CUBIST PHARMACEUTICALS, INC.
65 Hayden Avenue
Lexington, MA 02421

NOTICE OF 2009 ANNUAL MEETING OF STOCKHOLDERS

TO THE STOCKHOLDERS OF CUBIST PHARMACEUTICALS, INC.:

        NOTICE IS HEREBY GIVEN that the 2009 Annual Meeting of Stockholders of Cubist Pharmaceuticals, Inc., or the 2009 Annual Meeting, will be held at our offices at 55 Hayden Avenue, Lexington, MA 02421, on Thursday, June 4, 2009 at 8:30 A.M. local time, for the following purposes:

1.

To elect three (3) Class I directors to our Board of Directors, each to hold office for a three-year term and until his or her successor has been duly elected and qualified.



2.

To consider and vote upon a proposal to amend our Amended and Restated 1997 Employee Stock Purchase Plan, or ESPP, to increase the number of shares issuable under the ESPP by 500,000.



3.

To consider and vote upon a proposal to amend our Amended and Restated 2002 Directors' Equity Incentive Plan, or Directors' Plan, to extend the term of the Directors' Plan by three years and to increase the number of shares issuable under the Directors' Plan by 400,000.



4.

To ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009.



5.

To transact such other business as may properly come before the 2009 Annual Meeting or any adjournments or postponements thereof.

        The Board of Directors has fixed April 9, 2009 as the record date for the determination of stockholders entitled to notice of, and to vote at, the 2009 Annual Meeting. Accordingly, only stockholders of record at the close of business on the record date will be entitled to notice of, and to vote at, the meeting or any adjournments thereof.

        We are pleased to take advantage of Securities and Exchange Commission rules that allow us to furnish proxy materials, including this Notice, the Proxy Statement, our 2008 Annual Report and the proxy card for the 2009 Annual Meeting, to our stockholders via the Internet. Taking advantage of these rules allows us to lower the cost of delivering annual meeting materials to our stockholders and reduce the environmental impact of printing and mailing these materials.

        To ensure your representation at the 2009 Annual Meeting, you are urged to vote by proxy by one of the following steps as promptly as possible:

(a)

Vote via the Internet pursuant to the instructions provided in the Notice of Internet Availability of Proxy Materials, or Notice of Internet Availability, that we will mail no later than April 25, 2009 to all stockholders of record and beneficial owners as of the record date; or

(b)

Request printed copies of the proxy materials by mail pursuant to the instructions provided in the Notice of Internet Availability and either:



(i)

complete, date, sign and return the proxy card that you will receive in response to your request; or



(ii)

vote via telephone (toll-free) in the United States or Canada in accordance with the instructions on the proxy card.

        The Internet and telephone voting procedures are designed to authenticate stockholders' identities, to allow stockholders to vote their shares, and to confirm that stockholders' instructions have been properly recorded. Voting via the Internet or telephone must be completed by 2:00 a.m. Eastern Time on June 4, 2009. Your shares cannot be voted unless you vote by one of the methods described above or attend the 2009 Annual Meeting in person. Regardless of the number of shares you own, your careful consideration of, and vote on, the matters before the stockholders is important.

		By Order of the Board of Directors,
		TAMARA L. JOSEPH Secretary

April 24, 2009

CUBIST PHARMACEUTICALS, INC.
65 Hayden Avenue
Lexington, MA 02421

PROXY STATEMENT

GENERAL INFORMATION

Proxy Solicitation

        This Proxy Statement is furnished to the holders of our common stock, $.001 par value per share, in connection with the solicitation of proxies on behalf of our Board of Directors, or Board, for use at the 2009 Annual Meeting of Stockholders, or the 2009 Annual Meeting, to be held at our offices at 55 Hayden Avenue, Lexington, Massachusetts on Thursday, June 4, 2009 at 8:30 A.M. local time or at any future date and time following an adjournment or postponement of the meeting. The purposes of the 2009 Annual Meeting and the matters to be acted upon are set forth in the accompanying Notice of 2009 Annual Meeting of Stockholders, or the Notice. The Board knows of no other business that will come before the 2009 Annual Meeting.

        In accordance with applicable Securities and Exchange Commission, or SEC, rules and regulations, instead of mailing a printed copy of our proxy materials to each stockholder of record, we are furnishing our proxy materials, including the Notice, this Proxy Statement, our 2008 Annual Report to Stockholders and the proxy card for the 2009 Annual Meeting, by providing access to such documents on the Internet. We will send a Notice of Internet Availability of Proxy Materials, or the Notice of Internet Availability, no later than April 25, 2009 to our stockholders of record and beneficial owners as of April 9, 2009, the record date for the 2009 Annual Meeting. The Notice of Internet Availability contains instructions for accessing and reviewing our proxy materials on the Internet and voting by proxy over the Internet. If you prefer to receive printed copies of our proxy materials, the Notice of Internet Availability contains instructions on how to request such materials by mail. You will not receive printed copies of the proxy materials unless you request them this year or have requested them in response to a Notice of Internet Availability in the past. If you elect to receive the materials by mail, you may also vote by proxy on a proxy card or via telephone. Viewing our proxy materials and voting by proxy electronically will save us the cost of printing and mailing documents to you and will reduce the impact on the environment.

        If you are a stockholder of record, you may vote in person at the 2009 Annual Meeting even if you have voted previously by proxy. We will give you a ballot when you arrive.

        We will pay the costs of soliciting proxies. The members of the Board, which we refer to as our directors, as well as our officers and employees may solicit proxies on our behalf, without additional compensation, personally or by telephone. We will also solicit proxies by email from stockholders who are our employees or who previously requested to receive proxy materials electronically, and may utilize the assistance of third parties in connection with our proxy solicitation efforts.

Voting and Revocability of Proxy

        Stockholders of record can vote their shares (1) via the Internet, (2) via a toll-free telephone call from the U.S. or Canada, (3) by mailing a signed proxy card, or (4) in person at the 2009 Annual Meeting. The Internet and telephone voting procedures are designed to authenticate stockholders' identities, to allow stockholders to vote their shares, and to confirm that their instructions have been properly recorded.

        Stockholders may revoke the authority granted by their execution of proxies at any time before the effective exercise of such authority by filing with our Secretary a written revocation or a duly executed proxy bearing a later date or by voting in person at the 2009 Annual Meeting. Shares represented by executed and unrevoked proxies will be voted in accordance with the choice or instructions specified thereon. If no specifications are given, the proxies intend to vote the shares represented thereby to (i) approve Proposal No. 1 to elect the Class I nominees to the Board, (ii) approve Proposal No. 2 to amend our Amended and Restated Employee Stock Purchase Plan, or ESPP, to increase the number of shares issuable under the ESPP by 500,000, (iii) approve Proposal No. 3 to amend our Amended and Restated 2002 Directors' Equity Incentive Plan, or the Directors' Plan, to extend the term of the plan by three years and to increase the number of shares issuable under the Directors' Plan by 400,000, and (iv) approve Proposal No. 4 to ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009, each as set forth in the accompanying Notice and in accordance with the proxies' best judgment on any other matters that may properly come before the 2009 Annual Meeting.

Record Date, Voting Rights and Vote Required

        Only stockholders of record at the close of business on April 9, 2009, the record date, are entitled to notice of, and to vote at, the 2009 Annual Meeting or any adjournment or postponement of the meeting. On the record date, we had outstanding 57,629,157 shares of common stock, each of which is entitled to one vote upon each of the matters to be presented at the 2009 Annual Meeting. The presence, in person or by proxy, of a majority of the issued and outstanding shares of common stock on the record date, will constitute a quorum for the transaction of business at the 2009 Annual Meeting. Votes withheld from any nominee, abstentions, and broker "non-votes" are counted as present or represented for purposes of determining the presence or absence of a quorum for the 2009 Annual Meeting. A broker "non-vote" occurs when a nominee holding shares for a beneficial owner does not vote on one or more proposals because the nominee does not have discretionary voting power and has not received instructions from the beneficial owner.

        In the election of directors, the affirmative vote of a plurality of the shares of common stock present or represented and entitled to vote at the 2009 Annual Meeting, in person or by proxy, is required for the election of each of the nominees. Abstentions and broker "non-votes" will have no effect on the voting outcome with respect to the election of directors. For the proposals to increase the number of shares issuable under the ESPP, to extend the term and to increase the number of shares issuable under the Directors' Plan, and to ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009, the affirmative vote of the holders of a majority of shares present in person or represented by proxy at the 2009 Annual Meeting and entitled to vote on such proposals, is required. Abstentions have the practical effect of a vote against these proposals. Broker "non-votes" will have no effect on the voting outcome of these proposals.

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PRINCIPAL STOCKHOLDERS

        The following table sets forth certain information with respect to each person known to us to be the beneficial owner of more than 5% of our issued and outstanding common stock as of April 9, 2009. On April 9, 2009, we had outstanding 57,629,157 shares of common stock.

(1)

We calculated the percentage of class based on the number of shares reported as beneficially owned in the SEC filings of the beneficial owners divided by the actual number of shares outstanding as of April 9, 2009. The percentages in the table may differ from the percentages reported in the beneficial owners' filings with the SEC because the beneficial owners may have used different denominators than the actual number of shares outstanding as of April 9, 2009.

(2)

The information reported is based on a Schedule 13G/A filed with the SEC on March 10, 2009 jointly by Federated Investors, Inc., or Federated, Voting Shares Irrevocable Trust, or the Trust, and John F. Donahue, Rhodora J. Donahue and J. Christopher Donahue, each individually and as a trustee of the Trust. Federated reported that it had sole voting and dispositive power with respect to 7,044,963 shares as of February 28, 2009. Federated reported that it is the parent holding company of Federated Equity Management Company of Pennsylvania and Federated Global Investment Management Corp., which act as investment advisers to registered investment companies and separate accounts that own such shares.

(3)

The information reported is based on a Schedule 13G/A filed with the SEC on April 9, 2009 by Wellington Management Company, LLP, or Wellington. Wellington, an investment adviser, reported that it beneficially owned 6,012,774 shares and that it had shared voting power with respect to 5,253,301 shares and shared dispositive power with respect to 6,001,374 shares as of March 31, 2009. Various clients of Wellington have the right or the power to direct the receipt of dividends from, or the proceeds from the sale of, such shares.

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(4)

The information reported is based on a Schedule 13G/A filed with the SEC on February 17, 2009 by FMR LLC. Various persons, including FMR LLC, have the right or the power to direct the receipt of dividends from, or the proceeds from, the sale of such shares.

(5)

The information reported is based on a Schedule 13G filed with the SEC on February 5, 2009 by Barclays Global Investors, N.A., or Barclays, and certain affiliated entities. Barclays reported that it holds the shares in trust accounts for the economic benefit of the beneficiaries of those accounts and that it had sole voting power with respect to 3,645,787 shares and sole dispositive power with respect to 4,512,711 shares as of December 31, 2008.

4

MANAGEMENT STOCKHOLDERS

        The following table sets forth information as of April 9, 2009, as reported to us, with respect to the beneficial ownership of common stock by each member of our Board, who we refer to as our directors, and each Named Executive Officer (as that term is defined in the Compensation Discussion and Analysis section of this Proxy Statement), and by all of our current directors and Executive Officers as a group. Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to stock options held by that person that are currently exercisable or exercisable within 60 days of April 9, 2009 are deemed outstanding. These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated below and pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder's name. Shares included below in the column entitled "Right to Acquire" represent shares subject to outstanding stock options currently exercisable or exercisable within 60 days of April 9, 2009. On April 9, 2009, we had outstanding 57,629,157 shares of common stock.

*

Less than 1% of the issued and outstanding shares of common stock.

(1)

Dr. Martin holds his shares and stock options through a trust, the trustees of which are Dr. Martin and his wife.

(2)

Mr. Maupay holds a portion of his shares with joint voting and investment power with his wife.

5

INFORMATION AS TO DIRECTORS AND NOMINEES FOR DIRECTOR

        The names of our directors (including the nominees for re-election as Class I Directors at the 2009 Annual Meeting) and certain information regarding each director are listed below.

(1)

Member of Audit Committee

(2)

Member of Corporate Governance and Nominating Committee

(3)

Member of Scientific Affairs Committee

(4)

Member of Compensation Committee

*

Dr. Martin will retire from the Board as of the 2009 Annual Meeting. As of the 2009 Annual Meeting, the Class I Directors will be reduced to three.

**

Committee Chair

        Mr. Bate has served as one of our directors since June 2003 and became our Lead Director in June 2006. Since January 2007, Mr. Bate has been President and Chief Executive Officer and a director of Nitromed, Inc., a pharmaceutical company. From March 2006 until January 2007, Mr. Bate was Chief Operating Officer and Chief Financial Officer of Nitromed. From January 2005 to March 2006, he was employed at JSB Partners, a firm which Mr. Bate co-founded that provides banking and advisory services to biopharmaceutical companies. From 2002 to January 2005, Mr. Bate was head of commercial operations and Chief Financial Officer at Millennium Pharmaceuticals, Inc. In 1999, Mr. Bate co-founded JSB Partners, an investment banking and transaction advisory firm serving the biopharmaceutical industry. He was a partner at JSB Partners through 2002. From 1997 to 1999, Mr. Bate served as Senior Managing Director and Chief Executive Officer of MPM Capital, LP, a venture capital company. He was also an advisor to BB Bioventures, a venture capital fund. Mr. Bate's life sciences industry experience also includes six years at Biogen, Inc.; from 1993 to 1996 as the company's Vice President of sales and marketing, and as Chief Financial Officer from 1990 to 1993. Mr. Bate is a director of AVEO Pharmaceuticals, Inc., a biopharmaceutical company. Mr. Bate received his B.A. degree in Chemistry from Williams College, and an MBA from The Wharton School of the University of Pennsylvania.

        Mr. Bonney has served as our President and Chief Executive Officer and as a member of the Board of Directors since June 2003. From January 2002 to June 2003, he served as our President and Chief

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Operating Officer. From 1995 to 2001, he held various positions of increasing responsibility at Biogen, Inc., a biopharmaceutical company, including Vice President, Sales and Marketing from 1999 to 2001. While at Biogen, Mr. Bonney built the commercial infrastructure for the launch of Avonex. Prior to that, Mr. Bonney held various positions of increasing responsibility in sales, marketing and strategic planning at Zeneca Pharmaceuticals, ending his eleven-year career there serving as National Business Director. Mr. Bonney received a B.A. in Economics from Bates College. Mr. Bonney is a director of NPS Pharmaceuticals, Inc., a biopharmaceutical company, and serves on the Boards of Trustees of the Beth Israel Deaconess Medical Center and Bates College. Mr. Bonney is also a member of the Biotechnology Industry Organization, or BIO, Health Section Governing Body.

        Dr. Corrigan has served as one of our directors since June 2008. Dr. Corrigan is Executive Vice President, Research and development at Sepracor, Inc. and has served in this position since he joined Sepracor in April 2003. Prior to joining Sepracor, Dr. Corrigan was Group Vice President of Global Clinical Research and Experimental Medicine at Pharmacia Corp., a pharmaceutical company, from 1998 to 2003, with responsibility for clinical research, biostatistical/data management and global procurement for compounds in Phases I-IIIB. Prior to joining the pharmaceutical industry with the Upjohn Company (which became Pharmacia) in 1993, Dr. Corrigan spent five years in academic research at the University of North Carolina Medical School, focusing in psychoneuroendocrinology. During his tenure, he was a principal investigator for several novel antipsychotics and continues to maintain an appointment as Adjunct Clinical Professor of Psychiatry. Dr. Corrigan also serves on the board of NeuroMed Technologies, Inc. He has more than 20 years of experience in treating psychiatric and central nervous system disorders and is board certified in psychiatry and neurology. He earned his undergraduate and medical degrees from the University of Virginia and subsequently received specialty training in psychiatry at Cornell and Maine Medical Center. Dr. Corrigan is a Distinguished Fellow of the American Psychiatric Association (APA).

        Dr. Grégoire has served as one of our directors since June 2006. Since 2007, Dr. Grégoire has served as President, Human Genetic Therapies division of Shire Pharmaceuticals Group plc, a pharmaceuticals company. From August 2005 to June 2008, she served as a director of IDM-Pharma, a biopharmaceuticals company, including serving as Executive Chairwoman from August 2006 to October 2007. From 2004 to 2005, Dr. Grégoire served as President and Chief Executive Officer of GlycoFi, Inc., a biotherapeutics company. From 2003 to 2004, Dr. Grégoire was a consultant to the biopharmaceuticals industry. From 2001 through 2003, Dr. Grégoire served as Executive Vice President, Technical Operations, of Biogen, Inc. and its successor Biogen Idec Inc., and from 1995 to 2001, she held various roles of increasing responsibility with Biogen. Prior to Biogen, Dr. Grégoire held clinical research and regulatory roles with Merck & Co., a pharmaceuticals company. She received her Pharm.D. degree from the State University of New York at Buffalo and her pharmacy graduate degree (Bachalaureat en Pharmacie) from the Université Laval, Quebec City.

        Dr. Hutson has served as one of our directors since June 2008. She retired from Pfizer, Inc. in 2006 after spending 25 years in various research and leadership positions, most recently serving as Senior Vice President, Pfizer Global Research and Development and Director of Pfizer's pharmaceutical R&D site, known as Groton/New London Laboratories. Dr. Hutson's career at Pfizer was marked by progressively demanding jobs, first in the research laboratories, then in strategic staff roles and as global leader of Exploratory Development, she led the Groton/New London Laboratory, which was the largest R&D site of any pharmaceutical company. She led 4,500 colleagues (primarily scientists) and managed a budget in excess of $1 billion. While at Pfizer, Dr. Hutson was an active member of numerous committees, serving as Chair of the Groton New London Laboratories Leadership Team and

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the Exploratory Development Strategy Team, and as a member of the Worldwide Development Operations Group, Senior Leadership Team and the Pharmaceuticals Steering Committee, among others. She was also a sponsor of the Network of Executive Women where she served as a mentor for senior women at Pfizer Global Research and Development. Dr. Hutson has authored or co-authored more than 45 academic research papers and abstracts. Dr. Hutson is also a director of Endo Pharmaceuticals and Inspire Pharmaceuticals, Inc. She received her B.A. in General Biology from Illinois Wesleyan University and her Ph.D. in Physiology and Biochemistry from Vanderbilt University. She completed a post-doctoral fellowship at the Diabetes and Endocrinology Center at Vanderbilt and a post-doctoral fellowship in the Department of Clinical Biochemistry at the University of Oxford.

        Dr. Martin has served as one of our directors since October 1997 and served as our Lead Director from October 2004 until June 2006. Since 2004, he has been the Founder, Chairman, and Chief Executive Officer of AvidBiotics Corporation, a biotechnology company. In 2003, he was Chairman and Chief Executive Officer of GangaGen, Inc., a biotechnology company. From July 1997 until April 2003, Dr. Martin served as President, Chief Executive Officer and a founder of Eos Biotechnology, Inc., a biotechnology company. From 1995 to 1996, Dr. Martin was President and Chief Executive Officer of Lynx Therapeutics, Inc., a biotechnology company. During 1994 and through May 1995, Dr. Martin served as Senior Vice President of Chiron Corporation, a biopharmaceutical company. From 1991 to 1994, Dr. Martin served as Executive Vice President of DuPont Merck Pharmaceutical Company. From 1983 to 1990, Dr. Martin was Vice President and then Senior Vice President of Research and Development at Genentech, Inc., a biopharmaceutical company. Prior to 1983, Dr. Martin was a Professor of Medicine, Professor of Biochemistry and an Investigator of the Howard Hughes Medical Institute at the University of California, San Francisco. Dr. Martin is also Lead Director of Varian Medical Systems, Inc., a medical equipment and software supplier. Dr. Martin attended M.I.T. and received an M.D. from Duke University.

        Mr. Maupay has served as one of our directors since June 1999. Since June 1995, when he retired from Calgon Vestal Laboratories, a division of Bristol-Myers Squibb Corporation, Mr. Maupay has served as a director at a number of public and private companies. Mr. Maupay is currently a director of SyntheMed, Inc., a biomaterials company, and is director and non-executive chair of Kensey Nash Corporation, a medical device company. From January 1995 to June 1995, Mr. Maupay served as Group Executive of Calgon Vestal Laboratories. From 1988 to 1995, Mr. Maupay served as President of Calgon Vestal Laboratories, at that time, a subsidiary of Merck and Company. From 1984 to 1988, Mr. Maupay served as Vice President, Healthcare at Calgon Vestal Laboratories. Mr. Maupay received his B.S. in Pharmacy from Temple University and an MBA from Lehigh University.

        Dr. Rosenberg has served as one of our directors since March 2005. Since 2003, Dr. Rosenberg has been the Chief Scientific Officer of Promega Corporation, a biotechnology company. From 2001 to 2003, Dr. Rosenberg served as Vice President, Research and Development of Promega Corporation. From 2000 until 2001, Dr. Rosenberg was Senior Vice President, Anti-Infectives, Drug Discovery at GlaxoSmithKline, a pharmaceutical company. From 1996 until 2000, Dr. Rosenberg was Senior Vice President, Anti-Infectives at SmithKline Beecham Corporation, a predecessor company to GlaxoSmithKline. Prior to 2000, Dr. Rosenberg held a variety of roles of increasing responsibility with SmithKline Beecham Corporation. Before joining SmithKline Beecham, Dr. Rosenberg spent 10 years at the National Institutes of Health and was a Section Chief at the National Cancer Institute. Dr. Rosenberg is a director of Promega Corporation, the Medical College of Wisconsin Research Foundation, and Scarab Genomics, a biotechnology company. He also serves as a member of the Advisory Council for the National Institutes of Allergy & Infectious Diseases at the National Institute

8

of Health. He participates on a variety of academic and industry Scientific Advisory Boards and holds an adjunct Professorship at the University of Wisconsin, Department of Bacteriology, Madison, WI. Dr. Rosenberg is an Editor of Microbial Biotechnology, a Senior Editor of the Journal of Bacteriology and a member of several other journal Editorial Boards. Dr. Rosenberg received a B.A. degree from the University of Rochester and a Ph.D. from Purdue University.

        Mr. Singleton has served as one of our directors since June 2003. From 2000 to the present, he has served as Executive Vice President and Chief Financial Officer of CitationShares, LLC, a majority-owned subsidiary of Cessna Aircraft Company and Textron Inc. From 1994 to 1997, Mr. Singleton served as a Managing Director, Executive Vice President and Chief Administrative Officer of CIBC World Markets, an investment banking firm. Previous to that, he served in a variety of roles from 1974 until 1994 at Arthur Andersen & Co., a public accounting firm, ending his tenure there as Partner-In-Charge of the Metro New York Audit and Business Advisory Practice. During 1980 and 1981, he served as a Practice Fellow at the Financial Accounting Standards Board. Mr. Singleton served as a director of Salomon Asset Reinvestment Company from 1998 to 2006. He received an A.B. in Economics from Princeton University and an M.B.A. from New York University. Mr. Singleton is a Certified Public Accountant.

        Mr. Soeters has served as one of our directors since September 2006. Since 2008, Mr. Soeters has served as President of Novo Nordisk Europe A/S, a healthcare company located in Europe, and since 2007, as Senior Vice President of Novo Nordisk Europe A/S. Novo Nordisk A/S is a healthcare company with headquarters in Copenhagen, Denmark. From 2000 to 2007, Mr. Soeters served as President and Senior Vice President of Novo Nordisk, Inc. in Princeton, NJ. From 1998 to 2000, he served as Senior Vice President International Marketing at Novo Nordisk Denmark, and from 1994 to 1998, he served as Managing Director of Novo Nordisk France. From 1992 to 1995, Mr. Soeters was Managing Director at Novo Nordisk Belgium, and in 1991, he was International Marketing Director at Novo Nordisk Denmark. Prior to that time, he held various sales and marketing positions at Novo Nordisk in the Netherlands between 1980 and 1991. During 2007 and 2008, Mr. Soeters was a director of Pharmacopeia, Inc., a biopharmaceutical company. He is also a member of the Board of Overseers of the Joslin Diabetes Center. He was a Trustee of the HealthCare Institute of New Jersey, and from 2005 to 2007, a member of the Biotechnology Industry Organization Board of Directors. From 2004 to 2006, he served on the Board of Directors of the Pharmaceutical Research and Manufacturers of America (PhRMA) in Washington, D.C. Mr. Soeters studied meteorology, as well as sales, product and marketing management in the Netherlands, and he also attended the Stanford Executive Program.

        Dr. Wood has served as one of our directors since March 2005. Dr. Wood is currently an Orthopedic Surgeon and retired President-emeritus of the Mayo Foundation and Professor of Orthopedic Surgery, Mayo Clinic School of Medicine. He was previously Chief Executive Officer of the Mayo Foundation from 1999 until 2003. Prior to 1999, Dr. Wood held a variety of roles within the Mayo Clinic. Dr. Wood is a director of Steris Corporation, a medical sterilization company, and Assistive Technology Group, Inc., a rehabilitation and durable medical equipment company. Dr. Wood is also a director of SingHealth, an integrated health system in Singapore. Dr. Wood received a B.A. degree from Franklin and Marshall College, an M.D., C.M. degree from McGill University and an M.S. degree from the University of Minnesota.

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COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

        We rely on certain core principles to guide our approach to our customers, employees and stockholders. Many of these core principles also apply to how we approach executive compensation. With respect to executive compensation, we believe in results-oriented pay as evidenced by our pay programs that award substantial pay for concrete results. The Compensation Committee and our Chief Executive Officer and President, Michael Bonney, believe in taking a leadership position in results-oriented pay for Executive Officers (as defined below) and have consistently demonstrated that leadership over the years by providing Mr. Bonney and our other Executive Officers with moderate guaranteed pay (base salary) and making a substantial portion of their pay dependent upon the achievement of aggressive corporate goals (through annual cash performance awards) and long-term stock performance (through stock options).

        Our non-employee directors, based on recommendations from the Compensation Committee, make all of the compensation determinations with respect to Mr. Bonney. The Compensation Committee, based, in part, on recommendations from Mr. Bonney, makes all of the compensation determinations with respect to our other Executive Officers.

        To assist it with carrying out its duties and responsibilities, the Compensation Committee has engaged Pearl Meyer & Partners, or PM&P, a nationally recognized executive compensation consulting firm, as its compensation consultant. PM&P serves as an independent advisor to the Compensation Committee on topics primarily related to Board and executive compensation. PM&P reports to the Compensation Committee Chair, takes direction from the Compensation Committee, and does not provide us with any services other than the services provided at the request of the Compensation Committee.

        Our key executive compensation objectives are as follows:

•

To provide competitive compensation that differentiates and rewards Executive Officers for their overall contribution to the company.



•

To further our short- and long-term strategic goals by aligning Executive Officer compensation with the achievement of individual and corporate objectives designed to promote the creation and protection of value for stockholders.



•

To design short- and long-term incentive compensation programs that attract and retain high-quality executive officers and motivate high performance at the individual and corporate levels.



•

To emphasize the alignment of Executive Officer pay with our financial and stock performance.

        In 2008 and in prior years, the primary elements of our executive compensation consisted of base salary, annual cash performance awards and long-term incentives (stock options). As detailed below, each of these compensation elements have different objectives that collectively enable us to achieve our overall compensation objectives. We allocate our compensation between short- and long-term compensation with significant emphasis on long-term incentives due to our stage of growth and desire to focus on long-term results. For example, in 2007 and 2008, the compensation paid to Mr. Bonney

10

and our other Named Executive Officers (as defined below), as a group, was allocated between short-and long-term compensation as follows:

(1)

All of these long-term incentives were in the form of stock options (based on the value ascribed to such awards in the Summary Compensation Table of this Proxy Statement).

        As detailed below, the Board determined that our level of achievement against our 2008 corporate goals was 136% as compared to 96% in 2007 and 85% in 2006. Our strong 2008 performance was driven, in part, by the individual performance of Mr. Bonney and our Executive Officers. As a result, in 2008, Mr. Bonney and our Executive Officers received higher annual cash performance awards than in prior years and a higher allocation of annual cash performance awards as compared to other elements of compensation than in prior years.

        As detailed in the Summary Compensation Table and other compensation tables in this Proxy Statement (and qualified in their entirety by reference to the disclosure in such tables and the footnotes thereto), in 2008, Mr. Bonney and our other Named Executive Officers, earned base salary, annual cash performance awards (paid in February 2009) and long-term incentives as follows:

(1)

Except for Dr. Gilman, all of these stock options were granted in February 2008 as part of our year-end performance and compensation reviews. Dr. Gilman's grant was made in March 2008 and represented his initial/new hire grant.

(2)

Dr. Gilman joined the company in February 2008; his annual base salary was $360,000, the amount in the table reflects the amount of salary that Dr. Gilman was actually paid in 2008.

        As detailed below and elsewhere in this Proxy Statement, we provide our Executive Officers with retention letters that provide for severance payments and other benefits in certain termination

11

scenarios. We believe that the benefits of these retention letters outweigh the potential costs in that they, among other things:

•

Assist us in attracting and retaining top executive talent by providing our executives with competitive severance arrangements.



•

Encourage frank discourse by our executives with Mr. Bonney and the Board, and between Mr. Bonney and the Board, without fear of adverse consequences.



•

Balance the need for an Executive Officer to act in the best interest of our stockholders in a situation involving a potential change of control with the need for personal financial security.

        We will use the term "Executive Officers" when referring to all of our executive officers who are subject to the reporting requirements under Section 16 of the Securities and Exchange Act of 1934, or the Securities Exchange Act, and we will use the term "Named Executive Officers" when referring to the five individuals named in the Summary Compensation Table in this Proxy Statement. When discussing compensation matters generally, we will provide such information with reference to all of our Executive Officers as a group. When we discuss specific matters with respect to the 2008 compensation figures and percentages described in the compensation tables contained in this Proxy Statement, we will provide such information for our Named Executive Officers only.

Data Used to Make Compensation Determinations

Compensation Benchmarking and Survey Data

        As part of establishing the total compensation packages for our Executive Officers, the Compensation Committee reviewed compensation packages for comparable positions, based on similarity of job content, at comparable companies. PM&P recommended a list of comparable companies for compensation comparisons primarily based on industry, revenues and market capitalization. The list of peer group companies was approved by the Compensation Committee. For 2008, our peer group consisted of the following companies:

        The comparable companies are reviewed each year and may change from year-to-year depending on changes in the marketplace, acquisitions, divestitures and business focus of us and/or our comparable companies. In 2008, five new companies—Alkermes, Inc., Millenium Pharmaceuticals, Inc., Nektar Therapeutics, Inc., Salix Pharmaceuticals, Ltd. and The Medicines Company—were added to our peer group, and five companies—Isis Pharmaceuticals, Inc., Ligand Pharmaceuticals, Inc., Myriad Genetics, Inc., Neurocrine Biosciences, Inc. and Tanox, Inc., were removed from our peer group. These changes were made in order to maintain closer similarity between us and our peer group companies based upon the comparable company criteria described above and acquisitions of certain companies in our 2007 peer group.

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        The Compensation Committee utilizes the peer group to inform its compensation decision making. The compensation paid by peer group companies to their respective executive officers does not factor into the Compensation Committee's determination of the peer group. After the peer group companies are selected, PM&P prepares and presents a report to the Compensation Committee summarizing the competitive data and comparisons of Mr. Bonney and our other Executive Officers to the comparable company market data utilizing publicly available data from the comparable companies and broad survey data (reflecting companies of similar size in the pharmaceutical/biotech industry). Each of our elements of compensation is reviewed as part of this comparable company analysis.

Other Data and Information

        Executive Officer compensation can be above or below the compensation target assigned to each Executive Officer by the peer group and survey comparison analysis described above, depending on a number of factors. These include retention considerations, individual and corporate performance, relative value of the position within the company as compared to peer companies, and internal equity considerations.

        As part of making its decisions with respect to Mr. Bonney's compensation, the Board and the Compensation Committee also utilized the following data:

•

Quantitative evaluations of our performance against our annual corporate goals and objectives.



•

Qualitative input on Mr. Bonney's performance from all directors, many of our Executive Officers, and some external sources for use in connection with Mr. Bonney's performance evaluation.



•

The company's and Mr. Bonney's historical performance.



•

Mr. Bonney's total cash compensation as compared to the second highest paid Executive Officer and our lowest paid employee in order to determine whether Mr. Bonney's relative cash compensation is fair and reasonable in the context of internal equity.

        As part of making its decisions with respect to the compensation of Executive Officers other than Mr. Bonney, the Compensation Committee took into account:

•

Quantitative evaluations of our performance against corporate goals and each Executive Officer's performance against individual goals.



•

Qualitative evaluations, conducted by Mr. Bonney, of each Executive Officer's contribution to our corporate goals, performance against individual goals and potential future contributions to our success.



•

Retention considerations.



•

Mr. Bonney's compensation recommendations for each Executive Officer.

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Compensation Elements and Determinations

        Base Salary.    We target starting base salaries for our Executive Officers at the median of the marketplace for the following reasons:

•

We have a pay-for-performance philosophy, which emphasizes incentive pay and is determined based on corporate and individual performance.



•

This approach ensures that we are competitive in paying for the base value of the position, yet still allows us to emphasize performance.

        In certain circumstances, starting base salaries higher than the median are offered for positions that require more complex work, have critical value to the company, are in high demand in the marketplace and have fewer qualified candidates, or in situations where candidates enter the position with extraordinary relevant experience. Higher base salaries may also be paid over time to reflect superior individual performance. Base salaries are considered for increases annually.

        After taking into account the benchmarking and evaluation criteria described above, Mr. Bonney's 2008 base salary was set at $460,000, which represented a 5.7% increase from his 2007 base salary of $435,000. The Compensation Committee determined that Mr. Bonney performed at a very high level, as evidenced by our strong 2007 performance, the overall strength of his leadership, his past and potential future contributions to the company, including his contributions to successfully dealing with unanticipated challenges in 2007 that did not fit within the parameters of our corporate goals. As noted above, the Board determined that our level of achievement against corporate goals in 2007 was 96%, which determination is further described in the Compensation Discussion and Analysis section of our 2008 Proxy Statement. The Compensation Committee continues to maintain Mr. Bonney's base salary below the median of the market due to the Compensation Committee's and Mr. Bonney's desire to demonstrate leadership in keeping Mr. Bonney's pay reasonable and consistent with our other Executive Officers. Mr. Bonney's 2008 base salary was below the 25^th percentile as compared to the peer group and survey data used by the Compensation Committee and his 2007 base salary was at the 25th percentile as compared to such data.

        The 2008 base salaries earned by our Named Executive Officers are set forth in the Summary Compensation Table and footnotes to the table. The Compensation Committee set these salaries based upon the benchmarking and evaluation criteria described above. The base salaries of these Named Executive Officers were on average at about the 50^th percentile, as compared to the peer group and survey data used by the Compensation Committee.

        Annual performance awards.    We provide for an annual cash performance award under our written Short Term Incentive Plan, or the 2008 STIP, which is filed with the SEC. We target annual cash awards that allow total cash compensation to exceed the median of the marketplace depending upon individual and corporate performance for the following reasons:

•

To encourage specific short-term Executive Officer behaviors that create and protect company and stockholder value.



•

To focus Executive Officers on important short-term business objectives that are expected to have a positive long-term impact on our success.



•

To provide competitive cash compensation packages if goals are met or exceeded.

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•

To reward the accomplishment of specific corporate and individual goals during the year.

        The key features of the 2008 STIP are as follows:

•

Set the target awards, expressed as a percentage of base salary, for each Executive Officer, as follows:

The target awards are designed to provide similar award opportunities to our Executive Officers as the target award opportunity for executives at comparable companies. The Chief Operating Officer's and Chief Financial Officer's target awards are higher than our other Executive Officers (except for Mr. Bonney) because of the competitiveness in the marketplace for these roles, as well as the relative importance of their positions within the company.

•

Set the weighting of goals as between corporate and individual goals for our Executive Officers, as follows:

•

Required us to achieve at least 70% of our corporate goals for any annual performance awards to be paid. We believe that achievement of this minimum level of performance is necessary to justify the payment of any performance award, and that this minimum performance threshold is reasonable and consistent with industry practices.



•

Provided that we achieve at least 70% of our corporate goals, provides the Board with the discretion to reduce, increase or eliminate award payments in accordance with its assessment of our achievement against corporate goals.



•

Provides that the maximum annual performance awards that can be paid are 200% of the target award.

        In December 2007, Mr. Bonney, after consultation with the other Executive Officers, proposed 2008 corporate goals to the Compensation Committee. The Compensation Committee discussed the proposed corporate goals with Mr. Bonney, incorporated appropriate modifications and made a recommendation to the full Board. The full Board discussed the recommendations of the Compensation Committee and approved the proposed 2008 corporate goals. The corporate and the individual goals described below were set with a reasonable level of difficulty that requires that the company and our Executive Officers perform at a high level in order to meet the goals and that the likelihood of attaining these goals is not assured. The level of difficulty of our corporate goals is evidenced by our historical level of achievement against corporate goals: 136% in 2008 (as calculated in

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the table below), 96% in 2007, 85% in 2006 and 105% in 2005. Mr. Bonney discussed our performance with the Compensation Committee and the Board on a regular basis throughout 2008.

        For 2008, our corporate goals and our achievement against such goals were as follows:

        Mr. Bonney's annual performance award is determined primarily by reference to our achievement against corporate goals. Our other Executive Officers have individual goals and, as noted above, their level of achievement against such goals factors into their annual performance award. The individual goals for these Executive Officers are determined by Mr. Bonney, in consultation with each Executive Officer, and are designed to focus them on individual behaviors that support our overall performance and success. These goals generally consist of both objective and subjective goals that are relevant to the

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Executive Officer's responsibilities. The following is a summary of the 2008 individual goals of our Named Executive Officers (other than Mr. Bonney):

        Other than Lindon Fellows, each Executive Officer's level of achievement against his or her individual goals is initially evaluated by Mr. Bonney. Mr. Fellows's level of achievement against individual goals is initially evaluated by Mr. Perez, who then reviews the evaluation with Mr. Bonney. The level of achievement against individual goals of each Executive Officer is finally determined by the Compensation Committee. In 2008, an Executive Officer's level of achievement against his or her individual goals was subject to the same 125% multiplier described in the corporate goals table above. In 2008, the Compensation Committee determined as follows with respect to the performance against individual goals of our Named Executive Officers (other than Mr. Bonney):

•

Robert Perez: 109% achievement against individual goals due primarily to net U.S. Cubicin sales exceeding $370 million, the acquisition of a clinical stage compound, the level of achievement against his other goals and his overall leadership. With the 125% multiplier, Mr. Perez's level of achievement against his individual goals was determined to be 136%.

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•

David McGirr: 90% achievement against individual goals due to pre-tax profit exceeding $65 million, the level of achievement against his other goals, and his overall leadership. With the 125% multiplier, Mr. McGirr's level of achievement against his individual goals was determined to be 113%.



•

Lindon Fellows: 85% achievement against individual goals due primarily to the level of achievement against his goals and his overall leadership. With the 125% multiplier, Mr. Fellows's level of achievement against his individual goals was determined to be 106%.



•

Steven Gilman: 114% achievement against individual goals due primarily to the successful filing of two INDs by year-end, the development of a discovery/internal product pipeline strategy, the level of achievement against his other goals and his overall leadership. With the 125% multiplier, Dr. Gilman's level of achievement against his individual goals was determined to be 143%.

        Mr. Bonney was awarded a 2008 annual performance award of 136% of his target award, or $500,480, which was paid in February 2009. This performance award was determined based on our achievement of 136% of our 2008 corporate goals. Taken together, the 2008 base salary and annual performance award paid to Mr. Bonney were at about the 55th percentile compared to the peer group and survey benchmarking data used by the Compensation Committee.

        The annual performance awards for our Named Executive Officers were calculated using the formula set forth in the 2008 STIP and as described above. The Compensation Committee chose not to exercise its discretion to adjust these annual performance awards up or down. Details of the 2008 annual performance awards for these Named Executive Officers (which were paid in February 2009) can be found in the Summary Compensation Table in this Proxy Statement. Taken together, the 2008 base salary and annual performance awards paid to these Named Executive Officers were at about the 65^th percentile compared to the peer group and survey benchmarking data used by the Compensation Committee.

        Long-term incentive awards.    Executive Officers are eligible to receive long-term incentive awards based on performance in order to tie a significant portion of the Executive Officers' compensation directly to our long-term performance. Through 2008, our long-term incentives consisted solely of stock options. We have reconsidered our use of stock options as our only long-term incentive vehicle and, beginning in 2009, we will begin awarding restricted stock units to Executive Officers and certain other employees in lieu of a portion of their annual merit-based stock option grants. The use of restricted stock units will result in less potential dilution of our total outstanding shares because we grant fewer restricted stock units than the number of options we would have typically granted to Executive Officers and employees in view of the fact that, when granted, restricted stock units have more value than stock options. For Executive Officers in 2009, stock options will represent 70% of the present value of their long-term incentives and restricted stock units will represent the remaining 30%.

        We use long-term incentives and target them at or above the median of the marketplace for the following reasons:

•

To focus Executive Officers on multi-year results.



•

To provide Executive Officers with a financial interest in the appreciation of the value of our common stock and focus them on long-term financial objectives.

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•

To align Executive Officer interests with stockholder interests and to create motivation to increase stockholder value.



•

To provide Executive Officers with a compensation package that is competitive with comparable companies.



•

To retain Executive Officers over the long-term through the use of vesting of their equity awards. Stock options vest 25% per year (6.25% per quarter) over four years and remain in effect for 10 years, and restricted stock units will vest 25% per year over four years.



•

Restricted stock units, in particular, will have the added benefit of incentivizing our Executive Officers to remain with us and continue performing at a high level even during periods during which our stock price is down, when previously-granted stock options may have little or no realizable value.

        The Board's determination to grant Mr. Bonney 150,000 stock options in February 2008 was made after careful consideration of the benchmarking and other evaluation criteria described above, with significant emphasis placed on Mr. Bonney's overall contributions to our 2007 performance and Mr. Bonney's potential future contributions to our performance. As noted above, the Board determined that our level of achievement against corporate goals in 2007 was 96%, which determination is described in the Compensation Discussion and Analysis section of our 2008 Proxy Statement. This stock option grant put Mr. Bonney's 2008 long-term incentive compensation at about the 25th percentile compared to the peer group and survey benchmarking data used by the Compensation Committee.

        The Compensation Committee's determinations to grant our Named Executive Officers (other than Mr. Bonney) stock options in February 2008 were made after careful consideration of the benchmarking and other evaluation criteria described above, with significant emphasis placed on retention considerations and each Named Executive Officer's potential future contributions to our performance. Details of the stock option grants made to the Named Executive Officers in 2008 can be found in the Summary Compensation Table and Grants of Plan-Based Awards in 2008 Table in this Proxy Statement. These stock option grants put the 2008 long-term incentive compensation paid to these Named Executive Officers at about the 40th percentile compared to the peer group and survey benchmarking data used by the Compensation Committee.

Retention Letters with Executive Officers

        We have entered into retention letters with all of our Executive Officers other than Dr. Santosh Vetticaden, who joined us as our Senior Vice President, Clinical Development and Chief Medical Officer, in December 2008. Forms of the retention letters have been filed with the SEC. The terms of the retention letters and the value of the retention letters under various termination scenarios can be found in the section of this Proxy Statement entitled "Termination of Employment and Change-in-Control Agreements." Under the terms of Dr. Vetticaden's offer letter, which is filed with the SEC, Dr. Vetticaden will receive a retention letter once he is employed by us for at least 6 months. In addition, in the event that a change of control occurs within Dr. Vetticaden's first six months of employment, he will be entitled to receive the same benefits upon a change of control as our Executive Officers, other than Mr. Bonney, receive. Dr. Vetticaden will also receive three months of salary continuation in the event that his employment with us terminates within six months of his employment start date other than for cause or criminal misconduct.

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        The objectives of these retention letters are described in the Executive Summary section of this CD&A. To ensure that these agreements remain reasonable and competitive, the Compensation Committee periodically reviews competitive data provided by PM&P, as well as potential costs to the Company of the retention letters under various potential termination scenarios. The Compensation Committee reviews Executive Officer wealth accumulation on an annual basis. However, to date, wealth accumulation has not been a factor in the Compensation Committee's periodic review of our retention arrangements with its Executive Officers. The Compensation Committee plans to periodically review wealth accumulation to determine whether it should factor into the terms of the retention letters.

Perquisites and Personal Benefits

        Our Executive Officers participate in the benefit programs that we provide to all employees (for example, medical, dental, 401(k) plan, life and disability insurance, employee stock purchase plan). As necessary, we provide relocation assistance to newly hired Executive Officers and other key employees as part of their compensation packages. We believe that providing such relocation assistance is consistent with industry and peer group practices and enables us to better compete for key talent. As a result, we provided Ms. Joseph and Dr. Vetticaden with certain relocation assistance associated with their relocation to the Lexington, Massachusetts area. We provided Ms. Joseph with a $100,000 sign-on bonus that she could use at her discretion to cover her relocation expenses. We provided Dr. Vetticaden with a relocation package that includes the payment of $77,200 to cover certain costs related to Dr. Vetticaden's purchase of a house in the Lexington, Massachusetts area and the reimbursement of expenses, along with a tax gross up on the taxable portion of certain of such reimbursed expenses, for a specified set of expenses that are incurred within a specified period of time after his employment start date. These expenses include, among other things, temporary lodging or duplicate housing assistance, as the case may be; a limited number of trips to his California residence so long as he owns his California residence; certain closing costs related to the purchase of his residence in the Lexington, Massachusetts area; and certain other reasonable expenses associated with his and his family's relocation. The relocation payment and reimbursement of expenses are subject to repayment by Dr. Vetticaden in certain circumstances.

Impact of Accounting and Tax on the Form of Compensation

        The Compensation Committee has considered the impact of Statement of Financial Accounting Standard No. 123(R), "Share-Based Payment", or SFAS 123(R), on our use of equity incentives as a key retention tool. The Compensation Committee has determined that the current estimated costs of continuing to use equity incentives, including restricted stock units, relative to the benefits we believe these programs provide does not warrant any change to our current equity incentive framework.

        Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, limits the tax deduction for compensation paid to Named Executive Officers to $1,000,000. This deduction limitation does not apply to compensation that constitutes "qualified performance-based compensation" within the meaning of Section 162(m) of the Code and regulations promulgated thereunder, including certain performance-based compensation that has been approved by stockholders. Our stockholders have approved our employee equity incentive plan, which is designed to allow the deduction of income recognized in connection with stock options granted under such plan. We have in the past and may in the future award compensation that is not fully deductible under the Code when we view such compensation as consistent with our compensation policies and in the best interests of the company

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and our stockholders. For 2008, we did not provide our Executive Officers with any compensation that was not deductible under Section 162(m).

        Under our retention letters, we do not compensate executives for any excise tax liability they may incur by reason of payments and benefits received pursuant to the letters. As a result, if a Named Executive Officer is assessed any excise tax liability under Section 280G of the Code as a result of payments and benefits received under a retention letter, that Named Executive Officer is responsible for the payment of such excise tax.

Equity Granting Practices

        We have never had a program or policy in place to coordinate equity grants with the release of material, non-public information.

        We issue stock option awards to our employees at various times throughout the year. All options are priced at the closing market price of our common stock on the grant date. Generally, new employees receive a stock option award that is granted and priced on the 15^th day of the month following the month in which they join the company (or, if no trades were reported on such date, the closing price on the most recent trading day preceding such date on which a trade occurred). In addition, we typically issue stock options to employees who are promoted during the year. These options are also granted and priced on the 15^th day of the month following the month in which the employee's promotion is authorized (or, if no trades were reported on such date, the closing price on the most recent trading day preceding such date on which a trade occurred). We also issue performance-related stock options once each year, after the beginning of the year, to employees who demonstrate superior performance and high potential.

        The Compensation Committee has authorized a pool of options which may be issued by Mr. Bonney from time to time during the year in recognition of extraordinary results. Any such options are granted and priced on the 15^th day of the month following the month in which the award is made (or, if no trades were reported on such date, the closing price on the most recent trading day preceding such date on which a trade occurred).

        As noted above, we will begin awarding restricted stock units to employees in April 2009. These awards will be determined in April 2009 and will have a grant date of May 15, 2009.

        At the end of each calendar year, the Compensation Committee approves guidelines for both new hire stock option awards and for stock options to be granted in connection with promotions. In addition, prior to issuance of any annual performance-related stock options or restricted stock units, the Compensation Committee approves a pool of such stock options and restricted stock units for such performance-related grants. The CEO is required to further approve all individual awards issued in accordance with the foregoing pools and guidelines. The Compensation Committee must approve all awards of stock options and restricted stock units to Executive Officers other than Mr. Bonney and the Board must approve all awards of stock options and restricted stock units to Mr. Bonney.

Stock Ownership Guidelines

        Executive Officers are subject to the stock ownership guidelines described in the table below. The guidelines are designed to align the interests of our Executive Officers with those of our stockholders by ensuring that our Executive Officers have a meaningful financial stake in our success. The amount

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of stock required to be held to satisfy ownership requirements was established by the Compensation Committee after reviewing market practices of peer companies and determining what would constitute meaningful ownership to align executives and stockholders.

        As of January 1, 2009, Mr. Bonney had achieved 76% of the ownership requirement and our other Executive Officers who are required to meet the ownership requirement by January 1, 2012 had achieved between 15%-44% of the requirement.

        The guidelines impose additional requirements on Executive Officers, including:

•

the requirement that any Executive Officer who sells any shares of our common stock prior to his or her ownership requirement compliance date and does not at the time of such sale own the amount of shares required by the ownership guidelines retain shares of our common stock with a market value of at least 30% of the net proceeds received as a result of such sale.



•

the requirement that any Executive Officer who sells any shares of our common stock after his or her ownership requirement compliance date and does not at the time of such sale own the amount of shares required by the ownership guidelines retain shares of our common stock with a market value of at least 50% of the net proceeds received as a result of such sale.

        Our non-employee directors are also subject to stock ownership guidelines, which are described in the Director Compensation section of this Proxy Statement.

Recoupment Policy

        The Board has adopted a policy providing that, if the independent members of the Board determine, in their reasonable and sole discretion, that any fraud, gross negligence or intentional misconduct by Mr. Bonney or Mr. McGirr caused or contributed to us having to restate all or a portion of our financial statements, then the independent directors may take any action they deem necessary or appropriate to remedy the misconduct and prevent its recurrence. The policy further provides that, in connection with taking such action, the independent directors, to the fullest extent permitted by law, in cases they deem appropriate, will require, on our behalf, reimbursement of any bonus or incentive compensation awarded to Mr. Bonney or Mr. McGirr, effect the cancellation of outstanding equity awards and seek reimbursement of any gains realized on the exercise or sale of any equity based awards if and to the extent that: (a) the amount of the bonus or equity compensation was calculated based upon the achievement of certain financial results that were subsequently reduced due to a restatement, (b) Mr. Bonney or Mr. McGirr engaged in any fraud, gross negligence or intentional misconduct that caused or contributed to the need for the restatement, or (c) the amount of the bonus or equity compensation that would have been awarded to Mr. Bonney or Mr. McGirr had the results been properly reported would have been lower than the amount actually awarded.

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EXECUTIVE COMPENSATION

        The following table summarizes aggregate amounts of compensation paid or accrued by us for 2008, 2007 and 2006 (1) for services rendered in all capacities by our Named Executive Officers.

Summary Compensation Table

(1)

No amounts are shown for Mr. Fellows in 2006 because he was not a Named Executive Officer in that year. No amounts are shown for Dr. Gilman for 2006 and 2007 because he did not begin employment with us until February 2008.

(2)

Represents the proportionate amount of the total fair value of option awards recognized by the Company as an expense in the covered fiscal year for financial accounting purposes, disregarding for this purpose the estimate of forfeitures related to service-based vesting conditions, for all option awards held by the Named Executive Officer as of the end of each covered fiscal year. The fair values of these awards and the amounts expensed were determined using the Black-Scholes option pricing model in accordance with SFAS 123(R). In calculating the grant date fair values of these awards, we used the assumptions described in the notes to the consolidated audited financial statements in our Annual Reports on Form 10-K for the covered fiscal year as of the grant date, excluding assumptions related to forfeitures.

(3)

Reflects the cash performance awards earned in the covered year under our Short-Term Incentive Plan. Payments for awards earned in each covered year were made in the first quarter of the immediately succeeding year.

(4)

We do not have either a pension plan or a non-qualified deferred compensation plan.

(5)

All Other Compensation for 2008 for Mr. Bonney, Mr. McGirr and Mr. Perez primarily consists of 401(k) matching contributions of $10,350, and All Other Compensation for 2008 for Dr. Gilman and Mr. Fellows consists entirely of 401(k) matching contributions.

(6)

Dr. Gilman's base salary in 2008 on an annualized basis was $360,000. Dr. Gilman's 2008 salary reflected in this Summary Compensation Table represents the amount that he actually received in salary in 2008, given that he began employment with us in February 2008.

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Grants of Plan-Based Awards in 2008

        The following table sets forth information concerning grants of awards pursuant to plans made to the Named Executive Officers during 2008.

(1)

The Grant Date column shows the grant dates of all non-qualified stock options granted in 2008. Mr. Bonney's option award was approved by the Board of Directors on February 13, 2008 and the awards to our other Named Executive Officers were approved by the Compensation Committee on February 11, 2008, as set forth in the Date of Board or Committee Action column. All option awards have a term of 10 years and are exercisable in equal quarterly installments over a four year period from the grant date.

(2)

Target reflects the pre-established target award for each of the Named Executive Officers under the 2008 STIP, as follows: the target award for Mr. Bonney was 80% of his base salary, the target award for Mr. McGirr and Mr. Perez was 50% of base salary, and the target award for all other Named Executive Officers was 40% of base salary. Maximum awards under the plan are capped at 200% of the target award and threshold awards are contingent upon us achieving 70% of our corporate goals—the requirement for Executive Officers to be eligible to receive any performance award. Dr. Gilman joined the company in February 2008. As a result, Dr. Gilman's threshold, target and maximum awards are based on the amount of salary that he was paid in 2008 rather than his annualized base salary of $360,000. Mr. Bonney's award was based entirely on our performance against corporate goals; Mr. McGirr's and Mr. Perez's awards were based 80% on our performance against corporate goals and 20% on performance against individual goals; and all other Named Executive Officer awards were based 65% on our performance against corporate goals and 35% on performance against individual goals. The Compensation Committee retains the discretion to adjust an Executive Officer's annual performance award up or down based on the Executive Officer's relative contributions to the Company's overall performance and other factors. The Compensation Committee did not exercise this right with respect to 2008 awards. The actual awards paid to the Named Executive Officers for 2008 performance are set forth in the Summary Compensation Table of this Proxy Statement. These awards were paid in February 2009.

(3)

The exercise prices reflect the closing price of our common stock on the grant date.

(4)

These values reflect the grant date fair value using the Black-Scholes model. The grant date Black-Scholes value was $6.9544 per share. Assumptions used in the Black-Scholes model are as follows: volatility of 43%, a risk-free interest rate of 2.8%, a dividend yield of 0%, and an expected term of 4.3 years.

(5)

This value reflects the grant date fair value using the Black-Scholes model. The grant date Black-Scholes value was $7.0735 per share. Assumptions used in the Black-Scholes model are as follows: volatility of 43%, a risk-free interest rate of 2.4%, a dividend yield of 0%, and an expected term of 4.3 years.

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Outstanding Equity Awards at 2008 Year-End

        The following tables set forth information concerning outstanding equity awards held by each Named Executive Officer as of December 31, 2008.

(1)

Under some circumstances, the vesting of unexercisable stock options may be accelerated in accordance with the terms of the Named Executive Officer's retention letters and the terms of our Amended and Restated 2000 Equity Incentive Plan, or the 2000 Equity Incentive Plan.

(2)

All stock option grants have a four-year vesting schedule, vest equally over 16 calendar quarters and have a 10-year term.

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