and the related statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cubist Pharmaceuticals, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Boston, Massachusetts COOPERS & LYBRAND L.L.P. January 19, 1998 33 CUBIST PHARMACEUTICALS, INC. BALANCE SHEETS
December 31, ---------------------------- 1997 1996 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents ...................... $ 2,837,600 $ 19,329,353 Short-term investments ......................... 6,709,623 -- Accounts receivable ............................ 53,333 505,267 Prepaid expenses and other current assets ...... 142,635 286,642 ------------ ------------ Total current assets ........................... 9,743,191 20,121,262 Property and equipment .................................. 5,893,101 4,898,538 Less: Accumulated depreciation and amortization .............................. (2,712,341) (1,741,152) ------------ ------------ Property and equipment, net .................... 3,180,760 3,157,386 Long-term investments ................................... 8,569,107 -- Other assets ............................................ 180,294 173,799 ------------ ------------ Total assets .......................... $ 21,673,352 $ 23,452,447 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ............................... $ 275,260 $ 741,409 Accrued expenses ............................... 492,304 484,732 Deferred revenue ............................... -- 126,900 Current portion of long-term debt .............. 189,730 188,062 Current portion of capital lease obligations ... 548,351 559,767 ------------ ------------ Total current liabilities ............. 1,505,645 2,100,870 Long-term debt, net of current portion .................. 100,072 291,683 Long-term capital lease obligation, net of current portion ........................................ 1,004,969 761,284 ------------ ------------ Total liabilities ..................... 2,610,686 3,153,837 ------------ ------------ Commitments (Note J) Stockholders' Equity: Preferred Stock non-cumulative; convertible, $.001 par value; authorized 5,000,000 shares, 1997 and 1996; issued and outstanding 1997 and 1996 no shares -- -- Common Stock, $.001 par value; authorized 25,000,000 shares, 1997 and 1996; issued and outstanding 1997 10,580,555 shares; issued and outstanding 1996 9,544,373 shares ....... 10,581 9,544 Additional paid-in capital .............................. 42,047,966 36,019,608 Accumulated deficit ..................................... (22,995,881) (15,730,542) ------------ ------------ Total stockholders' equity ............ 19,062,666 20,298,610 ------------ ------------ Total liabilities and stockholders' equity ................................ $ 21,673,352 $ 23,452,447 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements. 34 CUBIST PHARMACEUTICALS, INC. STATEMENTS OF OPERATIONS
For the Years Ended December 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Sponsored research revenues ...................... $ 2,733,083 $ 4,985,052 $ 1,271,333 Operating expenses: Research and development ................ 9,340,928 6,871,149 4,964,876 General and administrative .............. 3,292,241 1,989,284 1,708,513 ------------ ------------ ------------ Total operating expenses ....... 12,633,169 8,860,433 6,673,389 Interest income .................................. 1,038,532 306,017 239,030 Interest expense ................................. (237,119) (229,305) (232,980) Other income (Note E) ............................ 1,833,334 -- -- ------------ ------------ ------------ Net loss ................................ $ (7,265,339) $ (3,798,669) $ (5,396,006) ------------ ------------ ------------ ------------ ------------ ------------ Basic and diluted net loss per common share ...... $ (0.73) $ (1.49) $ (5.47) ------------ ------------ ------------ ------------ ------------ ------------ Weighted average number of common shares for basic and diluted net loss per common share ........... 9,994,718 2,553,999 986,255 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements. 35 CUBIST PHARMACEUTICALS, INC. STATEMENTS OF CASH FLOWS
For the Years Ended December 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Cash flows for operating activities: Net loss .......................................... $ (7,265,339) $ (3,798,669) $ (5,396,006) Adjustments to reconcile net loss to net cash used in operating activities: Gain on sale of equity interest ................ (1,833,334) -- -- Amortization of equity interest ................ 833,334 -- -- Depreciation and amortization ................. 1,057,887 740,408 570,556 Changes in assets and liabilities: Accounts receivable ...................... 451,934 482,733 (988,000) Prepaid expenses and other current assets 144,007 (219,646) 15,713 Other assets ............................. (6,495) (15,228) (8,390) Accounts payable and accrued expenses .... (458,577) 911,622 (708,104) Deferred revenue ......................... (126,900) 126,900 -- ------------ ------------ ------------ Total adjustments .................... 61,856 2,026,789 (1,118,225) ------------ ------------ ------------ Net cash used for operating activities ................. (7,203,483) (1,771,880) (6,514,231) ------------ ------------ ------------ Cash flows for investing activities: Purchase of equipment ............................. (899,810) (640,329) -- Leasehold improvements ............................ (94,753) (423,256) (99,325) Purchase of equity interest ....................... (1,000,000) -- -- Proceeds from sale of equity interest ............. 2,000,000 -- -- Purchase of short-term investments ................ (22,686,443) -- (3,942,610) Redemption and maturities of short-term investments 15,976,820 1,006,569 2,936,041 Purchase of long-term investments ................. (8,569,107) -- -- ------------ ------------ ------------ Net cash used for investing activities ................. (15,273,293) (57,016) (1,105,894) ------------ ------------ ------------ Cash flows from financing activities: Issuance of stock ................................. 5,942,697 19,146,448 8,467,928 Proceeds from long-term debt ...................... -- -- 345,500 Repayments of long-term debt ...................... (189,943) (168,565) (141,130) Proceeds from capital lease financing ............. 927,686 599,593 94,671 Principal payments of capital lease obligations ... (695,417) (468,782) (318,272) ------------ ------------ ------------ Net cash provided by financing activities .............. 5,985,023 19,108,694 8,448,697 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ... (16,491,753) 17,279,798 828,572 Cash and cash equivalents at beginning of year ......... 19,329,353 2,049,555 1,220,983 ------------ ------------ ------------ Cash and cash equivalents at end of year ............... $ 2,837,600 $ 19,329,353 $ 2,049,555 ------------ ------------ ------------ ------------ ------------ ------------ Supplemental disclosures of cash flow information: Cash paid during the year for interest ............ $ 237,119 $ 229,305 $ 232,980
The accompanying notes are an integral part of the financial statements. 36 CUBIST PHARMACEUTICALS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31, 1997, 1996 and 1995
# of Shares # of Shares # of Shares # of Shares # of Shares $ Preferred A Preferred B Preferred C Preferred D Common Preferred ----------- ----------- ----------- ----------- ----------- ----------- 12/31/94 Balance .......... 5,000,000 14,733,370 -- -- 910,027 $ 19,733 --------- ---------- ------- ------------ --------- ---------- ------- ------------ Series C Preferred Stock par $.001 at $.60 share 15,017,813 $ 15,018 Series C Preferred Stock Offering Expenses ..... Common Stock par $.007 at $.35 and $.42 share 114,082 Exercise of Common Stock Options ............... 785 Repurchase of Common Stock ................. (8,232) Repayment of Notes Receivable Preferred Series B .............. Notes Receivable Common Stock ................. Forgiveness of Promissory Notes ................. Issuance of Stock Options ............... Amortization of Deferred Compensation .......... Net Loss .................. --------- ---------- ---------- --------- ------------ 12/31/95 Balance .......... 5,000,000 14,733,370 15,017,813 -- 1,016,662 $ 34,751 --------- ---------- ---------- --------- ------------ --------- ---------- ---------- --------- ------------
$ Additional Paid-in Capital $ $ ------------------------------------------ $ Issuance of Notes Deferred Accumulated Stockholders' Common Shares Receivable Compensation Deficit Equity ----------- ------------ ------------ ------------ ------------ ------------ 12/31/94 Balance .......... $ 910 $ 7,981,632 $ (632,527) $ (11,030) $ (6,535,867) $ 822,851 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Series C Preferred Stock par $.001 at $.60 share 8,995,670 9,010,688 Series C Preferred Stock Offering Expenses ..... (45,787) (45,787) Common Stock par $.007 at $.35 and $.42 share 114 47,274 47,388 Exercise of Common Stock Options ............... 1 274 275 Repurchase of Common Stock ................. (8) (2,873) (2,881) Repayment of Notes Receivable Preferred Series B .............. 435,000 435,000 Notes Receivable Common Stock ................. (4,989) (4,989) Forgiveness of Promissory Notes ................. 23,615 23,615 Issuance of Stock Options ............... 28,020 (28,020) Amortization of Deferred Compensation .......... 4,619 4,619 Net Loss .................. (5,396,006) (5,396,006) ------------ ------------ ------------ ------------ ------------ ------------ 12/31/95 Balance .......... $ 1,017 $ 17,004,210 $ (178,901) $ (34,431) $(11,931,873) $ 4,894,773 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements. 37 CUBIST PHARMACEUTICALS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED) For the Years Ended December 31, 1997, 1996 and 1995
# of Shares # of Shares # of Shares # of Shares # of Shares $ Preferred A Preferred B Preferred C Preferred D Common Preferred ----------- ----------- ----------- ----------- ----------- ----------- Series D Preferred Stock par $.001 at $1.42 share, net of expenses ................ 2,816,902 2,817 Conversion of Preferred Stock to Common Stock par $.001 (5,000,000) (14,733,370) (15,017,813) (2,816,902) 5,366,849 (37,568) Exercise of Stock Options ... 58,244 Repurchase of Common Stock ................... (36,634) Initial Public Offering, net of expenses ................ 3,139,252 Forgiveness of Promissory Notes ................... Issuance of Common Stock Options and Warrants ..... Amortization of Deferred Compensation ............ Net Loss .................... --------- 12/31/96 Balance ............ -- -- -- -- 9,544,373 -- --------- ---------
$ Additional Paid-in Capital $ $ ------------------------------------------ $ Issuance of Notes Deferred Accumulated Stockholders' Common Shares Receivable Compensation Deficit Equity ----------- ------------ ------------ ------------ ------------ ------------ Series D Preferred Stock par $.001 at $1.42 share, net of expenses ................ 3,941,727 3,944,544 Conversion of Preferred Stock to Common Stock par $.001 5,367 32,201 0 Exercise of Stock Options ... 58 35,232 35,290 Repurchase of Common Stock ................... (37) (12,273) (12,310) Initial Public Offering, net of expenses ................ 3,139 15,151,343 15,154,482 Forgiveness of Promissory Notes ................... 24,442 24,442 Issuance of Common Stock Options and Warrants ..... 101,378 (101,378) 0 Amortization of Deferred Compensation ............ 56,058 56,058 Net Loss .................... (3,798,669) (3,798,669) ----------- ------------ ----------- ------------ ------------ ------------ 12/31/96 Balance ............ $ 9,544 $ 36,253,818 $ (154,459) $ (79,751) $(15,730,542) $ 20,298,610 ----------- ------------ ----------- ------------ ------------ ------------ ----------- ------------ ----------- ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements. 38 CUBIST PHARMACEUTICALS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED) For the Years Ended December 31, 1997, 1996 and 1995
# of Shares # of Shares # of Shares # of Shares # of Shares $ Preferred A Preferred B Preferred C Preferred D Common Preferred ----------- ----------- ----------- ----------- ----------- ----------- Exercise of Stock Option 57,981 Repurchase of Common Stock .................. (1,390) Issuance of Common Stock, net of offering expenses 979,591 Amortization of Deferred Compensation ........... Forgiveness of Promissory Notes ...... Net Loss ................ ---------- 12/31/97 Balance ........ -- -- -- -- 10,580,555 -- ---------- ----------
$ Additional Paid-in Capital $ $ ------------------------------------------ $ Issuance of Notes Deferred Accumulated Stockholders' Common Shares Receivable Compensation Deficit Equity ----------- ------------ ------------ ------------ ------------ ------------ Exercise of Stock Option $ 58 $ 119,320 $ 119,378 Repurchase of Common Stock .................. (1) (519) (520) Issuance of Common Stock, net of offering expenses 980 5,902,859 (80,000) 5,823,839 Amortization of Deferred Compensation ........... 20,000 43,924 63,924 Forgiveness of Promissory Notes ...... 22,774 22,774 Net Loss ................ (7,265,339) (7,265,339) ------------ ------------ ----------- ----------- ------------ ------------ 12/31/97 Balance ........ $ 10,581 $ 42,275,478 $ (191,685) $ (35,827) $(22,995,881) $ 19,062,666 ------------ ------------ ----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------
The accompanying notes are an integral part of the financial statements. 39 CUBIST PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS A. Nature of Business Cubist Pharmaceuticals, Inc. ("Cubist" or the "Company") is a biopharmaceutical company founded in May 1992 and is engaged in the research, development and commercialization of novel classes of antiinfective drugs to treat infectious diseases caused by bacteria and fungi, primarily those resistant to existing antiinfective drugs. Cubist has established multiple technology licenses and collaborations, has established a network of advisors and collaborators and is located in Cambridge, Massachusetts. B. Accounting Policies Basis of Presentation The accompanying financial statements are stated on an accrual basis. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Risks and Uncertainties The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, development by its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with FDA government regulations. Cash Equivalents Cash equivalents consist of short-term interest-bearing instruments (U.S. Government treasuries and money market accounts) with original maturities of three months or less. These investments are carried at cost which approximates market value. Short-term Investments Short-term investments, with an original maturity of more than three months and less than one year when purchased, consisted of certificates of deposit and investment-grade commercial paper at December 31, 1997. Short-term investments, all of which are held to maturity, are stated at amortized cost plus accrued interest, which approximates market value. Long-Term Investments Long-term investments, with a maturity of more than twelve months when purchased, consisted of investment-grade corporate debt at December 31, 1997. Long-term investments, all of which are held to maturity, are stated at amortized cost plus accrued interest, which approximates market value. 40 CUBIST PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) B. Accounting Policies (Continued) Property and Equipment Property and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, generally three years for computer equipment and five years for laboratory equipment, furniture and fixtures. Leasehold improvements are stated at cost and are amortized over the lesser of the life of the lease or their estimated useful lives. The leasehold improvements are also utilized as collateral up to a value of $289,802, which relates to the balance of long-term debt. Maintenance and repairs are charged to expense as incurred, while major betterments are capitalized. When assets are retired or otherwise disposed of, the assets and related allowances for depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in income. Research and Development All research and development costs are expensed as incurred. Income Taxes Research and experimentation and other tax credits, when utilized, will be recorded using the flow-through method of accounting as a reduction of the current provision for federal and state income taxes. Earnings Per Share Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share", which requires the disclosure of Basic Earnings per Common Share and Diluted Earnings per Common Share for all periods presented. At December 31, 1997, the Company had 802,468 options and 86,619 warrants outstanding. Adoption of this statement has not affected the amounts presented in any period because the effect of including these equity instruments would be anti-dilutive. Prior to the adoption of this statement, all common and common equivalent shares issued during the twelve month period prior to the filing of the initial public offering ("cheap stock") were included in the calculation of basic and diluted earnings per share as if they were outstanding for all periods presented. Adoption of this statement, and the related guidance set out in Securities and Exchange Commission Staff Accounting Bulletin No. 98, has eliminated the inclusion of cheap stock from the calculation of basic and diluted earnings per share prior to issuance of the securities. Accordingly, basic and diluted earnings per share in 1996 and 1995 have been restated from $(1.39) and $(3.99), respectively. C. Property and Equipment At December 31, property and equipment consisted of:
1997 1996 ----------- ----------- Leasehold improvements ....................... $ 2,584,489 $ 2,489,736 Laboratory equipment ......................... 2,389,683 1,799,587 Furniture and fixtures ....................... 286,197 251,427 Computer equipment ........................... 632,732 357,788 ----------- ----------- 5,893,101 4,898,538 ----------- ----------- Less accumulated depreciation and amortization (2,712,341) (1,741,152) ----------- ----------- Property and equipment, net .................. $ 3,180,760 $ 3,157,386 ----------- ----------- ----------- -----------
Depreciation and amortization expense was $971,189, $659,908 and $542,322 in 1997, 1996 and 1995, respectively. 41 CUBIST PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) D. Accrued Expenses At December 31, accrued expenses consisted of:
1997 1996 -------- -------- Payroll and benefits ...................... $218,583 $125,087 Vacation .................................. 67,837 60,019 Construction .............................. -- 46,250 Legal, audit and patent ................... 119,500 68,275 Database .................................. -- 42,200 Annual report ............................. 35,000 60,000 Utilities ................................. -- 76,339 Miscellaneous ............................. 51,384 6,562 -------- -------- Total accrued expenses .................... $492,304 $484,732 -------- -------- -------- --------
E. Collaborative Research Agreements On December 15, 1995, the Company entered into a collaborative research agreement with Pfizer, Inc. Under the terms of the agreement, Pfizer paid the Company a technology licensing fee upon execution and research support payments. These payments were recognized as income under the terms of the agreement. In addition, Pfizer reimbursed the Company for expenses related to the screening of Pfizer compounds against the Company's targets. In accordance with the agreement, these payments were recognized as revenue as the work was completed. The Company included in sponsored research revenues $150,000, $587,000 and $988,000 in 1997, 1996 and 1995, respectively. On June 20, 1997, the Company's collaborative agreement with Pfizer expired pursuant to its own terms. Prior to such expiration, the Company had received all of the research support payments and technology licensing fees that the Company was entitled to receive under that collaborative agreement. In accordance with the terms of that collaborative agreement, the Company selected and licensed from Pfizer one of the chemical compounds that was identified and characterized during the Company's collaboration with Pfizer. Pursuant to the terms of that license, the Company may develop and commercialize such licensed compound without further obligation to Pfizer. In June 1996, the Company entered into a collaborative research agreement with Bristol-Myers Squibb Company ("Bristol-Myers Squibb"). Under the terms of the agreement, Bristol-Myers Squibb purchased from the Company $4,000,000 of the Company's Preferred Stock upon execution of the agreement, and has agreed to make payments to the Company upon the achievement of certain milestones. These milestone payments are recognized as income as earned under the terms of the agreement. In addition, Bristol-Myers Squibb will reimburse the Company a fixed amount for research and development expenses relating to the production of certain targets and also for expenses relating to the screening of Bristol-Myers Squibb compounds against the Company's targets over three years, with an option to fund a fourth year. These reimbursements are to be paid at the beginning of each calendar quarter in accordance with the agreement. The Company included in sponsored research revenues $500,000 and $1,000,000 in milestone payments in 1997 and 1996, respectively; and $1,000,000 and $516,668 in 1997 and 1996, respectively, for certain research and development revenues in accordance with the agreement. 42 CUBIST PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) E. Collaborative Research Agreements (Continued) In June 1996, the Company entered into a collaborative research agreement with Merck & Co., Inc. ("Merck"). Under the terms of the agreement, Merck paid the Company a technology licensing fee upon execution and will pay certain milestone payments. These payments are recognized as income as earned under the terms of the agreement. In addition, Merck will reimburse the Company for research and development expenses relating to the production of certain targets; for expenses relating to the screening of Merck compounds against the Company's targets; and for expenses relating to compound optimization. These payments are recognized as revenue as the work is completed. During 1996, the Company included in sponsored research revenues $1,500,000 for the technology licensing fee and $875,233 and $1,012,300 in 1997 and 1996, respectively, for certain research and development revenues in accordance with the agreement. In May 1997, the Company acquired 333,333 shares of Series B Convertible Preferred Stock of Novalon Pharmaceutical Corporation ("Novalon"), together with an option to purchase all of the capital stock of Novalon. The aggregate purchase price for such shares and such option was $1.0 million. The Company allocated all of the $1.0 million aggregate purchase price to the option based on management's estimates of the relative fair values of the option and the shares of Series B Convertible Preferred Stock acquired. The value of the option was amortized over the option period resulting in an $833,333 research and development expense. On September 29, 1997, the Company agreed to terminate its option to acquire Novalon and sold its equity position back to Novalon for $2.0 million resulting in a gain of $1,833,333 included in other income. In connection with this transaction, the Company, at its sole discretion, was granted a one year option to purchase up to twenty percent of the outstanding shares of Novalon from existing shareholders at $6.00 per share payable in cash. The Company will pay Novalon a percent of revenues received by the Company that relates to the use of the technology and currently pays a monthly fee for research funding to Novalon. F. License Agreement On November 7, 1997, the Company entered into a license agreement with Eli Lilly and Company ("Eli Lilly") pursuant to which the Company acquired exclusive worldwide rights to develop, manufacture and market daptomycin. Daptomycin is a natural product being developed for the treatment of Staphylococcus aureus and enterococcus infections. In exchange for such license, the Company has paid an upfront license fee in cash and, if certain drug development milestones are achieved, has agreed to pay milestone payments by issuing shares of Common Stock to Eli Lilly. In addition, the Company will be required to pay royalties to Eli Lilly on worldwide sales of daptomycin. G. Financing On July 18, 1997, the Company completed a private equity financing in which the Company raised $6.0 million before offering expenses of $96,161 by issuing 979,591 common shares at $6.125 per share. These shares were subsequently registered with the Securities and Exchange Commission. 43 CUBIST PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) H. Stockholders' Equity Common Stock As of December 31, 1997, 1,095,388 shares of Common Stock were issued to employees, scientific founders and consultants of the Company. At December 31, 1997, 43,514 of these shares issued are subject to repurchase, at the Company's option, at the original issuance price in accordance with vesting provisions upon termination of the shareholder's relationship with the Company. Warrants Total warrants outstanding at December 31, 1997 were 86,619. On October 23, 1996, the Company amended 17,142 of these warrants issued to both Drs. Rebek and Schimmel in May 1995 to extend the expiration date of such warrants from the effective date of the Company's initial public offering to May 15, 2005, and to provide that the warrants will vest in four equal annual installments commencing upon the first anniversary of their grant date. As a result of this amendment, the Company recorded deferred compensation in the amount of $62,000 to be amortized to the income statement over the remaining vesting period from October 1996 to May 1999. Notes Receivable from Related Parties The Company has accepted a promissory note from the Chief Executive Officer in consideration for the Preferred Stock issued to him. The aggregate principal amount of this note at December 31, 1997 is $131,685 and is reflected in stockholders' equity as a reduction to paid-in capital. In 1997, the term of this note was extended to fall due in equal quarterly installments of $10,000 commencing on March 31, 1998. The Company has accepted a promissory note from the Chief Business Officer in consideration for the Common Stock options issued to him. The aggregate principal amount of this note at December 31, 1997 is $80,000 and is reflected in stockholders' equity as a reduction to paid-in-capital. This note has an annual interest rate of 4% and falls due May 19, 2000. The note will be forgiven in three equal annual installments, contingent upon the Chief Business Officer's employment, from May 1998 to May 2000. I. Stock Options The Company has a stock option plan under which options to purchase 1,500,000 shares of its Common Stock may be granted to employees, directors, officers or consultants. The options are granted at fair market value on the date of the grant as determined by the Board of Directors, vest ratably over a four-year period and expire ten years from the date of grant. In addition, the Company issued to certain consultants and directors non-qualified stock options to purchase 87,300 shares of its Common Stock. During 1995 and 1994, the Company allowed employees and consultants to exercise their full grants to take advantage of certain favorable tax benefits. The Company reserved the right to repurchase any unearned shares at the original purchase price if the employee or consultant does not fulfill their vesting requirement. 1,390, 36,634 and 8,232 shares of previously exercised options were repurchased in 1997, 1996 and 1995, respectively, because vesting schedules were not fulfilled. The Company adopted the disclosure provisions of SFAS 123, Accounting for Stock Based Compensation, in 1996 and has applied APB Opinion 25 and related Interpretations in accounting for its plans. Had compensation costs for the Company's stock-based compensation plan been determined based on the fair value at the grant dates as calculated in accordance with SFAS 123, the Company's net loss and loss per share for the years ended December 31, 1997, 1996 and 1995 would have been increased to the pro forma amounts indicated below: 44 CUBIST PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) I. Stock Options (Continued)
1997 1996 1995 Basic and Diluted Basic and Diluted Basic and Diluted Net Loss Loss Per Share Net Loss Loss Per Share Net Loss Loss Per Share ----------- ----------------- ----------- ----------------- ----------- ----------------- As Reported $(7,265,339) $ (0.73) $(3,798,669) $ (1.49) $(5,396,006) $ (5.47) Pro forma $(7,859,006) $ (0.79) $(4,053,670) $ (1.59) $(5,408,006) $ (5.48)
The fair value of each stock option was estimated on the date of grant using Black-Scholes option-pricing model with the following weighted-average assumptions: an expected life of four (4) years, expected volatility of 87%, a dividend yield of 0% and a risk-free interest rate of 6.36%. The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. Additional awards in future years are anticipated. A summary of the status of the Company's stock option plan as of December 31, 1997, 1996, 1995 and changes during each of the years then ended, is presented below:
1997 1996 1995 WAEP* WAEP* WAEP* Number per share Number per share Number per share ------- --------- ------- --------- ------- --------- Balance at January 1 ..................................... 500,760 $ 1.93 159,057 $ .40 42,214 $ .24 Granted .................................................. 438,614 7.06 414,103 2.52 121,442 .42 Exercised ................................................ 56,591 2.06 21,610 .61 785 .35 Canceled ................................................. 80,315 2.29 50,790 .97 3,814 .35 Balance at December 31 ................................... 802,468 $ 4.69 500,760 $ 1.93 159,057 $ .40 ------- -------- ------- -------- ------- ------- Options exercisable at December 31 .............................................. 191,911 $ 2.73 86,560 $ 1.19 25,617 $ .26 ------- -------- ------- -------- ------- ------- ------- -------- ------- -------- ------- ------- Weighted average grant-date fair value of options granted during the year .......................... $ 5.41 $ 2.52 $ .42
- ------------------------------------------- * Weighted-Average Exercise Price The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable --------------------------------------------------- ------------------------------- Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - --------------- ----------- ---------------- ---------------- ----------- ---------------- $.007 - $1.96 333,263 8.1 years $ 1.45 145,966 $ 1.29 $5.25 - $7.00 247,905 9.6 years 6.04 18,344 6.13 $8.00 - $10.125 221,300 9.3 years 8.03 27,601 8.04 ------- --------- -------- ------- -------- 802,468 8.9 years $ 4.69 191,911 $ 2.73 ------- --------- -------- ------- -------- ------- --------- -------- ------- --------
J. Lease Commitments The Company leases its facilities under an operating lease agreement which expires on September 15, 2003 and is renewable at the Company's option for one additional five-year period. Under the terms of the lease, the Company is obligated to pay its prorated share of common operating expenses and real estate taxes as well as base rents. In addition, the Company entered into an agreement with the landlord under which the landlord provided financing to the Company for a portion of the buildout cost ($543,393) at an interest rate of 12% per year payable in equal monthly installments of $12,087 over five years through October 1998. At December 31, 1997, the outstanding principal balance was $114,484. The Company also provided a security deposit of $100,000 upon execution of the lease. The security deposit bears interest in a segregated account, CUBIST PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) J. Lease Commitments (Continued) 45 and is partially refundable ($79,000 plus interest) upon the fifth anniversary, and fully refundable plus interest within thirty days after the expiration of the lease, provided no event of default has occurred. The Company also financed an additional $345,500 during the first quarter of 1995 relating to a 6,510 square foot facility expansion completed during the first week of January 1995. This additional debt is payable in equal monthly installments of $7,685 over five years with an annual interest rate of 12% through February 2000. No additional security deposit was required. At December 31, 1997, the outstanding principal balance was $175,318. The Company leases certain equipment under long-term capital leases. The cost of this equipment included in fixed assets was $3,279,151 at the end of 1997 and $2,320,201 at the end of 1996, with associated accumulated depreciation of $1,803,995 at December 31, 1997 and $1,042,297 at December 31, 1996. The Company has an option to purchase all of the lease equipment at a price to be negotiated at lease end. Future lease payments for non-cancelable leases for the respective years ended December 31 are as follows:
Operating Leases Capital Leases ---------------- -------------- 1998 ............................ $ 171,365 $ 685,135 1999 ............................ 192,364 563,083 2000 ............................ 207,679 406,383 2001 ............................ 207,679 145,598 2002 ............................ 207,679 -- 2003 and thereafter ............. 164,413 -- ----------- ---------- Total minimum lease payments ............. $ 1,151,179 $1,800,199 ----------- ---------- Less amount representing interest payments (246,879) ----------- Present value of minimum lease payments .. 1,553,320 Less current portion ..................... (548,351) ----------- Long-term obligation ..................... $ 1,004,969 ----------- -----------
Lease payments under operating leases were $246,498 in fiscal year 1997, $248,784 in fiscal year 1996, and $207,898 in fiscal year 1995. K. Employee Benefits The Company instituted a 401(k) savings plan in 1993, in which substantially all of its permanent employees are eligible to participate. Participants may contribute up to 15% of their annual compensation to the plan, subject to certain limitations. The Company contributes a matching amount of up to 1.5% of a participant's total compensation or $500 annually, whichever is less. The Company contributed $20,165, $16,025 and $14,072, during 1997, 1996 and 1995 respectively. L. Income Taxes The Company follows the liability method of accounting for income taxes in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," whereby a deferred tax liability is measured by the enacted tax rates which will be in effect when any differences between the financial statements and tax basis of assets reverse. The deferred tax liability can be reduced by net operating losses being carried forward for tax purposes. CUBIST PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) L. Income Taxes (Continued) 46 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
1997 1996 ------------ ----------- Net operating loss carryforwards ... $ 5,780,000 $ 4,376,000 Capitalized research and development 2,690,000 1,700,000 Research and experimentation credits 1,575,000 765,000 Other, net ......................... 377,000 306,000 ------------ ----------- Total Deferred Tax Assets .......... $ 10,422,000 $ 7,147,000 ------------ ----------- Valuation reserve .................. $(10,422,000) $(7,147,000) ------------ ----------- ------------ -----------
The federal and state net operating loss and tax credit carryforwards begin to expire in the years 2007 and 1997, respectively. Research and experimentation tax credits of approximately $325,000 begin to expire in 2008. The net operating loss carryforwards may be subject to an annual limitation as a result of the change in ownership due to the initial public offering. The Company has established a valuation reserve against the deferred tax benefit arising from these carryforwards due to the uncertainty of earning sufficient taxable income to receive the benefit and accordingly has not given recognition to these tax benefits in these financial statements. These carryforwards are also subject to review by the Internal Revenue Service. M. Recent Pronouncements The FASB recently issued Statement of Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income". This statement requires changes in comprehensive income to be shown in a financial statement that is displayed with the same prominence as other financial statements. The Company believes the implementation of this statement will not have a material impact on the financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III 47 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors and compliance with Section 16(a) of the Securities Exchange Act may be found in the sections captioned "Proposal No. 1 - Election of Directors", "Executive Compensation" and "Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the definitive Proxy Statement to be delivered to Stockholders in connection with the Annual Meeting of Stockholders to be held on May 21, 1998. Such information is incorporated herein by reference. Information with respect to Executive Officers may be found under the section captioned "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required with respect to this item may be found in the sections captioned "Executive Compensation" appearing in the definitive Proxy Statement to be delivered to Stockholders in connection with the Annual Meeting of Stockholders to be held on May 21, 1998. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required with respect to this item may be found in the section captioned "Principal Stockholders" and "Proposal No. 1 - Election of Directors" appearing in the definitive Proxy Statement to be delivered to Stockholders in connection with the Annual Meeting of Stockholders to be held on May 21, 1998. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Information required with respect to this item may be found in the section captioned "Certain Transactions" appearing in the definitive Proxy Statement to be delivered to Stockholders in connection with the Annual Meeting of Stockholders to be held on May 21, 1998. Such information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as part of Form 10-K 1. Financial Statements. The following financial statements and supplementary data are included in Part II Item 8 filed as part of this report: - Report of Independent Accountants - Balance Sheets as of December 31, 1997 and 1996 - Statements of Operations for the years ended December 31, 1997, 1996 and 1995 - Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 - Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 - Notes to Financial Statements 2. Financial Statement Schedule. None. Schedules not listed above have been omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto. 3. List of Exhibits.
Exhibits - --------- *3.3 Restated Certificate of Incorporation of the Registrant.
48
Exhibits - --------- *3.1 Restated Certificate of Incorporation of the Registrant. *3.2 Amended and Restated By-Laws of the Registrant, as amended to date. *4.1 Specimen certificate for shares of Common Stock. +*10.1 Patent License Agreement between the Registrant and the Massachusetts Institute of Technology, dated March 10, 1994. +*10.2 License Agreement between the Registrant and the Board of Trustees of Leland Stanford Junior University, dated April 1, 1994. *10.3 Employment Agreement between the Registrant and Scott M. Rocklage, dated June 20, 1994. *10.4 Consulting Agreement between the Registrant and Paul R. Schimmel, dated May 1, 1992. *10.5 Amended and Restated 1993 Stock Option Plan. +*10.6 Collaborative Research Agreement between the Registrant and Pfizer Inc., dated December 15, 1995. **** 10.7 Letter Agreement, dated June 26, 1997, between the Company and Pfizer, Inc. *10.8 Collaborative Research and License Agreement between the Registrant and Merck & Co., Inc., dated June 13, 1996. *10.9 Collaborative Research and License Agreement between the Registrant and Bristol-Myers Squibb Company and the Registrant, dated June 25, 1996. *10.10 Screening Agreement, dated November 28, 1995, between the Registrant and Monsanto Company. *10.11 Letter Agreement, dated January 18, 1996, between Pharm-Eco Laboratories, Inc. and the Registrant. + 10.12 Research Collaboration and License Agreement with ArQule, Inc., dated October 22, 1997. *10.13 Lease Agreement between Registrant and Stimpson Family Trust dated April 30, 1993, regarding 24 Emily Street, Cambridge, MA., as amended by the First Amendment to Lease, dated September 19, 1994. *10.14 Form of Employee Confidentiality and Nondisclosure Agreement. *10.15 Master Lease Agreement between the Registrant and Comdisco, Inc., dated as of August 30, 1993, as amended February 7, 1995, and as further amended on February 26, 1996. *10.16 Series B Convertible Preferred Stock Purchase Warrant between the Registrant and Comdisco, Inc., dated August 30, 1993. *10.17 Series C Convertible Preferred Stock Purchase Warrants between the Registrant and Comdisco, Inc., dated February 28, 1995 and February 26, 1996. *10.18 Series C Convertible Preferred Stock Purchase Options issued to Dr. Paul Schimmel and Dr. Julius Rebek in May 1995, as amended by certain Letter Agreements, dated October 23, 1995, between the Registrant and each of Dr. Schimmel and Dr. Rebek. *10.19 Amended and Restated Stockholders Rights Agreement by and among the Registrant and the parties signatory thereto. **10.20 Secured Promissory Note, dated as of July 21, 1994, by Scott M. Rocklage to the Registrant. **10.21 Amendment to Promissory Note, dated as of July 21, 1996, by and between the Registrant and Scott M. Rocklage. 10.22 Amendment to Promissory Note, dated as of December 23, 1997, by and between the Registrant and Scott M. Rocklage **10.23 Promissory Note, dated as of October 18, 1995, by and between the Registrant and Scott M. Rocklage. **+10.24 Compound Library Screening Agreement between the Registrant and Genzyme Corporation, dated February 24, 1997. **+10.25 Library Sample Evaluation Agreement between the Registrant and Pharmacopeia, Inc., dated as of September 11, 1996. ****10.26 Stock Purchase Agreement, dated July 18, 1997, between International Biotechnology Trust plc and the Company ****10.27 Registration Rights Agreement, dated July 18, 1997, between International Biotechnology Trust plc and the Company. ****10.28 Registration Rights Agreement, dated July 18, 1997, between each of H&Q Healthcare Investors and H&Q Life Sciences Investors and the Company. ***10.29 Incentive Stock Option Agreement, dated as of May 19, 1997, between Mark Carthy and the Company. ***10.30 Letter Agreement, dated as of May 19, 1997, by Mark Carthy and the Company. ***10.31 Secured Promissory Note, dated May 19, 1997, by Mark Carthy to the Company. ***10.32 Stock Pledge Agreement, dated May 19, 1997, between Mark Carthy and the Company. 10.33 Letter Agreement, dated as of January 9, 1998, by Mark Carthy and the Company. 10.34 Master Lease Agreement between the Registrant and Transamerica Business Credit, dated as of February 14, 1997. 23.2 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule
- -------------------- * Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No. 333-6795). ** Incorporated by reference from the Company's Registration Statement on Form 10K filed with the SEC on March 31, 1997. *** Incorporated by reference from the Company's Quarterly Report on Form 10Q filed with the SEC on August 13, 1997. 49 **** Incorporated by reference from the Company's Registration Statement on Form S-1 filed with the SEC on August 18, 1997 (Registration No. 333-33883) as amended on Form S-3 filed with the SEC on January 9, 1998. + Confidential Treatment requested as to certain portions. 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CUBIST PHARMACEUTICALS, INC. /s/ Scott M. Rocklage ----------------------------------------- Scott M. Rocklage President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on its behalf of the registration and in the capacities on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Scott M. Rocklage 3/12/98 - -------------------------- President, Chief Executive Officer ------------ Scott M. Rocklage and Director (Principal Executive Officer) /s/ Thomas A. Shea 3/12/98 - -------------------------- Treasurer ------------ Thomas A. Shea (Principal Financial and Accounting Officer) /s/ John K. Clarke 3/12/98 - -------------------------- Chairman of the Board of Directors ------------ John K. Clarke /s/ Barry Bloom 3/10/98 - -------------------------- Director ------------ Barry Bloom /s/ George Conrades 3/10/98 - -------------------------- Director ------------ George Conrades /s/ Ellen M. Feeney 3/13/98 - -------------------------- Director ------------ Ellen M. Feeney /s/ David W. Martin, Jr. 3/12/98 - -------------------------- Director ------------ David W. Martin, Jr. /s/ Terrance G. McGuire 3/13/98 - -------------------------- Director ------------ Terrance G. McGuire /s/ Julius Rebek, Jr. 3/10/98 - -------------------------- Director ------------ Julius Rebek, Jr. /s/ Paul R. Schimmel 3/13/98 - -------------------------- Director ------------ Paul R. Schimmel
51 EX-10.12 2 EXHIBIT 10.12 Exhibit 10.12 CONFIDENTIAL TREATMENT RESEARCH COLLABORATION AND LICENSE AGREEMENT This Research Collaboration and License Agreement (this "Agreement") is entered into as of October 22, 1997 (the "Effective Date") by and between ArQule, Inc. ("ArQule"), a Delaware corporation, and Cubist Pharmaceuticals, Inc. ("Cubist"), a Delaware corporation. RECITALS WHEREAS, ArQule and Cubist previously entered into a Material Transfer and Screening Agreement dated June 4, 1996 (the "MTA") pursuant to which ArQule delivered certain of its Mapping Array-TM- compounds to Cubist, and Cubist screened those compounds against certain of its proprietary targets; WHEREAS, Cubist detected activity of certain ArQule compounds against Cubist certain Cubist targets; WHEREAS, pursuant to the terms of the MTA, ArQule and Cubist have negotiated this Agreement to expand their joint research activities and to pursue further development of the active compounds discovered by Cubist. NOW, THEREFORE, ArQule and Cubist hereby agree as follows: 1. Definitions. 1.1. "Active Compound" means any ArQule Compound which exhibits confirmed significant functional activity against a Target, as determined by the Research Committee. 1.2. "Affiliate" means any legal entity (such as a corporation, partnership, or limited liability company) that is controlled by a party. For the purposes of this definition, the term "control"" means (i) beneficial ownership of at least fifty percent (50%) of the voting securities of a corporation or other business organization with voting securities or (ii) a fifty percent (50%) or greater interest in the net assets or profits of a partnership or other business organization without voting securities. 1.3. "ArQule Compound" means a small organic chemical molecule that is synthesized by ArQule and provided by ArQule to Cubist under this Agreement, as well as Derivatives of such ArQule Compound. 1.4. "Array" means a set of ArQule Compounds consisting of diverse, structurally related small organic chemical compounds arranged in a spatially addressable format such as a microliter screening plate. 1.5. "Available Compound" means an ArQule Compound that is not (i) licensed or otherwise committed to a third party in the Field or (ii) committed to an internal ArQule program in the Field. "Available Active Compound" means an Active Compound that is also an Available Compound. 1.6. "Chemical Theme" means the chemical or structural characteristics shared by a group of Active Compounds, as determined by the Research Committee. 1.7. "Clinical Candidate" means a Collaboration Compound that the Research Committee has selected for Clinical Development. 1.8. "Clinical Development" means the clinical development of a compound after an IND is filed and approved, including Phase I, Phase II and Phase III Clinical Trials, and resulting in the filing of a complete NDA. 1.9. "Clinical Development Plan" means a plan for Clinical Development of one or more Clinical Candidates as approved by the Research Committee and the Steering Committee for a Collaboration Project. The Clinical Development Plan will include a detailed description of the specific responsibilities of each party for various Clinical Development activities, or plans to oursource certain tasks, and a proposed timetable for accomplishment of certain objectives for the Collaboration Project. 1.10. "Collaboration" means the collaborative research and development program described in Article 3 of this Agreement. 1.11. "Collaboration Compound" means any Available Active Compound designated by the Research Committee as a Collaboration Compound pursuant to Subsection 3.3.(d) or 3.4.(e). 1.12. "Collaboration Project" means a project for the Lead Optimization, Preclinical Development, and Clinical Development of one 2 or more Collaboration Compounds for a Target, as approved by the Research Committee and the Steering Committee. 1.13. "Collaborator" means any third party with whom a party enters into an agreement pursuant to which such party grants or receives rights in proprietary technology, intellectual property, or the commercial value of a product. For example, an ArQule Collaborator shall include a third party who participates in a Mapping Array Program or Directed Array Program, and a Cubist Collaborator shall include a third party who obtains license rights to Cubist Patent Rights and Cubist Technology. 1.14. "Commercialization Plan" means a plan for the commercialization of a Collaboration Compound as approved by the Steering Committee. 1.15. "Confidential Information" means any technical or business information furnished by one party (the "Disclosing Party") to the other party (the "Receiving Party") in connection with this Agreement. Such Confidential Information may include, without limitation, the identity of a chemical compound, the use of a chemical compound, trade secrets, know-how, inventions, technical data or specifications, testing methods, business or financial information, research and development activities, Steering Committee reports, Research Committee reports, royalty reports, product and marketing plans, and customer and supplier information. 1.16. "Derivative" means a chemical compound structurally derived in one or more steps from an ArQule Compound by a process of modification or partial substitution of at least one component wherein at least one structural feature is retained at each process step. The number of intermediate steps or compounds is not relevant to the classification of a compound as a "Derivative Compound." A compound need not have any structural similarity to another compound in order to be classified as a Derivative Compound. 1.17. "Directed Array-TM-" means Array of ArQule Compounds based on one or more Collaboration Compounds that have the same Chemical Theme and that exhibit activity for the same Target, which Arrays shall be synthesized by ArQule for Lead Optimization. The term "Directed Array" is a trademark owned by ArQule. The process of synthesizing and testing Directed Arrays based on a Collaboration Compound is known as a "Directed Array Program." 1.18. "FDA" means the United States Food and Drug Administration (or its foreign equivalent in Japan or Europe). 3 1.19. "Field" means human and animal therapeutic applications, as well as diagnostic applications intended for use with such therapeutic products. 1.20. "IND" means an investigational new drug application filed with the FDA prior to beginning clinical trials in humans or any comparable application filed with the regulatory authorities of a country other than the United States, prior to beginning clinical trials in humans in that country. 1.21. "Lead Optimization" means the iterative synthesis and testing of analogs and derivatives of a compound in connection with a biological target to identify a compound that exhibits certain optimal characteristics, such as maximal activity, minimal toxicity, and an acceptable initial bioavailability and pharmacokinetic, profile. 1.22. "Mapping Array-TM-" means an Array of ArQule Compounds that ArQule generally makes available to its collaborators for screening on a non-exclusive basis. The term "Mapping Array" is a trademark owned by ArQule. The term "Mapping Array Program" generally describes an arrangement under which ArQule provides a collaborator with Mapping Arrays and the collaborator screens the Mapping Arrays on a non-exclusive basis, and specifically describes the arrangement between ArQule and Cubist as set forth in Section 3.3. 1.23. "NDA" means a New Drug Application, as such term is defined by the FDA, and any equivalent filing in a foreign jurisdiction. 1.24. "Patent Rights" means any United States patent application and any divisional, continuation, or continuation-in-part of such patent application (to the extent the claims are directed to subject matter specifically described therein), as well as any patent issued thereon and any reissue or reexamination of such patent, and any foreign counterparts to such patents and patent applications. "ArQule Patent Rights" means Patent Rights that are either (i) assigned solely to ArQule, (ii) assigned jointly to ArQule and a party other than Cubist, or (iii) licensed to ArQule, in each case to the extent that ArQule has the ability to license or sublicense the rights required under this Agreement. "Cubist Patent Rights" means Patent Rights that are either (i) assigned solely to Cubist, (ii) assigned jointly to Cubist and a party other than ArQule, or (iii) licensed to Cubist, in each case to the extent that Cubist has the ability to license or sublicense the rights required under this Agreement. "Joint Patent Rights" means Patent Rights assigned to both ArQule and Cubist 4 as joint owners. Joint Patent Rights will include (i) Patent Rights claiming Joint Technology and (ii) Patent Rights claiming both ArQule Technology and Cubist Technology in a single filing. 1.25. "Phase I Clinical Trials" means clinical trials in a small number of patients to determine the metabolism and pharmacologic actions of a product in humans, the side effects associated with increasing doses and to gather evidence on effectiveness and meeting the requirements established by the FDA for Phase I clinical trials. 1.26. "Phase II Clinical Trials" means clinical trials in a small sample of the intended patient population to assess the efficacy for a specific indication of a compound proposed to be used as a therapeutic pharmaceutical product, to determine dose tolerance and the optimal dose range as well as to gather additional information relating to safety and potential adverse effects, and meeting the requirements established by the FDA for Phase II clinical trials. 1.27. "Phase III Clinical Trials" means clinical trials designed to demonstrate safety and efficacy of a compound proposed to be used as a therapeutic pharmaceutical product in an expanded patient population at geographically dispersed study sites, meeting the requirements established by the FDA for Phase III clinical trials. 1.28. "Preclinical Candidate" means a Collaboration Compound that the Research Committee has selected for Preclinical Development. 1.29. "Preclinical Development" means the performance of animal testing and other preclinical development activities that are required by the FDA to file a complete IND. 1.30. Preclinical Development Plan" means a plan for Preclinical Development of one or more Preclinical Candidates as approved by the Research Committee and the Steering Committee for a Collaboration Project. The Preclinical Development Plan will include a detailed description of the specific responsibilities of each party for various Preclinical Development activities and a proposed timetable for accomplishment of certain objectives for the Collaboration Project. 1.31. "Research Committee" means the Research Committee described in Section 2. 1. 1.32. "Research Materials" means any tangible research materials, whether biological, chemical, physical, or otherwise, including without 5 limitation all ArQule Compounds and Cubist assay reagents. "Proprietary Research Materials" means any Research Materials that a party designates as proprietary or confidential, including without limitation all Mapping Array compounds and Directed Array compounds. 1.33. "Research Plan" means a plan for Lead Optimization of one or more Collaboration Compounds as approved by the Research Committee and the Steering Committee for a Collaboration Project. The Research Plan will include a detailed description of the specific responsibilities of each party for various Lead Optimization activities and a proposed timetable for accomplishment of certain objectives for the Collaboration Project. 1.34. "Steering Committee" means the Steering Committee described in Section 2.2. of this Agreement. 1.35. "Sublicensee" means any non-Affiliate third party licensed by a party to make, have made, use, or sell any Royalty-Bearing Product. 1.36. "Target" means each biological or molecular target selected by Cubist for use in the Collaboration and for which Cubist has certain expertise or proprietary technology, or both. 1.37. "Technology" it means any proprietary development, idea, design, concept, technique, process, invention, Research Material, discovery, or improvement, whether or not patentable or copyrightable. "ArQule Technology" means Technology that is either (i) assigned solely to ArQule, (H) assigned jointly to ArQule and a party other than Cubist, or (iii) licensed to ArQule, in each case to the extent that ArQule has the ability to license or sublicense the rights required under this Agreement. "Cubist Technology" means Technology that is either (i) assigned solely to Cubist, (ii) assigned jointly to Cubist and a party other than ArQule, or (iii) licensed to Cubist, in each case to the extent that Cubist has the ability to license or sublicense the rights required under this Agreement. "Joint Technology" means Technology that is developed or discovered jointly by one or more employees or consultants of Cubist and one or more employees or consultants of ArQule in connection with the Collaboration. 2. Management of Research Program. 2.1. Research Committee. (a) Creation of Research Committee. The parties hereby create a Research Committee which shall consist of four (4) members. 6 Cubist shall designate two (2) members and ArQule shall designate two (2) members. If any member of the Research Committee dies, resigns, or becomes incapacitated, the party which designated such member shall designate his or her successor (whose term shall commence immediately), and any party may withdraw the designation of any of its members of the Research Committee and designate a replacement (whose term shall commence immediately) at any time by giving notice of the withdrawal and replacement to the other party. The chairperson of the Research Committee shall be designated annually on an alternating basis between the parties. The initial chairperson shall be designated by the Research Committee at its first meeting. The party not designating the chairperson shall designate one of its representatives as secretary to the Research Committee for such year. (b) Meetings of the Research Committee. Regular meetings of the Research Committee shall be held within forty-five (45) days of the end of each calendar quarter, or at such other times as the parties may deem appropriate, at such times and places as the members of the Research Committee shall from time to time agree. Special meetings of the Research Committee may be called by either party on ten (10) days written notice to the other party unless notice is waived by the parties. All meetings shall alternate between the offices of the parties unless the parties otherwise agree. The chairperson shall be responsible for sending notice of meetings to all members. In the event a Research Committee member is unable to attend a meeting of the Research Committee, such Research Committee member may designate an alternate member who will serve solely for that Research Committee meeting. (c) Decisions of Research Committee. A quorum of the Research Committee shall be present at any meeting of the Research Committee if at least one representative of each party is present at such meeting in person or by telephone. If a quorum exists at any meeting, the unanimous consent of all members of the Research Committee present at such meeting is required to take any action on behalf of the Research Committee. Unless otherwise specifically stated to the contrary herein, no individual party shall purport to act on behalf of the other party unless and then only to the extent authorized to do so by the Research Committee. (d) Responsibilities of Research Committee. The Research Committee shall be responsible for the day-to-day conduct and progress of the Collaboration, including without limitation: (i) directing and administering the Collaboration; 7 (ii) providing a forum for the exchange of scientific information among the scientists participating in the Collaboration; (iii) determining the criteria of significant functional activity necessary for an ArQule Compound to qualify as an Active Compound; (iv) confirming that an ArQule Compound qualifies as an Active Compound and designating such Active Compounds as Collaboration Compounds; (v) reviewing test reports provided by Cubist as to the significant functional activity of each Collaboration Compound in the Mapping Arrays and, based on such results, determining which Collaboration Compounds and Chemical Themes will be used in a Directed Array Program, with the scope of each Chemical Theme determined on the basis of the following criteria: (1) the specific reaction or reaction sequence used to combine members of two or more discrete chemical units in which each chemical unit bears the functional group(s) required for the specific reaction(s) that result in the combination of the chemical units; and (2) the extent to which a class of compounds is related by a recurring structural motif associated with a particular biological activity; (vi) selecting Mapping Arrays for delivery to Cubist under Subsection 3.3. (a); (vii) determining the appropriate number of compounds that ArQule should generate in a Directed Array based on Collaboration Compounds with the same Chemical Theme, and determining the appropriate amount of each compound in a Directed Array that ArQule should deliver Cubist for further research and development with the relevant Target; (viii) determining whether to conduct Preclinical Development of any Preclinical Candidate, as 8 well as the scope of such Preclinical Development; (ix) determining and updating the list of Collaboration Compounds, Preclinical Candidates, and Clinical Candidates for each Target; (x) resolving matters involving scientific questions; (xi) preparing and updating the Research Plan, Preclinical Development Plan, and Clinical Development Plan; and (xii) monitoring and managing Clinical Development activities. (e) Research Committee Reports. Within ten (10) days following each meeting of the Research Committee held pursuant to Subsection 2.1. (b), the secretary of the Research Committee shall prepare and send to each party a written report of actions taken at the meeting in such form and containing such detail as shall be determined by the Research Committee. (f) Deadlock. In the event that the Research Committee cannot reach agreement with respect to any matter that is subject to its decision-making authority, then the matter shall be referred to the Steering Committee for resolution. 2.2. Steering Committee. (a) Creation of Steering Committee. The parties hereby also create a Steering Committee which shall consist of four (4) members: (i) the Chief Executive Officer or President of Cubist; (H) the Chief Executive Officer or President of ArQule; (iii) the Director of Business Development at Cubist (or such other similar position designated by Cubist from time to time) and (iv) the Director of Business Development at ArQule (or such other similar position designated by ArQule from time to time). If any member of the Steering Committee dies, resigns, or becomes incapacitated, the party which designated such member shall designate his or her successor (whose term shall commence immediately), and any party may withdraw the designation of any of its members of the Steering Committee and designate a replacement (whose term shall commence immediately) at any time by giving notice of the withdrawal 9 and replacement to the other party. The chairperson of the Steering Committee shall be designated annually on an alternating basis between the parties. The party not designating the chairperson shall designate one of its representatives as secretary of the Steering Committee for such year. (b) Meetings of the Steering Committee. Regular meetings of the Steering Committee shall be held within forty-five (45) days of the end of each calendar year, or at such other times as the parties may deem appropriate, at such times and places as the members of the Steering Committee shall from time to time agree. Special meetings of the Steering Committee may be called by either party on fifteen (15) days written notice to the other party unless notice is waived by the parties. All meetings shall alternate between the offices of the parties unless the parties otherwise agree. In the event a Steering Committee member is unable to attend a meeting of the Steering Committee, such Steering Committee member may designate an alternate member who will serve solely for that Steering Committee meeting. (c) Decisions of the Steering Committee. Unless otherwise specifically designated as a responsibility of the Research Committee pursuant to Subsection 2.1. (d), all decisions regarding the contractual and financial relationship created by this Agreement shall be made by the Steering Committee acting in accordance with this Agreement or by agents duly authorized in writing by the Steering Committee. A quorum of the Steering Committee shall be present at any meeting of the Steering Committee if the President or Chief Executive Officer of each party is present at such meeting in person or by telephone. If a quorum exists at any meeting, the unanimous consent of all members of the Steering Committee present at such meeting is required to take any action on behalf of the Steering Committee. Unless otherwise specifically stated to the contrary herein, no individual party shall purport to act on behalf of the other party unless and then only to the extent authorized to do so by the Steering Committee. (d) Responsibility of Steering Committee. The Steering Committee shall be responsible for approving long-term objectives for, and evaluating the progress of, the Collaboration and joint Clinical Development activities, including without limitation: (i) approval of all Research Plans, Preclinical Development Plans, Clinical Development Plans and all subsequent decisions regarding the direction and priority of all such plans; 10 (ii) reviewing and approving all third party collaborations involving the Research Plans, Preclinical Development Plans, and Clinical Development Plans; (iii) approval of all Clinical Development activities and associated expenses for Clinical Candidates; and (iv) developing a Commercialization Plan and managing commercialization of Collaboration Compounds. (e) Steering Committee Reports. Within ten (10) days following each meeting of the Steering Committee held pursuant to Subsection 2.2.(b), the secretary of the Steering Committee shall prepare and send to the members of the Steering Committee a detailed written report of actions taken at the meeting in such form and containing such detail as shall be determined by the Steering Committee. (f) Deadlock. In the event that the Steering Committee cannot reach agreement within sixty (60) days as to any matter that is subject to its decision-making authority, then (i) if the matter relates to this Agreement as a whole, either party may terminate the Agreement in accordance with Section 8.4. or (ii) if the matter relates only to specific activities under this Agreement, such as designation of Active Compounds as Collaboration Compounds, the initiation or conduct of Lead Optimization and Preclinical Development, the initiation or conduct of Clinical Development, or approval of commercialization plans, then the deadlock provision in the Agreement that is applicable to that circumstance shall apply. 3. Collaboration. 3.1. Overview of Collaboration. The overall purposes of this Collaboration are (i) to screen Mapping Arrays to find ArQule Compounds that demonstrate significant functional activity against selected Targets, (ii) to designate certain of these Active Compounds as Collaboration Compounds that are committed to the program, (iii) to perform Lead Optimization through a Directed Array Program on certain of these Collaboration Compounds to develop one or more Preclinical Candidates, (iv) to conduct Preclinical Development of these Preclinical Candidates, and (v) to conduct Clinical Development of Preclinical Candidates that successfully complete Preclinical Development and become Clinical Candidates. The initial screening will be conducted by Cubist under the ArQule Mapping Array Program described below. All Lead Optimization, 11 Preclinical Development, and Clinical Development activities will be conducted by both parties on a project-by-project basis in accordance with a Research Plan, Preclinical Development Plan, or Clinical Development Plan approved by the parties. Commercial exploitation of a Collaboration Compound will proceed under a Commercialization Plan. Separate Collaboration Projects may be established in the discretion of the Research Committee based on the relatedness of the Active Compounds and Targets identified. These Collaboration Projects may be conducted in series or in parallel at the discretion of the Research Committee. A Collaboration Project may terminate due to completion, withdrawal of a party, deadlock of the parties, or lack of merit. 3.2. Expenses and Revenues. (a) Expenses Prior to Clinical Development. [ ]* shall bear the costs and expenses of its respective activities in connection with this Collaboration prior to Clinical Development and shall promptly make payments to third parties arising therefrom. Neither party shall represent to creditors or vendors that such party has any authority to obligate or bind the other party, and shall affirmatively correct any misconception to that effect. Neither party shall use the name of the other party in connection with such transactions without the prior written consent of the other party, which consent may be withheld in its sole discretion. (b) Expenses of Clinical Development. [ ]* shall pay [ ]* of any direct expenses incurred in connection with Clinical Development activities approved by the Steering Committee. Prior to commencement of any activities for Clinical Development or commercialization of a Clinical Candidate, the Steering Committee shall establish guidelines and procedures that will set forth the operational details of this arrangement. The Steering Committee may revise these operational guidelines and procedures in its discretion. (c) Revenues. [ ]* shall receive [ ]* of all proceeds received in connection with commercialization of a Collaboration Compound arising from the Collaboration. 3.3. Conduct of Mapping Array Program. (a) Delivery of Mapping Arrays. Cubist acknowledges prior receipt of Mapping Arrays #[ * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 12 ]* pursuant to a Material Transfer and Screening Agreement dated June 4, 1996 between the parties, which prior agreement is hereby canceled and replaced by this Agreement. The Research Committee shall select additional Mapping Arrays for screening by Cubist. ArQule shall promptly deliver the selected Mapping Arrays to Cubist. The delivered Mapping Arrays will have the standard ArQule format of one ArQule Compound per well in 96 well microliter plates. Unless ArQule otherwise notifies the Research Committee, each Mapping Array will contain approximately the following amounts of each ArQule Compound in that Array: [ ]* Cubist shall not attempt to identify any compounds in the Mapping Arrays. (b) Identification of Active Compounds. ArQule hereby grants Cubist a nonexclusive, worldwide license (without the right to sublicense) under, the ArQule Patent Rights and other rights in ArQule Technology to screen the delivered Mapping Array compounds against any Targets in the Field. Cubist agrees to screen the delivered Mapping Array compounds expeditiously and in a scientifically sound manner. Cubist shall promptly disclose to ArQule the array plate number and well number of any Active Compounds. ArQule will promptly determine whether the Active Compounds are Available Compounds and notify Cubist of such determination. If an Active Compound is not an Available Compound, Cubist shall have no rights with respect to that Active Compound. For Available Active Compounds, ArQule shall disclose to Cubist the chemical composition and structure of those Active Compounds, and Cubist shall disclose to ArQule the identity of the Target, level of activity, and a description of the primary assays used to detect the activity. All such information disclosed by ArQule and Cubist shall be deemed Confidential Information and, as such, is subject to the restrictions set forth in Article 6. (c) Confirmation of Activity. For a period of [ ]* after the date upon which ArQule and Cubist exchange information about an Active Compound pursuant to Section 3.3.(b) (the "Reservation Period"), ArQule will reserve that Active Compound to the Collaboration. During the Reservation Period, ArQule will provide Cubist with reasonable additional quantities of that Active Compound and Cubist will perform secondary screens to confirm the activity of that Active Compound. The Research Committee will coordinate these confirmatory screening efforts. * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 13 (d) Designation of Collaboration Compounds. At any time during the Reservation Period, Cubist may request that the Research Committee designate the relevant Active Compound as a Collaboration Compound under this Agreement. After receiving this request, the Research Committee will confirm that the compound exhibits the requisite functional activity to qualify as an Active Compound, whereupon the Research Committee shall designate the relevant Active Compound as a Collaboration Compound under this Agreement. If the Research Committee fails to designate an ArQule Compound as a Collaboration Compound, then (i) Cubist shall have no rights with respect to that ArQule Compound and (ii) ArQule shall have the right to license or otherwise commit such ArQule Compound to a third party for any biological target and to include such ArQule Compound in an ArQule internal discovery program for an unrelated biological target, subject in both cases to the restrictions on Confidential Information set forth in Article 6. If the Research Committee does designate an ArQule Compound as a Collaboration Compound, then ArQule shall (i) internally designate the Collaboration Compound as committed to Cubist under this Agreement, (ii) remove the Collaboration Compound from future shipments of its Mapping Arrays, and (iii) undertake no internal program on the Target for which that Collaboration Compound exhibits activity. (e) Termination of Mapping Array Program. The Mapping Array Program described in this Section 3.3. will commence on the Effective Date and will continue during the term of this Agreement; provided that either party may terminate the Mapping Array Program before the expiration or termination of this Agreement with written notice to the other party which is received at least sixty (60) days prior to any anniversary of the Effective Date. In the event of early termination, Cubist shall immediately cease primary screens of the Mapping Array compounds but may (i) continue performing confirmatory screens of previously identified Active Compounds and (ii) request that the Research Committee designate any Active Compounds as Collaboration Compounds. all in accordance with the terms of this Agreement. 3.4. Conduct of Lead Optimization and Preclinical Development Activities. (a) Approval and Initiation of Project. At any time after an Active Compound is identified, but no later than sixty (60) days after the relevant Active Compound becomes a Collaboration Compound, the Research Committee may approve a proposal for the Lead Optimization and Preclinical Development of one or more Active Compounds for a Target. The Research Committee shall forward such proposals to the Steering Committee for approval. Once the Steering Committee approves a proposal, the proposed 14 research and development project shall automatically be designated a Collaboration Project under this Agreement. A Collaboration Project may be initiated by the parties at any time after the relevant Active Compounds have been designated as Collaboration Compounds by the Research Committee pursuant to Subsection 3.3.(d). If the Research Committee or Steering Committee fails to approve a proposed Lead Optimization or Preclinical Development project for one or more Collaboration Compounds for a Target because of withdrawal of a party or deadlock of the Steering Committee, the Collaboration Compound will be subject to compulsory commercialization pursuant to Subsection 3.4.(h). If the Research Committee or Steering Committee fails to approve a proposed Lead Optimization or Preclinical Development project for one or more Collaboration Compounds for a Target because of lack of business or scientific merit, the reversion provisions set forth in Subsection 3.4.(i) shall automatically take effect unless otherwise agreed by the parties. (b) Preparation and Approval of Research Plan and Preclinical Development Plan. Promptly following initiation of a Collaboration Project, the Research Committee shall prepare and submit to the Steering Committee (i) a proposed Research Plan for Lead Optimization of the relevant Collaboration Compounds to identify Preclinical Candidates and (ii) a preliminary Preclinical Development Plan for the Preclinical Development of any Preclinical Candidates that may be so identified. Unless otherwise decided by the Research Committee, the Research Plan shall provide that all Collaboration Compounds will be submitted to a Directed Array Program for Lead Optimization. The Steering Committee must approve the proposed Research Plan and the preliminary Preclinical Development Plan before the parties commence performance of the Collaboration Project. Before the parties commence any Preclinical Development activities, the Steering Committee must approve a final Preclinical Development Plan that is prepared and submitted by the Research Committee. The Research Committee will also prepare and submit to the Steering Committee any proposed modifications to previously approved Research Plans and Preclinical Development Plans. No such modifications will take effect until approved by the Steering Committee. (c) Responsibilities for Project. The parties intend that, in any Collaboration Project, ArQule will have general responsibility for tasks involving chemistry and Cubist will have general responsibility for tasks involving biology. However, the Research Committee will determine the actual tasks of each party for each Collaboration Project in accordance with an approved Research Plan or Preclinical Development Plan. If the Research Committee cannot agree upon the allocation of any task for a Collaboration Project, the matter shall be decided by the Steering Committee. If the 15 Steering Committee cannot resolve the matter within sixty (60) days after the Research Committee deadlocked, the tasks at issue will be performed by the party that has general responsibility for that task, as described Exhibit A. (d) Reports and Records. Each party agrees to promptly and regularly communicate to the other party all research results from a Collaboration Project, including quarterly reports to the Research Committee detailing all tests conducted and results obtained by such party in connection with a Collaboration Project. Each party shall prepare and maintain adequate records, including bound laboratory notebooks maintained in accordance with standard scientific procedures, containing all appropriate data reflecting all research results from a Collaboration Project. In addition, each party shall retain under appropriate conditions any necessary or desirable samples of Research Materials that are developed or used in a Collaboration Project. (e) Designation of Additional Collaboration Compounds. In the course of a Collaboration Project, Cubist is likely to detect additional Active Compounds for the relevant Target as it screens Directed Arrays derived from the Collaboration Compounds. After the Research Committee confirms that these ArQule Compounds exhibit the requisite functional activity to qualify as Active Compounds and ArQule confirms that the Active Compounds are Available Compounds, the Research Committee will designate such Active Compounds as additional Collaboration Compounds under this Agreement. (f) Designation of Preclinical Candidates. The Research Committee shall monitor Lead Optimization activities in each Collaboration Project. At the discretion of the Research Committee, but prior to commencement of any Preclinical Development activities for a Collaboration Project, the Research Committee shall designate one or more Collaboration Compounds as Preclinical Candidates for that Collaboration Project. Thereafter, the Research Committee shall have discretion to designate additional Collaboration Compounds as Preclinical Candidates and to eliminate Collaboration Compounds as Preclinical. Candidates for that Collaboration Project as circumstances warrant. The parties shall designate a Preclinical Candidate before commencing Preclinical. Development activities with a Collaboration Compound in a Collaboration Project. (g) Cross-Licenses for Lead Optimization and Preclinical Development. The following license grants shall have effect only with respect to activities undertaken in connection with and during the term of a Collaboration Project and as approved by the Research Committee: 16 (i) ArQule hereby grants Cubist a worldwide, [ ]*, exclusive (except as to ArQule) license under the ArQule Patent Rights and other rights in ArQule Technology to perform Lead Optimization and Preclinical Development in the Field with any Collaboration Compound. (ii) Cubist hereby grants ArQule a worldwide, [ ]*, exclusive (except as to Cubist) license under the Cubist Patent Rights and other rights in Cubist Technology to perform Lead Optimization and Preclinical Development in the Field with any Collaboration Compound. Each party acknowledges and agrees that these cross-licenses, while effective for a Collaboration Compound, preclude any further license grants in the Field by either party for that Collaboration Compound. Neither party shall have the right to sublicense the license grants set forth in this Section. During the term of a Collaboration Project, neither party shall grant any right or license under the applicable Joint Patent Rights or other rights in Joint Technology to any third party without the prior written consent of the other party. (h) Withdrawal or Deadlock. In the event that a party desires to withdraw from a proposed or ongoing project for Lead Optimization or Preclinical Development for one or more Collaboration Compounds for a Target, or if the Steering Committee deadlocks regarding (i) approval of a proposed Lead Optimization and Preclinical Development project pursuant to Subsection 3.4.(a) or (ii) an issue that arises in an ongoing Collaboration Project, the parties will immediately cease work on the Collaboration Project and attempt to outlicense the work product of that Collaboration Project. At the request of either party, the parties will select a mutually acceptable technology broker who shall have authority to license such work product on their behalf. If the parties cannot select a mutually acceptable technology broker within thirty (30) days, each party will select a third party representative and these representatives will select the technology broker. If neither party desires to use a technology broker, the parties will jointly market such work product and jointly negotiate and execute any resulting license agreement. [ ]* will pay [ ]* of any costs and expenses (including without limitation brokers fees, attorneys fees, and travel expenses) incurred in connection with any outlicensing activities under this Subsection, and [ ]* will receive [ ]* of any income resulting from such license. As an alternative to forced commercialization of such work * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 17 product, either party may make a buy-out offer to the other party at any time, but the other party may reject any buy-out offer and seek to outlicense the work product, in its sole discretion. (i) Lack of Merit. A Collaboration Project shall terminate immediately in the event of a decision by the Research Committee or Steering Committee to terminate the Collaboration Project for lack of scientific or business merit. In such event, the reversion provisions set forth below shall automatically take effect unless otherwise agreed by the parties: (i) Cubist shall have no further rights under the ArQule Patent Rights or ArQule Technology with respect to such Collaboration Compounds; (ii) ArQule shall have no further rights under the Cubist Patent Rights or Cubist Technology with respect to such Collaboration Compounds; (iii) Cubist shall grant ArQule an exclusive, worldwide, [ ]* license (with the right to sublicense) under any Joint Patent Rights and other rights in Joint Technology to the extent applicable to the composition of such Collaboration Compounds, provided that ArQule shall not assert such rights against any Cubist Collaborator that discovers such Collaboration Compounds independent of any information (whether or not published) derived from either party or arising from the Collaboration; (iv) ArQule retains the right to assert all ArQule Patent Rights and other rights in ArQule Technology against Cubist and any Cubist Collaborator; (v) ArQule shall grant Cubist an exclusive, worldwide, [ ]* license (with the right to sublicense) under any Joint Patent Rights and other rights in Joint Technology to the extent applicable to the use of such Collaboration Compounds with the identified Targets, provided that Cubist shall not assert such rights against any ArQule Collaborator that discovered such use independent of any information (whether or not published) derived from either party or arising from the Collaboration; and * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 18 (vi) Cubist retains the right to assert all Cubist Patent Rights and other rights in Cubist Technology against ArQule and any ArQule Collaborator. Each party shall remain subject to the restrictions on Confidential Information set forth in Article 6. Cubist acknowledges that ArQule shall have the right to [ ]* ArQule acknowledges that Cubist shall have the right (i) to screen and develop compounds other than those Collaboration Compounds, and (ii) to screen and develop those Collaboration Compounds if such compounds are independently discovered by a third party who, on its own initiative, offered those compounds to Cubist for use with the identified Target. 3.5. Clinical Development of Collaboration Compounds. (a) Designation of Clinical Candidate. After approval of an IND for a Preclinical Candidate, the Research Committee may designate that Preclinical Candidate as a Clinical Candidate for the purposes of this Section 3.5. Neither party will commence Clinical Development of any Collaboration Compound or Derivative before such compound has been designated as a Clinical Candidate in accordance with this Section. The Steering Committee will develop a Commercialization Plan for each Clinical Candidate. (b) Co-Development Right. Without further action, each party shall have the co-exclusive right to conduct the Clinical Development, commercial license, manufacture, distribution, marketing, and sale of any Clinical Candidate. (c) Authority. The parties shall have joint responsibility for and control over all activities for the Clinical Development and commercialization of the relevant Clinical Candidate, in accordance with the Clinical Development Plan and Commercialization Plan. The Steering Committee shall decide whether to proceed with each stage of Clinical Development and shall have oversight, management, and approval authority for commercialization decisions, activities, and agreements. The Research Committee shall have oversight and management authority for Clinical Development activities. Unless otherwise agreed by the parties, any grant of commercial rights * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 19 in a Clinical Candidate shall require the signatures of both parties to become effective. (d) Development Licenses. The following license grants shall have effect only with respect to activities approved by the Steering Committee and undertaken in connection with the Clinical Development of the relevant Clinical Candidate: (i) ArQule hereby grants Cubist a worldwide, [ ]*, exclusive (except as to ArQule) license under the ArQule Patent Rights, Joint Patent Rights, and other rights in ArQule Technology and Joint Technology to perform Clinical Development of the Clinical Candidate. (ii) Cubist hereby grants ArQule a worldwide, [ ]*, exclusive (except as to Cubist) license under the Cubist Patent Rights, Joint Patent Rights, and other rights in Cubist Technology and Joint Technology to perform Clinical Development of the Clinical Candidate. Each party acknowledges and agrees that these cross-licenses, while effective for Clinical Candidate, preclude any further license grants in the Field by either party for the Clinical Development of that Clinical Candidate. Neither party shall have the right to sublicense the license grants set forth in this Subsection without the approval of the Research Committee or Steering Committee, as appropriate. (e) Withdrawal and Deadlock. Each party shall have the right to decline to participate in, or to withdraw from, Clinical Development activities for a particular Clinical Candidate at any time upon sixty (60) days prior written notice to the other party. In such event, the relevant Collaboration Project shall terminate upon the conclusion of the sixty-day notice period. In the event that the Steering Committee reaches deadlock on an issue that arises in connection with Clinical Development or commercialization activities for a particular Clinical Candidate, the Collaboration Project shall immediately terminate. If a Collaboration Project terminates due to withdrawal or deadlock under this Section, the parties will immediately cease work on the Collaboration Project and attempt to outlicense the work product of that Collaboration Project. At the request of either party, the parties will select a mutually acceptable technology broker who shall have authority to license such work product on their behalf. If the parties cannot select a mutually acceptable technology broker within thirty * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 20 (30) days, each party will select a third party representative and these representatives will select the technology broker. If neither party desires to use a technology broker, the parties will jointly market such work product and jointly negotiate and execute any resulting license agreement. [ ]* will pay [ ]* of any direct costs and expenses (including without limitation brokers fees, attorneys fees, and travel expenses) incurred in connection with any outlicensing activities under this Subsection, and [ ]* will receive [ ]* of all proceeds resulting from such license. As an alternative to forced commercialization of such work product, either party may make a buy-out offer to the other party at any time, but the other party may reject any buy-out offer and seek to outlicense the work product, in its sole discretion. (f) Lack of Merit. In the event of a decision by the Research Committee or Steering Committee to terminate Clinical Development or commercialization activities for a Clinical Candidate for lack of clinical or business merit, the development licenses set forth in Subsection 3.5.(d) shall automatically and immediately terminate and the reversion provisions set forth below shall automatically take effect unless otherwise agreed by the parties: (i) Cubist shall have no further rights under the ArQule Patent Rights or ArQule Technology with respect to such Clinical Candidate and all other Collaboration Compounds within that Collaboration Project; (ii) ArQule shall have no further rights under the Cubist Patent Rights or Cubist Technology with respect to such Clinical Candidate and all other Collaboration Compounds within that Collaboration Project; (iii) Cubist shall grant ArQule an exclusive, worldwide, [ ]* license (with the right to sublicense) under any Joint Patent Rights and other rights in Joint Technology to the extent applicable to the composition of such Clinical Candidate and all other Collaboration Compounds within that Collaboration Project, provided that ArQule shall not assert such rights against any Cubist Collaborator that discovers such Collaboration Compounds independent of any information (whether or not published) derived from either party or arising from the Collaboration; * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 21 (iv) ArQule retains the right to assert all ArQule Patent Rights and other rights in ArQule Technology against Cubist and any Cubist Collaborator; (v) ArQule shall grant Cubist an exclusive, worldwide, [ ]* license (with the right to sublicense) under any Joint Patent Rights and other rights in Joint Technology to the extent applicable to the use of such Clinical Candidate and all other Collaboration Compounds within that Collaboration Project with the identified Targets, provided that Cubist shall not assert such rights against any ArQule Collaborator that discovered such use independent of any information (whether or not published) derived from either party or arising from the Collaboration; and (vi) Cubist retains the right to assert all Cubist Patent Rights and other rights in Cubist Technology against ArQule and any ArQule Collaborator. Each party shall remain subject to the restrictions on Confidential Information set forth in Article 6. Cubist acknowledges that ArQule shall have the right [ ]* ArQule acknowledges that Cubist shall have the right (i) to screen and develop compounds other than the Collaboration Compounds within the terminated Collaboration Project, and (ii) to screen and develop those Collaboration Compounds if such compounds are independently discovered by a third party who, on its own initiative, offered those compounds to Cubist for use with the identified Target. 4. Ownership and Management of Intellectual Property. 4.1. Intellectual Property Developed Outside of Collaboration. Except as expressly set forth in this Agreement, neither party shall have any rights in Patent Rights and Technology that is developed or discovered by the other party prior to the Effective Date or outside of the Collaboration. For example, Cubist shall have sole ownership of all right, title, and interest in Targets and other Cubist Proprietary Research Materials, and ArQule shall * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 22 have sole ownership of all right, title, and interest in ArQule Compounds provided to Cubist in the Mapping Array Program. Each party shall have sole responsibility for and control over Patent Rights claiming any of its Technology that was developed or discovered prior to the Effective Date or outside of the Collaboration. Neither party shall have any right to review and comment on such Patent Rights of the other party. 4.2. Ownership of Intellectual Property Arising From the Collaboration. Ownership of Patent Rights and Technology arising from the Collaboration shall be allocated in the following manner: [ ]* Each party shall ensure that its employees, consultants, agents, and representatives are contractually required to assign to such party all Patent Rights and other rights in Technology arising from the Collaboration and to promptly disclose to such party all patentable inventions within that Technology. 4.3. Notice of Intellectual property Arising From the Collaboration. Each party shall provide prompt written notice to the Research Committee of the internal disclosure of any significant Technology developed by its personnel in connection with the Collaboration. 4.4. Responsibility for Patent Rights Arising from the Collaboration. ArQule shall be responsible for and shall control, [ ]*, the preparation, filing, prosecution, grant, and maintenance of any Patent Rights claiming only ArQule Technology and shall consult with Cubist on, and give Cubist a reasonable opportunity to review, all such filings to the extent they directly relate to the Collaboration. Cubist shall be responsible for and shall control, [ ]* the preparation, filing, prosecution, grant, and maintenance of all Patent Rights claiming only Cubist Technology and shall consult with ArQule on, and give ArQule a reasonable opportunity to review, * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 23 all such filings to the extent they relate directly to the Collaboration. In the case of Joint Technology, the Research Committee will decide whether to seek Joint Patent Rights claiming that Technology or to maintain that Technology as a trade secret. The Research Committee will also decide whether to seek Patent Rights claiming both ArQule Technology and Cubist Technology in one filing, which also constitutes a Joint Patent Right. If the Research Committee decides to seek any Joint Patent Rights, the parties shall jointly prepare, file, prosecute, and maintain such Patent Rights, and all related expenses shall become equally by the parties. Notwithstanding the foregoing, neither party shall file any Joint Patent Rights claiming the composition or use of any Active Compound in a Mapping Array until the Research Committee has properly designated that Active Compound as a Collaboration Compound in accordance with Subsection 3.3.(d) or 3.4.(e). 4.5. Assumption of Rights by Other Party. In the event that a party desires to decline responsibility for obtaining or maintaining Patent Rights in a country for any of its Technology that is developed or discovered in connection with the Collaboration, such party will notify the other party before taking such action and, upon request, will allow the other party to assume responsibility for, and all expenses relating to, the relevant Patent Rights in those countries; provided, however, that neither party shall have the right to seek patent protection for any Technology that a party has decided, in its discretion, to maintain as a trade secret. In the event that a party desires to cease further payment of patent-related expenses for a Joint Patent Right in any country, such party may assign to the other party all rights in that Joint Patent Right in such country and thereafter have no further obligation to pay such expenses. 4.6. Cooperation. Each party agrees to cooperate fully in the preparation, filing, prosecution, and maintenance of all Patent Rights claiming Technology arising from the Collaboration. Such cooperation includes, without limitation, (i) promptly executing all papers and instruments, or requiring its employees, consultants, and agents to execute such papers and instruments, as reasonable and appropriate so as to enable one or both parties to file, prosecute, and maintain such Patent Rights in any country; (ii) promptly informing the other party of matters that may affect the preparation, filing, prosecution, or maintenance of any such Patent Rights; and (iii) undertaking no actions that are potentially deleterious to the preparation, filing, or prosecution of any such Patent Rights. 4.7. Abandonment of Joint Patent Rights. In the event that the parties fail to complete a Collaboration Project due to lack of merit pursuant to Subsection 3.4.(i), the parties shall discuss in good faith 24 whether to abandon any unpublished patent applications within the Joint Patent Rights relating to that Collaboration Project. The parties recognize that publication of such Joint Patent Rights could adversely affect each of their interests after reversion occurs under Subsection 3.4.(i). 5. Research Materials. 5.1. Ownership of Research Materials. In the course of this Collaboration, one party (the "Provider") may transfer to the other party (the "Recipient") certain of its Research Materials. The Recipient acknowledges and agrees that such Research Materials are and shall be owned by the Provider. The Recipient agrees to execute and deliver any documents of assignment or conveyance to effectuate the ownership rights of the Provider in such Research Materials. [ ]* 5.2. Use and Transfer of Research Materials. Except as otherwise agreed by the Research Committee, the Recipient agrees to use Research Materials provided by the Provider solely for purposes set forth in this Agreement and shall not distribute such Research Materials to any third party other than its employees and consultants who are working on the Collaboration. 5.3. Additional Restrictions for Property Research Materials. In the case of Proprietary Research Materials furnished by a Provider, Recipient agrees (i) not to transfer such Proprietary Research Materials to any third party without the prior written consent of the Provider, (ii) to permit access to the Proprietary Research Materials only to its employees and consultants requiring such access, (iii) to inform such employees and consultants of the proprietary nature of the Proprietary Research Materials, and (iv) to take reasonable precautions, at least as stringent as those observed by Recipient to protect its own proprietary materials, to ensure that such employees and consultants observe the obligations of Recipient under this Section. 5.4. Disposition of Unused Research Materials. At the request of Provider, Recipient will return or destroy any unused Research Materials furnished by Provider. * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 25 5.5. Compliance with Law. Recipient agrees to comply with all federal, state, and local laws and regulations applicable to the use, storage, disposal, and transfer of Research Materials furnished by Provider, including without limitation the Toxic Substances Control Act (15 USC 2601 et seq.) and implementing regulations (in particular, 40 CFR 720.36 [Research and Development Exemption]), the Food, Drug, and Cosmetic Act (21 USC 301 g et seq.) and implementing regulations, and all Export Administration Regulations of the Department of Commerce. Recipient assumes sole responsibility for any violation of such laws or regulations by Recipient or any of its Affiliates or Sublicensees. 5.6. Limitation of Liability. Any Research Materials delivered pursuant to this Agreement are understood to be experimental in nature and may have hazardous properties. Recipient should assume that the compounds are dangerous and should use appropriate precautions. [ .]* 6. Confidential Information. 6.1. Designation of Confidential Information. Confidential Information that is disclosed in writing shall be marked with a legend indicating its confidential status. Confidential Information that is disclosed orally or visually shall be documented in a written notice prepared by the Disclosing Party and delivered to the Receiving Party within thirty (30) days of the date of disclosure; such notice shall summarize the Confidential Information disclosed to the Receiving Party and reference the time and place of disclosure. 6.2. Obligations of Receiving Party. The Receiving Party agrees that it shall: (i) maintain all Confidential Information in strict confidence, except that the Receiving Party may disclose or permit the disclosure of any Confidential Information to its directors, officers, employees, consultants, and advisors who are obligated to maintain the confidential nature of such Confidential * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 26 Information and who need to know such Confidential Information for the purposes set forth in this Agreement; (ii) use all Confidential Information solely for the purposes of this Agreement; and (iii) allow its directors, officers, employees, consultants, and advisors to reproduce the Confidential Information only to the extent necessary to effect the purposes set forth in this Agreement, with all such reproductions being considered Confidential Information, 6.3. Exceptions. The obligations of the Receiving Party under Section 6.2. above shall not apply to the extent that the Receiving Party can demonstrate that certain Confidential Information: (i) was in the public domain prior to the time of its disclosure under this Agreement; (ii) entered the public domain after the time of its disclosure under this Agreement through means other than an unauthorized disclosure resulting from an act or omission by the Receiving Party; (iii) was independently developed or discovered by the Receiving Party without use of the Confidential Information; (iv) is or was disclosed to the Receiving Party at any time, whether prior to or after the time of its disclosure under this Agreement, by a third party having no fiduciary relationship with the Disclosing Party and having no obligation of confidentiality to the Disclosing Party with respect to such Confidential Information; or (v) is required to be disclosed to comply with applicable laws or regulations (such as disclosure to the FDA or the United States Patent and Trademark Office or to their foreign equivalents), or to comply with a court or administrative order, provided that the Disclosing Party receives prior written notice of such disclosure and that the Receiving Party takes all reasonable and lawful actions to obtain confidential treatment for such disclosure and, if possible, to minimize the extent of such disclosure. 27 6.4. Return of Confidential Information. Upon the termination of this Agreement, or earlier at the request of the Disclosing Party, the Receiving Party shall return to the Disclosing Party all originals, copies, and summaries of documents, materials, and other tangible manifestations of Confidential Information in the possession or control of the Receiving Party, except that the Receiving Party may retain one copy of the Confidential Information in the possession of its legal counsel solely for the purpose of monitoring its obligations under this Agreement. 6.5. Survival of Obligations. The obligations set forth in this Article shall remain in effect for an item of Confidential Information for a period of ten (10) years after the date upon which a Receiving Party first received that Confidential Information, except that the obligation of the Receiving Party to return Confidential Information to the Disclosing Party shall survive until fulfilled. 7. Indemnification and Insurance. 7.1. General Indemnification. [ ]* (the "Indemnifying Party") shall indemnify and hold harmless the other party, its Affiliates, and their respective directors, officers, employees and agents (collectively, the "Indemnitees ") from and against all claims, expenses or liability of whatever nature arising from any default, act, omission or negligence of the Indemnifying Party, its agents or employees, or others exercising rights by, through, or under the Indemnifying Party, or the failure of the Indemnifying Party or such persons to comply with any applicable laws, rules, regulations, codes, ordinances or directives of governmental authorities, in each case to the extent the same are related, directly or indirectly, to the Collaboration described herein; provided, however, that in no event shall the Indemnifying Party be obligated under this section to indemnify the Indemnitees where such claim, expense or liability results solely from any omission, fault, negligence, or other misconduct of any of the Indemnitees. 7.2. Procedure. The Indemnitees agree to provide the Indemnifying Party with prompt written notice of any claim, suit, action, demand, or judgment for which indemnification is sought under this Agreement. If an Indemnitee fails to provide such notice within a reasonable time, and if such failure prejudicially affects the ability of the Indemnifying Party to defend such action, the Indemnifying Party shall be relieved of its liability to such Indemnitee under this Article 7. The Indemnifying Party agrees, at its own expense, to provide attorneys reasonably acceptable to the Indemnitees to * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 28 defend against any such claim. The Indemnitees shall cooperate fully with the Indemnifying Party in such defense and will permit the Indemnifying Party to conduct and control such defense and the disposition of such claim, suit, or action (including all decisions relative to litigation, appeal, and settlement); provided, however, that any Indenmitee shall have the right to retain its own counsel, at the expense of the Indemnifying Party, if representation of such Indemnitee by the counsel retained by the Indemnifying Party would be inappropriate because of actual or potential differences in the interests of such Indemnitee and any other party represented by such counsel. The Indemnifying Party agrees to keep the other party informed of the progress in the defense and disposition of such claim and to consult with such party with regard to any proposed settlement. 8. Term and Termination. 8.1. Term. This Agreement shall commence on the Effective Date and shall continue for a period of ten (10) years unless earlier terminated pursuant to this Article 8. 8.2. Voluntary Termination. At any time on or after the first anniversary of the Effective Date, either party may terminate this Agreement immediately upon [ ]* notice to the other party. 8.3. Termination for Default. In the event that either party commits a material breach of its obligations under this Agreement and fails to cure that breach within [ ]* days after receiving written notice thereof, the other party may terminate this Agreement [ ]* notice to the party in breach. 8.4. Termination for Deadlock. In the event of a deadlock in the Steering Committee on a matter that affects the Agreement as a whole, as described in Subsection 2.2.(f), either party may terminate this Agreement [ ]* notice to the other party. 8.5. Force Majeure. Neither party will be responsible for delays resulting from acts beyond the control of such party, provided that the nonperforming party uses commercially reasonable efforts to avoid or remove such causes of nonperformance and continues performance hereunder with reasonable dispatch whenever such causes are removed. * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 29 8.6. Effect of Termination. Except as otherwise agreed by the parties, upon the expiration or termination of this Agreement, the provisions of Subsections 3.3.(e), 3.4.(h), and 3.5.(c) shall immediately apply to all ongoing activities of the Collaboration and the other provisions of this Agreement shall immediately terminate, except that the following provisions shall survive: Articles 4, 5, 6, 7, and 9; Sections 8.6., 10.1, 10.7., and 10.9. 9. Dispute Resolution. 9.1. Procedures Mandatory. The parties agree that any dispute arising out of or relating to this Agreement shall be resolved solely by means of the procedures set forth in this Article, and that such procedures constitute legally binding obligations that are an essential provision of this Agreement; provided, however, that all procedures and deadlines specified in this Article may be modified by written agreement of the parties. If either party fails to observe the procedures of this Article, as modified by their written agreement, the other party may bring an action for specific performance in any court of competent jurisdiction. 9.2. Dispute Resolution Procedures. (a) Negotiation. In the event of any dispute arising out of or relating to this Agreement, the affected party shall notify the other party, and the parties shall attempt in good faith to resolve the matter within ten (10) days after the date such notice is received by the other party (the "Notice Date"). Any disputes not resolved by good faith discussions shall be referred to the Steering Committee, which shall meet at a mutually acceptable time and location within thirty (30) days after the Notice Date and attempt to negotiate a settlement. (b) Mediation. If the matter remains unresolved within sixty (60) days after the Notice Date, or if the Steering Committee fails to meet within thirty (30) days after the Notice Date, either party may initiate mediation upon written notice to the other party, whereupon both parties shall be obligated to engage in a mediation proceeding under the then current Center for Public Resources ("CPR") Model Procedure for Mediation of Business Disputes, except that specific provisions of this Section shall override inconsistent provisions of the CPR Model Procedure. The mediator will be selected from the CPR Panels of Neutrals. If the parties cannot agree upon the selection of a mediator within ninety (90) days after the Notice Date, then upon the request of either party, the CPR shall appoint the mediator. The parties shall attempt to resolve the dispute through mediation until one of the following occurs: (i) the parties reach a written settlement; (ii) the mediator notifies the parties in writing that they have reached an impasse; 30 (iii) the parties agree in writing that they have reached an impasse; or (iv) the parties have not reached a settlement within one hundred and twenty (120) days after the Notice Date. (c) [ .]* If the parties fail to resolve the dispute through mediation, or if neither party elects to initiate mediation, each party shall have the right to pursue any other remedies legally available to resolve the dispute, [ .]* 9.3. Preservation of Rights Pending Resolution. (a) Performance to Continue. Each party shall continue to perform its obligations under this Agreement pending final resolution of any dispute arising out or relating to this Agreement; provided, however, that a party may suspend performance of its obligations during any period in which the other party fails or refuses to perform its obligations. (b) Provisional Remedies. [ ]* either party may seek a preliminary injunction or other provisional equitable relief if, in its reasonable judgment, such action is necessary to avoid irreparable harm to itself or to preserve its rights under this Agreement. (c) Statute of Limitations. The parties agree that all applicable statutes of limitation and time-based defenses (such as estoppel and laches) shall be tolled while the procedures set forth in Subsections 9.2.(a) and 9.2(b) are pending. The parties shall take any actions necessary to effectuate this result. 10. Miscellaneous. 10.1. Publicity. No press release, advertising, promotional sales literature, or other promotional oral or written statements to the public in connection with or alluding to work performed under this Agreement or the relationship between the parties created by it, having or containing any reference to ArQule or Cubist, shall be made by either party without the prior written approval of the other party, except for restatements of previously-approved statements and disclosures required by applicable law or regulation. * Confidential Treatment Requested: material has been omitted and filed separately with the Commission. 31 10.2. Relationship of Parties. For the purposes of this Agreement, each party is an independent contractor and not an agent or employee of the other party. Neither party shall have authority to make any statements, representations, or commitments of any kind, or to take any action which shall be binding on the other party, except as may be explicitly provided for herein or authorized in writing. 10.3. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 10.4. Headings. All headings in this Agreement are for convenience only and shall not affect the meaning of any provision hereof, 10.5. Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties and their respective lawful successors and assigns. 10.6. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other party, except that either of the parties may assign this Agreement to a successor in connection with the merger, consolidation, or sale of all or substantially all of its assets or that portion of its business pertaining to the subject matter of this Agreement. 10.7. Notices. All notices, requests, demands and other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given upon the date of receipt if delivered by hand, recognized national overnight courier, confirmed facsimile transmission, or registered or certified mail, return receipt requested, postage prepaid, to the following addresses or facsimile numbers: If to Cubist: Cubist Pharmaceuticals, Inc. 24 Emily Street Cambridge, MA 02139 Attn: Scott M. Rocklage, President Tel: (617) 576-1999 Fax: (617) 576-0232 32 If to ArQule: ArQule, Inc. 200 Boston Avenue Medford, MA 02155 Attn: Eric B. Gordon, President Tel: (617) 395-4100 Fax: (617) 395-1225 with a copy (which shall not constitute notice) to: Palmer & Dodge One Beacon Street Boston, MA 02108 Attn: Michael Lytton, Esq. Tel: (617) 573-0327 Fax: (617) 227-4420 Either party may change its designated address and facsimile number by notice to the other party in the manner provided in this Section. 10.8. Amendment and Waiver. This Agreement may be amended, supplemented, or otherwise modified at any time, but only by means of a written instrument signed by both parties. Any waiver of any rights or failure to act in a specific instance shall relate only to such instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar. 10.9. Governing Law. This Agreement and the legal relations among the parties shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts irrespective of any conflict of laws principles. 10.10. Severability. In the event that any provision of this Agreement shall, for any reason, be held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid or unenforceable provision had not been included herein. 10.11. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes any and all prior or contemporaneous oral and prior written agreements and understandings including, without limitation, a certain 33 Material Transfer and Screening Agreement dated June 4, 1996 between the parties. IN WITNESS WHEREOF, the undersigned have duly executed and delivered this Agreement as a sealed instrument effective as of the date first above written. CUBIST PHARMACEUTICALS, INC. By: /s/ Mark Carthy ----------------------------------------------- Mark Carthy Vice President and Chief Business Officer ARQULE, INC. By: /s/ Eric B. Gordon ----------------------------------------------- Eric B. Gordon, President and Chief Executive Officer 34 EX-10.22 3 EXHIBIT 10.22 Exhibit 10.22 AMENDMENT TO PROMISSORY NOTE This Amendment to Promissory Note (this "Amendment") is entered into as of this 23th day of December, 1997 by and between Cubist Pharmaceuticals, Inc., a Delaware Corporation, (the "Payee") and Scott M. Rocklage (the "Maker"). This Amendment is attached to and made part of that certain Secured Promissory Note, dated as of July 21, 1994 (the "Promissory Note"), in the principal amount of One Hundred Thirty-One Thousand Six Hundred Eighty-Five Dollars ($131,685.00) made payable by the Maker to the Payee. WHEREAS, the Maker and the Payee wish to amend the Promissory Note. NOW, THEREFORE, for the sum of ten and 00/100 Dollars ($10.00) and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Maker and Payee hereby amend the Promissory Note as follows: The wording "on July 21, 1996 (the "Maturity Date"), and to pay interest on the principal amount outstanding from time to time hereunder, from the date hereof through and including the date on which such principal amount is paid in full, at a rate of four percent (4%) per annum simple interest." appearing in the fifth line of the first paragraph immediately prior to the words "Interest hereunder" which was amended to "July 21, 1997" on "Amendment To Promissory Note" on July 21, 1996 is hereby deleted and replaced with "in equal quarterly installments of Ten Thousand Dollars ($10,000) payable on the last day of the quarter commencing on March 31, 1998 and completing on September 30, 2001 with no further interest due and payable from this date." EXCEPT AS SPECIFICALLY AMENDED BY THIS AMENDMENT THE PROMISSORY NOTE REMAINS UNMODIFIED AND IN FULL FORCE AND EFFECT ACCORDING TO ITS TERMS. IN WITNESS WHEREOF, the undersigned have executed this Amendment as a sealed instrument as of the date first above written. MAKER: WITNESS: /s/ Scott M. Rocklage ------------------------ ----------------------- Scott M. Rocklage PAYEE: Cubist Pharmaceuticals, Inc. WITNESS: /s/ John K. Clarke ------------------------ ----------------------- John K. Clarke Chairman of the Board 2 EX-10.33 4 EXHIBIT 10.33 Exhibit 10.33 CUBIST PHARMACEUTICALS, INC. 24 Emily Street Cambridge, MA 02139 January 9, 1998 Mr. Mark P. Carthy 21 Stone Road Belmont, Massachusetts 02178 Dear Mark: Reference is hereby made to that certain Letter Agreement, dated as of May 19, 1997 (the "Agreement"), between you and Cubist Pharmaceuticals, Inc., a Delaware corporation (the "Company"), pursuant to which you exercised your stock option to purchase 10,000 shares (the "Shares") of the Company's common stock, $.001 par value per share, at an exercise price of $8.00 per share, and you paid for the Shares by delivering to the Company a Secured Promissory Note in the principal amount of $80,000 (the "Note"), which the Company agreed to forgive over time. Capitalized terms which are not defined herein shall have the same meanings as ascribed to such terms in the Agreement. You and the Company hereby agree that in the event your employment with the Company terminates prior to April 11, 2000 and the market value of the Shares on the date of such termination (the "Termination Date") is less than the principal and accrued but unpaid interest under the Note at the Termination Date, then, notwitstanding anything in the Pledge Agreement to the contrary, the Shares shall be the Company's sole recourse for payment of the Note. In such event, you agree to surrender your certificate for the Shares accompanied by a stock power executed in blank to the Company, and upon such surrender and delivery of the Shares to the Company, you shall have no further obligation to the Company with respect to the Note and the Note shall be returned to you marked "Paid In Full." This letter agreement shall be governed by the internal substantive laws of the Commonwealth of Massachusetts and shall be binding upon the heirs, personal representatives, executors, administrators, successors and permitted assigns of the parties. The rights and obligations of either party under this letter agreement may only be assigned with the prior written consent of the other party hereto. This letter agreement supersedes all prior written and oral agreements and understandings between the parties and represents the entire agreement between the parties with respect to the subject matter hereof and may only be modified or amended pursuant to a written instrument signed by both parties. The Company is not by reason of this letter agreement obligated to continue your employment. Mr. Mark P. Carthy January 9, 1998 Page 2 If the foregoing accurately reflects our understanding, please so acknowledge by countersigning this letter agreement in the space provided for your signature below. Very truly yours, CUBIST PHARMACEUTICALS, INC. By: /s/ Scott M. Rocklage --------------------------------- Scott M. Rocklage, Ph.D. President and CEO Agreed and Accepted as of this 9th day of December, 1997: /s/ Mark Carthy - ------------------------ Mark P. Carthy 21 Stone Road Belmont, MA 02178 EX-10.34 5 EXHIBIT 10.34 Exhibit 10.34 MASTER LEASE AGREEMENT Lessor: TRANSAMERICA BUSINESS CREDIT CORPORATION Riverway II West Office Tower 9399 West Higgins Road Rosemont, Illinois 60018 Lessee: CUBIST PHARMACEUTICALS, INC. 24 Emily Street Cambridge, Massachusetts 02139 The lessor pursuant to this Master Lease Agreement ("Agreement") dated as of February 7, 1997, is Transamerica Business Credit Corporation ("Lessor"). All equipment, together with all present and future additions, parts, accessories, attachments, substitutions, repairs, improvements and replacements thereof or thereto, which are the subject of a Lease (as defined in the next sentence) shall be referred to as "Equipment." Simultaneous with the execution and delivery of this Agreement, the parties are entering into one or more Lease Schedules (each, a "Schedule") which refer to and incorporate by reference this Agreement, each of which constitutes a lease (each, a "Lease") for the Equipment specified therein. Additional details pertaining to each Lease are specified in the applicable Schedule. Each Schedule that the parties hereafter enter into shall constitute a Lease. Lessor has no obligation to enter into any additional leases with, or extend any future financing to, Lessee. 1. LEASE. (a) Subject to and upon all of the terms and conditions of this Agreement and each Schedule, Lessor hereby agrees to lease to Lessee and Lessee hereby agrees to lease from Lessor the Equipment for the Term (as defined in Paragraph 2 below) thereof (b) Except as provided below, before purchasing any Equipment from a manufacturer or supplier and leasing the same to Lessee, Lessor shall have received before the acceptance of the Equipment by Lessee an Assignment Agreement in form and substance satisfactory to Lessor, executed by Lessee and acknowledged by such manufacturer or supplier assigning to Lessor all of Lessee's right, title and interest in and to such Equipment and the purchase agreement relating thereto (the "Assignment"). Upon delivery of such Equipment, Lessee shall transmit to Lessor a properly executed Certificate of Acceptance in the form attached hereto covering each item of Equipment set forth in such Assignment. Upon execution by Lessee and delivery to Lessor of a Certificate of Acceptance, (x) each item of Equipment set forth therein shall be deemed to have been delivered to and irrevocably accepted by Lessee for lease hereunder, (y) Lessee shall make payments of interim rent ("Interim Rent") at the per them rate set forth in the Certificate of Acceptance, and (z) such Certificate of Acceptance shall be deemed a Schedule for all purposes hereof, until such time as a Schedule covering the Equipment described in the Certificate of Acceptance is executed and delivered by Lessee to Lessor. Interim Rent shall be due on the date stated in the Certificate of Acceptance. On or before the 28th day of the last month each calendar quarter, Lessee shall deliver to Lessor a Schedule, duly executed by Lessee, covering all Equipment delivered to Lessee through the second week of the last month of such calendar quarter for which no Schedule was previously delivered. 2. TERM. Each Lease shall be effective and the term of each Lease ("Term") shall commence on the commencement date specified in the applicable Schedule as the same may be adjusted, in the sole discretion of Lessor pursuant to an Adjustment Letter (the "Adjustment Letter")(but in no event shall any Lease have a commencement date of later than December 31, 1997) and, unless sooner terminated (as hereinafter provided), shall expire at the end of the term specified in such Schedule; provided, however, that obligations due to be performed by Lessee during the Term shall continue until they have been performed in full. Schedules will only be executed quarterly.. 3. RENT. Lessee shall pay as rent to Lessor, for use of the Equipment during the Term or Renewal Term (as defined in Paragraph 8), rental payments equal to the sum of all rental payments including, without limitation, security deposits, advance rents and interim rents payable in the amounts and on the dates specified in the applicable Schedule ("Rent"). If any Rent or other amount payable by Lessee is not paid within five days after the day on which it becomes payable, Lessee will pay on demand, as a late charge, an amount equal to 5% of such unpaid Rent or other amount but only to the extent permitted by applicable law. All payments provided for herein shall be payable to Lessor at its address specified above, or at any other place designated by Lessor. 4. LEASE NOT CANCELABLE; LESSEE'S OBLIGATIONS ABSOLUTE. No Lease may be canceled or terminated except as expressly provided herein. Lessee's obligation to pay all Rent due or to become due hereunder shall be absolute and unconditional and shall not be subject to any delay, reduction, set-off, defense, counterclaim or recoupment for any reason whatsoever, including any failure of the Equipment or any representations by the manufacturer or the vendor thereof. If the Equipment is unsatisfactory for any reason, Lessee shall make any claim solely against the manufacturer or the vendor thereof and shall, nevertheless, pay Lessor all Rent payable hereunder. 5. SELECTION AND USE OF EQUIPMENT. Lessee agrees that it shall be responsible for the selection, use of, and results obtained from, the Equipment and any other associated equipment or services. 6. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN OR CONDITION OF THE EQUIPMENT OR ITS MERCHANTABILITY, SUITABILITY, QUALITY OR FITNESS FOR A PARTICULAR PURPOSE, AND HEREBY DISCLAIMS ANY SUCH WARRANTY. LESSEE SPECIFICALLY WAIVES ALL RIGHTS TO MAKE A CLAIM AGAINST LESSOR FOR BREACH OF ANY WARRANTY WHATSOEVER. LESSEE LEASES THE EQUIPMENT "AS IS." IN NO EVENT SHALL LESSOR HAVE ANY LIABILITY FOR, NOR SHALL LESSEE HAVE ANY REMEDY AGAINST LESSOR FOR, ANY LIABILITY, CLAIM, LOSS, DAMAGE OR EXPENSE CAUSED DIRECTLY OR INDIRECTLY BY THE EQUIPMENT OR ANY DEFICIENCY OR DEFECT THEREOF OR THE OPERATION, MAINTENANCE OR REPAIR THEREOF OR ANY CONSEQUENTIAL DAMAGES AS THAT TERM IS USED IN SECTION 2-719(3) OF THE MODEL UNIFORM COMMERCIAL CODE, AS AMENDED FROM TIME TO TIME ("UCC"). Lessor grants to Lessee, for the sole purpose of prosecuting a claim, the benefits of any and all warranties made available by the manufacturer or the vendor of the Equipment to the extent assignable. 7. DELIVERY. Lessor hereby appoints Lessee as Lessor's agent for the sole and limited purpose of accepting delivery of the Equipment from each vendor thereof. Lessee shall pay any and all delivery and installation charges. Lessor shall not be liable to Lessee for any delay in, or failure of, delivery of the Equipment. 8. RENEWAL. So long as no Event of Default or event which, with the giving of notice, the passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing, or the Lessee shall not have exercised its purchase option under Paragraph 9 hereof, each Lease will automatically renew for a term of twelve months (the "Renewal Term") on the terms and conditions of this Agreement or as set forth in the applicable Schedule; provided, however, that Obligations due to be performed by the Lessee during the Renewal Term shall continue until they have been performed in full. The monthly rental payments for the Renewal Term shall be equal to 1.25% of the equipment cost plus any monthly sales or use tax. 9. PURCHASE OPTION. So long as no Event of Default or event which, with the giving of notice, the passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing, Lessee may, upon written notice to Lessor received at least one hundred eighty days before the expiration of a Term, purchase all, but not less than all, the Equipment covered by the applicable Lease on the date specified therefor in the applicable Schedule ("Purchase Date"). The purchase price for such Equipment shall be its fair market value as set forth in the Schedule on an "In-place, In-use" basis, as mutually agreed by Lessor and Lessee, or, if they cannot agree, as determined by an independent appraiser selected by Lessor and approved by Lessee, which approval will not be unreasonably delayed or withheld. Lessee shall pay the cost of any such appraisal. So long as no Event of Default or event which, with the giving of notice, the passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing, Lessee may, upon written notice to Lessor received at least one hundred eighty days prior to the expiration of the Renewal Term, 2 purchase all, but not less than all, the Equipment covered by the applicable Schedule by the last date of the Renewal Term (the "Alternative Purchase Date") at a purchase price equal to its then fair market value on an "In-place, In-use" basis. On the Purchase Date or the Alternative Purchase Date, as the case may be, for any Equipment, Lessee shall pay to Lessor the purchase price, together with all sales and other taxes applicable to the transfer of the Equipment and any other amount payable and arising hereunder, in immediately available funds, whereupon Lessor shall transfer to Lessee, without recourse or warranty of any kind, express or implied, all of Lessor's right, title and interest in and to such Equipment on an "As Is, Where Is" basis. 10. OWNERSHIP; INSPECTION; MARKING; FINANCING STATEMENTS. Lessee shall affix to the Equipment any labels supplied by Lessor indicating ownership of such Equipment. The Equipment is and shall be the sole property of Lessor. Lessee shall have no right, title or interest therein, except as lessee under a Lease. The Equipment is and shall at all times be and remain personal property and shall not become a fixture. Lessee shall obtain and record such instruments and take such steps as may be necessary to prevent any person from acquiring any rights in the Equipment by reason of the Equipment being claimed or deemed to be real property. Upon request by Lessor, Lessee shall obtain and deliver to Lessor valid and effective waivers, in recordable form, by the owners, landlords and mortgagees of the real property upon which the Equipment is located or certificates of Lessee that it is the owner of such real property or that such real property is neither leased nor mortgaged. Lessee shall make the Equipment and its maintenance records available for inspection by Lessor at reasonable times and upon reasonable notice. Lessee shall execute and deliver to Lessor for filing any UCC financing statements or similar documents Lessor may reasonably request. 11. EQUIPMENT USE. Lessee agrees that the Equipment will be operated by competent, qualified personnel in connection with Lessee's business for the purpose for which the Equipment was designed and in accordance with applicable operating instructions, laws and government regulations, and that Lessee shall use all reasonable precautions to prevent loss or damage to the Equipment from fire and other hazards. Lessee shall procure and maintain in effect all orders, licenses, certificates, permits, approvals and consents required by federal, state or local laws or by any governmental body, agency or authority in connection with the delivery, installation, use and operation of the Equipment. 12. MAINTENANCE. Lessee, at its sole cost and expense, shall keep the Equipment in a suitable environment as specified by the manufacturer's guidelines or the equivalent and meet all recertification requirements, and shall maintain the Equipment in its original condition and working order, ordinary wear and tear excepted. At the reasonable request of Lessor, Lessee shall furnish all proof of maintenance. 13. ALTERATION; MODIFICATIONS; PARTS. Lessee may alter or modify the Equipment only with the prior written consent of Lessor. Any alteration shall be removed and the Equipment restored to its normal, unaltered condition at Lessee's expense (without damaging the Equipment's originally intended function or its value) prior to its return to Lessor. Any part installed in connection with warranty or maintenance service or which cannot be removed in accordance with the preceding sentence shall be the property of Lessor. 14. RETURN OF EQUIPMENT. Except for Equipment that has suffered a Casualty Loss (as defined in Paragraph 15 below) and is not required to be repaired pursuant to Paragraph 15 below or Equipment purchased by Lessee pursuant to Paragraph 9 above, upon the expiration of the Renewal Term of a Lease, or upon demand by Lessor pursuant to Paragraph 22 below, Lessee shall contact Lessor for shipping instructions and, at Lessee's own risk, immediately return the Equipment, freight prepaid, to a location in the continental United States specified by Lessor. At the time of such return to Lessor, the Equipment shall (i) be in the operating order, repair and condition as required by or specified in the original specifications and warranties of each manufacturer and vendor thereof, ordinary wear and tear excepted, and meet all recertification requirements and (ii) be capable of being promptly assembled and operated by a third party purchaser or third party lessee without further repair, replacement, alterations or improvements, and in accordance and compliance with any and all statutes, laws, ordinances, rules and regulations of any governmental authority or any political subdivision thereof applicable to the use and operation of the Equipment. Except as otherwise provided under Paragraph 9 hereof, at least one hundred eighty days before 3 the expiration of the Renewal Term, Lessee shall give Lessor notice of its intent to return the Equipment at the end of such Renewal Term. During the one hundred eighty-day period prior to the end of a Term or the Renewal Term, Lessor and its prospective purchasers or lessees shall have, upon not less than two business days' prior notice to Lessee and during normal business hours, or at any time and without prior notice upon the occurrence and continuance of an Event of Default, the right of access to the premises on which the Equipment is located to inspect the Equipment, and Lessee shall cooperate in all other respects with Lessor's remarketing of the Equipment. The provisions of this Paragraph 14 are of the essence of the Lease, and upon application to any court of equity having jurisdiction in the premises, Lessor shall be entitled to a decree against Lessee requiring specific performance of the covenants of Lessee set forth in this Paragraph 14. If Lessee fails to return the Equipment when required, the terms and conditions of the Lease shall continue to be applicable and Lessee shall continue to pay Rent until the Equipment is received by Lessor. 15. CASUALTY INSURANCE; LOSS OR DAMAGE. Lessee will maintain, at its own expense, liability and property damage insurance relating to the Equipment, insuring against such risks as are customarily insured against on the type of equipment leased hereunder by businesses in which Lessee is engaged in such amounts, in such form, and with insurers satisfactory to Lessor; provided, however, that the amount of insurance against damage or loss shall not be less than the greater of (a) the replacement value of the Equipment and (b) the stipulated loss value of the Equipment specified in the applicable Schedule ("Stipulated Loss Value"). Each liability insurance policy shall provide coverage (including, without limitation, personal injury coverage) of not less than $1,000,000 for each occurrence, and shall name Lessor as an additional insured; and each property damage policy shall name Lessor as sole loss payee and all policies shall contain a clause requiring the insurer to give Lessor at least thirty days prior written notice of any alteration in the terms or cancellation of the policy. Lessee shall furnish a copy of each insurance policy (with endorsements) or other evidence satisfactory to Lessor that the required insurance coverage is in effect; provided, however Lessor shall have no duty to ascertain the existence of or to examine the insurance policies to advise Lessee if the insurance coverage does not comply with the requirements of this Paragraph. If Lessee fails to insure the Equipment as required, Lessor shall have the right but not the obligation to obtain such insurance, and the cost of the insurance shall be for the account of Lessee due as part of the next due Rent. Lessee consents to Lessor's release, upon its failure to obtain appropriate insurance coverage, of any and all information necessary to obtain insurance with respect to the Equipment or Lessor's interest therein. Until the Equipment is returned to and received by Lessor as provided in Paragraph 14 above, Lessee shall bear the entire risk of theft or destruction of, or damage to, the Equipment including, without limitation, any condemnation, seizure or requisition of title or use ("Casualty Loss"). No Casualty Loss shall relieve Lessee from its obligations to pay Rent except as provided in clause (b) below. When any Casualty Loss occurs, Lessee shall immediately notify Lessor and, at the option of Lessor, shall promptly (a) place such Equipment in good repair and working order; or (b) pay Lessor an amount equal to the Stipulated Loss Value of such Equipment and all other amounts (excluding Rent) payable by Lessee hereunder, together with a late charge on such amounts at a rate per annum equal to the rate imputed in the Rent payments hereunder (as reasonably determined by Lessor) from the date of the Casualty Loss through the date of payment of such amounts, whereupon Lessor shall transfer to Lessee, without recourse or warranty (express or implied), all of Lessor's interest, if any, in and to such Equipment on an "AS IS, WHERE IS" basis. The proceeds of any insurance payable with respect to the Equipment shall be applied, at the option of Lessor, either towards (i) repair of the Equipment or (ii) payment of any of Lessee's obligations hereunder. Lessee hereby appoints Lessor as Lessee's attorney-in-fact to make claim for, receive payment of, and execute and endorse all documents, checks or drafts issued with respect to any Casualty Loss under any insurance policy relating to the Equipment. 16. TAXES. Lessee shall pay when due, and indemnify and hold Lessor harmless from, all sales, use, excise and other taxes, charges, and fees (including, without limitation, income, franchise, business and occupation, gross receipts, licensing, registration, titling, personal property, stamp and interest equalization taxes, levies, imposts, duties, charges or withholdings of any nature), and any fines, penalties or interest thereon, imposed or levied by any governmental body, agency or tax authority upon or in connection with the Equipment, its purchase, ownership, delivery, leasing, possession, use or relocation of the Equipment or otherwise in connection with the transactions contemplated by each Lease or the Rent thereunder, excluding 4 taxes on or measured by the net income of Lessor. Upon request, Lessee will provide proof of payment. Unless Lessor elects otherwise, Lessor will pay all property taxes on the Equipment for which Lessee shall reimburse Lessor promptly upon request. Lessee shall timely prepare and file all reports and returns which are required to be made with respect to any obligation of Lessee under this Paragraph 16. Lessee shall, to the extent permitted by law, cause all billings of such fees, taxes, levies, imposts, duties, withholdings and governmental charges to be made to Lessor in care of Lessee. Upon request, Lessee will provide Lessor with copies of all such billings. 17. LESSOR'S PAYMENT. If Lessee fails to perform its obligations under Paragraph 15 or 16 above, or Paragraph 23 below, Lessor shall have the right to substitute performance, in which case, Lessee shall immediately reimburse Lessor therefor. 18. GENERAL INDEMNITY. Each Lease is a net lease. Therefore, Lessee shall indemnify Lessor and its successors and assigns against, and hold Lessor and its successors and assigns harmless from, any and all claims, actions, damages, obligations, liabilities and all costs and expenses, including, without limitation, legal fees, incurred by Lessor or its successors and assigns arising out of each Lease including, without limitation, the purchase, ownership, delivery, lease, possession, maintenance, condition, use or return of the Equipment, or arising by operation of law, except that Lessee shall not be liable for any claims, actions, damages, obligations and costs and expenses determined by a non-appealable, final order of a court of competent jurisdiction to have occurred as a result of the gross negligence or willful misconduct of Lessor or its successors and assigns. Lessee agrees that upon written notice by Lessor of the assertion of any claim, action, damage, obligation, liability or lien, Lessee shall assume full responsibility for the defense thereof, provided that Lessor's failure to give such notice shall not limit or otherwise affect its rights hereunder. Any payment pursuant to this Paragraph (except for any payment of Rent) shall be of such amount as shall be necessary so that, after payment of any taxes required to be paid thereon by Lessor, including taxes on or measured by the net income of Lessor, the balance will equal the amount due hereunder. The provisions of this Paragraph with regard to matters arising during a Lease shall survive the expiration or termination of such Lease. 19. ASSIGNMENT BY LESSEE. Lessee shall not, without the prior written consent of Lessor, (a) assign, transfer, pledge or otherwise dispose of any Lease or Equipment, or any interest therein; (b) sublease or lend any Equipment or permit it to be used by anyone other than Lessee and its employees; or (c) move any Equipment from the location specified for it in the applicable Schedule, except that Lessee may move Equipment to another location within the United States provided that Lessee has delivered to Lessor (A) prior written notice thereof and (B) duly executed financing statements and other agreements and instruments (all in form and substance satisfactory to Lessor) necessary or, in the opinion of the Lessor, desirable to protect Lessor's interest in such Equipment. Notwithstanding anything to the contrary in the immediately preceding sentence, Lessee may keep any Equipment consisting of motor vehicles or rolling stock at any location in the United States. 20. ASSIGNMENT BY LESSOR. Lessor may assign its interest or grant a security interest in any Lease and the Equipment individually or together, in whole or in part. If Lessee is given written notice of any such assignment, it shall immediately make all payments of Rent and other amounts hereunder directly to such assignee. Each such assignee shall have all of the rights of Lessor under each Lease assigned to it. Lessee shall not assert against any such assignee any set-off, defense or counterclaim that Lessee may have against Lessor or any other person. 21. DEFAULT; NO WAIVER. Lessee or any guarantor of any or all of the obligations of Lessee hereunder (together with Lessee, the "Lease Parties") shall be in default under each Lease upon the occurrence of any of the following events (each, an "Event of Default"): (a) Lessee fails to pay within five days of when due any amount required to be paid by Lessee under or in connection with any Lease; (b) any of the Lease Parties fails to perform any other provision under or in connection with a Lease or violates any of the covenants or agreements of such Lease Party under or in connection with a Lease; (c) any representation made or financial information delivered or furnished by any of the Lease Parties under or in connection with a Lease shall prove to have been inaccurate in any material respect when made; (d) any of the Lease Parties makes an 5 assignment for the benefit of creditors, whether voluntary or involuntary, or consents to the appointment of a trustee or receiver, or if either shall be appointed for any of the Lease Parties or for a substantial part of its property without its consent and, in the case of any such involuntary proceeding, such proceeding remains undismissed or unstayed for forty-five days following the commencement thereof-, (e) any petition or proceeding is filed by or against any of the Lease Parties under any Federal or State bankruptcy or insolvency code or similar law and, in the case of any such involuntary petition or proceeding, such petition or proceeding remains undismissed or unstayed for forty-five days following the filing or commencement thereof, or any of the Lease Parties takes any action authorizing any such petition or proceeding; (f) any of the Lease Parties fails to pay when due any indebtedness for borrowed money or under conditional sales or installment sales contracts or similar agreements, leases or obligations evidenced by bonds, debentures, notes or other similar agreements or instruments to any creditor (including Lessor under any other agreement) after any and all applicable cure periods therefor shall have elapsed; (g) any judgment shall be rendered against any of the Lease Parties which shall remain unpaid or unstayed for a period of sixty days; (h) any of the Lease Parties shall dissolve, liquidate, wind up or cease its business, sell or otherwise dispose of all or substantially ail of its assets or make any material change in its lines of business; (i) any of the Lease Parties shall amend or modify its name, unless such Lease Party delivers to Lessor thirty days prior to any such proposed amendment or modification written notice of such amendment or modification and within ten days before such amendment or modification delivers executed financing statements (in form and substance satisfactory to the Lessor); 0) any of the Lease Parties shall merge or consolidate with any other entity or make any material change in its capital structure, in each case without Lessor's prior written consent, which shall not be unreasonably withheld; (k) any of the Lease Parties shall suffer any loss or suspension of any material license, permit or other right or asset necessary to the profitable conduct of its business, fail generally to pay its debts as they mature, or call a meeting for purposes of compromising its debts; (1) any of the Lease Parties shall deny or disaffirm its obligations hereunder or under any of the documents delivered in connection herewith; or (m) there is a change in more than 35% of the ownership of any equity interests of any of the Lease Parties on the date hereof or more than 35% of such interests become subject to any contractual, judicial or statutory lien, charge, security interest or encumbrance. 22. REMEDIES. Upon the occurrence and continuation of an Event of Default, Lessor shall have the right, in its sole discretion, to exercise any one or more of the following remedies: (a) terminate each Lease; (b) declare any and all Rent and other amounts then due and any and all Rent and other amounts to become due under each Lease (collectively, the "Lease Obligations") immediately due and payable; (c) take possession of any or all items of Equipment, wherever located, without demand, notice, court order or other process of law, and without liability for entry to Lessee's premises, for damage to Lessee's property or otherwise; (d) demand that Lessee immediately return any or all Equipment to Lessor in accordance with Paragraph 14 above, and, for each day that Lessee shall fail to return any item of Equipment, Lessor may demand an amount equal to the Rent payable for such Equipment in accordance with Paragraph 14 above; (e) lease, sell or otherwise dispose of the Equipment in a commercially reasonable manner, with or without notice and on public or private bid; (f) recover the following amounts from the Lessee (as damages, including reimbursement of costs and expenses, liquidated for all purposes and not as a penalty): (i) all costs and expenses of Lessor reimbursable to it hereunder,. including, without limitation, expenses of disposition of the Equipment, legal fees and all other amounts specified in Paragraph 23 below; (ii) an amount equal to the sum of (A) any accrued and unpaid Rent through the later of (1) the date of the applicable default or (2) the date that Lessor has obtained possession of the Equipment or such other date as Lessee has made an effective tender of possession of the Equipment to Lessor (the "Default Date") and (B) if Lessor resells or re-lets the Equipment, Rent at the periodic rate provided for in each Lease for the additional period that it takes Lessor to resell or re-let all of the Equipment; (iii) the present value of all future Rent reserved in the Leases and contracted to be paid over the unexpired Term of the Leases discounted at five percent simple interest per annum; (iv) the reversionary value of the Equipment as of the expiration of the Term of the applicable Lease as set forth on the applicable Schedule; and (v) any indebtedness for Lessee's indemnity under Paragraph 18 above, plus a late charge at the rate specified in Paragraph 3 above, less the amount received by Lessor, if any, upon sale or re-let of the Equipment; and (g) exercise any other right or remedy to recover damages or enforce the terms of the Leases. Upon the occurrence and continuance of an Event of Default or an event which with the giving of notice or the passage of time, or both, would result in an Event of Default, Lessor shall have the right, whether or not Lessor has made any demand or the obligations of Lessee hereunder have matured, to 6 appropriate and apply to the payment of the obligations of Lessee hereunder all security deposits and other deposits (general or special, time or demand, provisional or final) now or hereafter held by and other indebtedness or property now or hereafter owing by Lessor to Lessee. Lessor may pursue any other rights or remedies available at law or in equity, including, without limitation, rights or remedies seeking damages, specific performance and injunctive relief. Any failure of Lessor to require strict performance by Lessee, or any waiver by Lessor of any provision hereunder or under any Schedule, shall not be construed as a consent or waiver of any other breach of the same or of any other provision. Any amendment or waiver of any provision hereof or under any Schedule or consent to any departure by Lessee herefrom or therefrom shall be in writing and signed by Lessor. No right or remedy is exclusive of any other provided herein or permitted by law or equity. All such rights and remedies shall be cumulative and may be enforced concurrently or individually from time to time. 23. LESSOR'S EXPENSE. Lessee shall pay Lessor on demand all its reasonable expenses which shall not exceed $5,000 without the written consent of Lessee (including legal fees and expenses) incurred in connection with the preparation, execution and delivery of this Agreement and any other agreement and transaction contemplated hereby and all costs and expenses in protecting and enforcing Lessor's rights and interests in each Lease and the Equipment, including, without limitation, legal, collection and remarketing fees and expenses incurred by Lessor in enforcing the terms, conditions or provisions of each Lease or, upon the occurrence and continuation of an Event of Default. 24. LESSEE'S WAIVERS. To the extent permitted by applicable law, Lessee hereby waives any and all rights and remedies conferred upon a lessee by Sections 2A-508 through 2A-522 of the UCC. To the extent permitted by applicable law, Lessee also hereby waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use any Equipment in mitigation of Lessor's damages as set forth in Paragraph 22 above or which may otherwise limit or modify any of Lessor's rights or remedies under Paragraph 22. Any action by Lessee against Lessor for any default by Lessor under any Lease shall be commenced within one year after any such cause of action accrues. 25. NOTICES; ADMINISTRATION. Except as otherwise provided herein, all notices, approvals, consents, correspondence or other communications required or desired to be given hereunder shall be given in writing and shall be delivered by overnight courier, hand delivery or certified or registered mail, postage prepaid, if to Lessor, then to Technology Finance Division, 76 Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice President, Lease Administration, with a copy to Lessor at Riverway 11, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal Department, if to Lessee, then to Cubist Pharmaceuticals, Inc., 24 Emily Street, Cambridge, Massachusetts 02139, Attention: Director: Finance and Administration or such other address as shall be designated by Lessee or Lessor to the other party. All such notices and correspondence shall be effective when received. 26. REPRESENTATIONS. Lessee represents and warrants to Lessor that (a) Lessee is duly organized, validly existing and in good standing under the laws of the State of its incorporation; (b) the execution, delivery and performance by Lessee of this Agreement are within Lessee's powers, have been duly authorized by all necessary action, and do not contravene (i) Lessee's organizational documents or (ii) any law or contractual restriction binding on or affecting Lessee; (c) no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by Lessee of this Agreement; (d) each Lease constitutes the legal, valid and binding obligations of Lessee enforceable against Lessee in accordance with its terms; (e) the cost of each item of Equipment does not exceed the fair and usual price for such type of equipment purchased in like quantity and reflects all discounts, rebates, and allowances for the Equipment (including, without limitation, discounts for advertising, prompt payment, testing or other services) given to the Lessee by the manufacturer, supplier or any other person; and (f) all information supplied by Lessee to Lessor in connection herewith is correct and does not omit any material statement necessary to insure that the information supplied is not misleading. 7 27. FURTHER ASSURANCES. Lessee, upon the request of Lessor, will execute, acknowledge, record or file, as the case may be, such further documents and do such further acts as may be reasonably necessary, desirable or proper to carry out more effectively the purposes of this Agreement. Lessee hereby appoints Lessor as its attorney-in-fact to execute on behalf of Lessee and authorizes Lessor to file without Lessee's signature any UCC financing statements and amendments Lessor deems advisable. 28. FINANCIAL STATEMENTS. Lessee shall deliver to Lessor: (a) as soon as available, but not later than 120 days after the end of each fiscal year of Lessee and its consolidated subsidiaries, the consolidated balance sheet, income statement and statements of cash flows and shareholders equity for Lessee and its consolidated subsidiaries (the "Financial Statements") for such year, reported on by independent certified public accountants without an adverse qualification; and (b) as soon as available, but not later than 60 days after the end of each of the first three fiscal quarters in any fiscal year of Lessee and its consolidated subsidiaries, the Financial Statements for such fiscal quarter, together with a certification duly executed by a responsible officer of Lessee that such Financial Statements have been prepared in accordance with generally accepted accounting principles and are fairly stated in all material respects (subject to normal year-end audit adjustments). Lessee shall also deliver to Lessor as soon as available copies of all press releases and other similar communications made by Lessee. 29. CONSENT TO JURISDICTION. Lessee irrevocably submits to the jurisdiction of any Illinois state or federal court sitting in Illinois for any action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby, and Lessee irrevocably agrees that all claims in respect of any such action or proceeding may be heard and determined in such Illinois state or federal court. 30. WAIVER OF JURY TRIAL. LESSEE AND LESSOR IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 31. FINANCE LEASE. Lessee and Lessor agree that each Lease is a "Finance Lease" as defined by Section 2A-103(g) of the UCC. Lessee acknowledges that Lessee has reviewed and approved each written Supply Contract (as defined by UCC 2A-103(y)) covering Equipment purchased from each "Supplier" (as defined by UCC 2A- 103 (x)) thereof 32. NO AGENCY. Lessee acknowledges and agrees that neither the manufacturer or supplier, nor any salesman, representative or other agent of the manufacturer or supplier, is an agent of Lessor. No salesman, representative or agent of the manufacturer or supplier is authorized to waive or alter any term or condition of this Agreement or any Schedule and no representation as to the Equipment or any other matter by the manufacturer or supplier shall in any way affect Lessee's duty to pay Rent and perform its other obligations as set forth in this Agreement or any Schedule. 33. SPECIAL TAX INDEMNIFICATION. Lessee acknowledges that Lessor, in determining the Rent due hereunder, has assumed that certain tax benefits as are provided to an owner of property under the Internal Revenue Code of 1986, as amended (the "Code"), and under applicable state tax law, including, without limitation, depreciation deductions under Section 168(b) of the Code, and deductions under Section 1631 of the Code in an amount at least equal to the amount of interest paid or accrued by Lessor with respect to any indebtedness incurred by Lessor in financing its purchase of the Equipment, are available to Lessor as a result of the lease of the Equipment. In the event Lessor is unable to obtain such tax benefits as a result of an act or omission of Lessee, is required to include in income any amount other than the Rent or is required to recognize income in respect of the Rent earlier than anticipated pursuant to this Agreement, Lessee shall pay Lessor additional rent ("Additional Rent") in a lump sum in an amount needed to provide Lessor with the same after-tax yield and after-tax cash flow as would have been realized by Lessor had Lessor (i) been able to obtain such tax benefits, (ii) not been required to include any amount in income other than the Rent and (iii) not been required to recognize income in respect of the Rent earlier than anticipated pursuant to this Agreement. The Additional Rent shall be computed by Lessor, which computation shall be binding on Lessee. The Additional Rent shall be due immediately upon written notice by Lessor to Lessee of Lessor's inability to obtain tax benefits, the inclusion of any amount in income other than the Rent or the recognition of income in respect of 8 the Rent earlier than anticipated pursuant to this Agreement. The provisions of this Paragraph 33 shall survive the termination of this Agreement. 34. GOVERNING LAW; SEVERABILITY. EACH LEASE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO ITS CONFLICT OF LAW PROVISIONS. IF ANY PROVISION SHALL BE HELD TO BE INVALID OR UNENFORCEABLE, THE VALIDITY AND ENFORCEABILITY OF THE REMAINING PROVISIONS SHALL NOT IN ANY WAY BE AFFECTED OR IMPAIRED. LESSEE ACKNOWLEDGES THAT LESSEE HAS READ THIS AGREEMENT AND THE SCHEDULE HERETO, UNDERSTANDS THEM, AND AGREES TO BE BOUND BY THEIR TERMS AND CONDITIONS. FURTHER, LESSEE AND LESSOR AGREE THAT THIS AGREEMENT AND THE SCHEDULES DELIVERED IN CONNECTION HEREWITH FROM TIME TO TIME ARE THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, SUPERSEDING ALL PROPOSALS OR PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF. IN WITNESS WHEREOF, the parties hereto have executed or caused this Master Lease Agreement to be duly executed by their duly authorized officers as of this 14th day of February, 1997. CUBIST PHARMACEUTICALS, INC. By: /s/ Thomas A. Shea ------------------------------- Name: Thomas A. Shea Title: Director of Finance & Administration Federal Identification Number ###-##-#### TRANSAMERICA BUSINESS CREDIT CORPORATION By: /s/ Gary P. Moro ------------------------------- Name: Gary P. Moro Title: Vice President EX-23.2 6 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Cubist Pharmaceuticals, Inc., on Form S-3 (File no. 333-33883) and Form S-8 (File no. 333-25707) of our report dated January 19, 1998, on our audits of the financial statements of Cubist Pharmaceuticals, Inc., as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 18, 1998 EX-27 7 EXHIBIT 27
5 0000912183 CUBIST PHARMACEUTICALS, INC. YEAR YEAR DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 2,837,600 19,329,353 6,709,623 0 0 0 0 0 0 0 9,743,191 20,121,262 5,893,101 4,898,538 (2,712,341) (1,741,152) 21,673,352 23,452,447 1,505,645 2,100,870 0 0 0 0 0 0 10,581 9,544 19,052,085 20,289,066 21,673,352 23,452,447 0 0 2,733,083 4,985,052 0 0 12,633,169 8,860,433 0 0 0 0 237,119 229,305 (7,265,339) (3,798,669) 0 0 (7,265,339) (3,798,669) 0 0 0 0 0 0 (7,265,339) (3,798,669) (.73) (1.49) (.73) (1.49)
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