UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-21379

CUBIST PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

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

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

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

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

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

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

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o

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

Number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on October 20, 2011: 61,571,081.

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PART I. Financial Information

Item 1. Condensed Consolidated Financial Statements

CUBIST PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

(in thousands, except share data)

	September 30,			December 31,
	2011			2010
ASSETS
Current assets:
Cash and cash equivalents	$	223,954		$	372,969
Short-term investments	751,229			516,842
Accounts receivable, net	79,863			61,197
Inventory	21,740			23,824
Deferred tax assets, net	3,575			16,609
Prepaid expenses and other current assets	25,859			24,802
Total current assets	1,106,220			1,016,243
Property and equipment, net	158,294			82,434
In-process research and development	194,000			194,000
Goodwill	61,459			61,459
Other intangible assets, net	11,947			13,845
Long-term investments	—			20,101
Other assets	30,858			27,075
Total assets	$	1,562,778		$	1,415,157

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	19,911		$	23,484
Accrued liabilities	93,739			93,527
Short-term deferred revenue	4,408			2,642
Short-term contingent consideration	58,739			30,991
Total current liabilities	176,797			150,644
Long-term deferred revenue	25,991			20,581
Long-term deferred tax liabilities, net	72,914			82,833
Long-term contingent consideration	72,741			55,506
Long-term debt, net	449,507			435,800
Other long-term liabilities	7,666			6,370
Total liabilities	805,616			751,734
Commitments and contingencies (Notes C, F, K and L)
Stockholders’ equity:
Preferred stock, non-cumulative; convertible, $.001 par value; authorized 5,000,000 shares; no shares issued and outstanding	—			—
Common stock, $.001 par value; authorized 150,000,000 shares; 61,478,185 and 59,344,957 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively	61			59
Additional paid-in capital	868,630			800,618
Accumulated other comprehensive (loss) income	(409		)	71
Accumulated deficit	(111,120		)	(137,325		)
Total stockholders’ equity	757,162			663,423
Total liabilities and stockholders’ equity	$	1,562,778		$	1,415,157

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

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CUBIST PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

UNAUDITED

(in thousands, except share and per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Revenues:
U.S. product revenues, net	$	186,433		$	154,486		$	508,724		$	444,744
International product revenues	9,778			6,009			25,825			18,983
Service revenues	3,020			—			3,020			8,500
Other revenues	2,467			1,556			3,498			2,426
Total revenues, net	201,698			162,051			541,067			474,653

Costs and expenses:
Cost of product revenues	48,380			37,000			123,933			105,178
Research and development	46,171			36,955			128,458			115,984
Contingent consideration	2,069			1,094			84,983			3,789
Selling, general and administrative	35,949			34,871			114,454			106,503
Total costs and expenses	132,569			109,920			451,828			331,454

Operating income	69,129			52,131			89,239			143,199

Other income (expense):
Interest income	598			1,068			2,002			3,655
Interest expense	(7,878		)	(5,534		)	(23,585		)	(16,379		)
Other income	467			3,788			1,002			1,345
Total other income (expense), net	(6,813		)	(678		)	(20,581		)	(11,379		)
Income before income taxes	62,316			51,453			68,658			131,820
Provision for income taxes	38,081			20,225			42,453			52,045
Net income	$	24,235		$	31,228		$	26,205		$	79,775

Basic net income per common share	$	0.40		$	0.53		$	0.43		$	1.36
Diluted net income per common share	$	0.33		$	0.50		$	0.41		$	1.29

Shares used in calculating:
Basic net income per common share	61,238,131			59,047,880			60,411,324			58,621,263
Diluted net income per common share	82,528,893			69,780,060			77,834,805			69,312,849

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

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CUBIST PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(in thousands)

	Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net income	$	26,205		$	79,775
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	8,865			8,707
Amortization and accretion of investments	5,359			4,915
Unrealized gain on auction rate securities	—			(2,309		)
Amortization of debt discount and debt issuance costs	15,078			11,316
Deferred income taxes	3,115			38,427
Foreign exchange (gain) loss	(490		)	1,148
Stock-based compensation	13,970			11,938
Contingent consideration expense	84,983			3,789
Payment of contingent consideration	(23,209		)	—
Charge for company 401(k) common stock match	2,930			2,699
Inventory write-off	4,692			—
Changes in assets and liabilities:
Accounts receivable	(18,666		)	(3,477		)
Inventory	(2,528		)	(217		)
Prepaid expenses and other current assets	(1,057		)	(25,511		)
Other assets	(5,148		)	(5,441		)
Accounts payable and accrued liabilities	2,575			(23,105		)
Deferred revenue and other long-term liabilities	11,975			8,536
Total adjustments	102,444			31,415
Net cash provided by operating activities	128,649			111,190
Cash flows from investing activities:
Purchases of property and equipment	(89,938		)	(11,837		)
Purchases of investments	(1,099,130		)	(414,897		)
Proceeds from investments	879,006			316,237
Net cash used in investing activities	(310,062		)	(110,497		)
Cash flows from financing activities:
Payment of contingent consideration	(16,791		)	(20,000		)
Issuance of common stock, net	35,465			13,777
Excess tax benefit on stock-based awards	13,234			19,295
Net cash provided by financing activities	31,908			13,072
Net (decrease) increase in cash and cash equivalents	(149,505		)	13,765
Effect of changes in foreign exchange rates on cash balances	490			971
Cash and cash equivalents at beginning of period	372,969			157,316
Cash and cash equivalents at end of period	$	223,954		$	172,052

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

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CUBIST PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

A. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation and Consolidation

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

The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2010, which are contained in Cubist’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 23, 2011.

The accompanying condensed consolidated financial statements include the accounts of Cubist and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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

Fair Value Measurements

The carrying amounts of Cubist’s cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair value due to the short-term nature of these amounts. Investments are considered available-for-sale as of September 30, 2011 and December 31, 2010, and are carried at fair value. In connection with its acquisition of Calixa Therapeutics Inc., or Calixa, in December 2009, the Company recorded contingent consideration relating to potential amounts payable to Calixa’s former stockholders upon the achievement of certain development, regulatory and sales milestones. This contingent consideration liability is recognized at its estimated fair value.

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

Investments

Short-term investments include bank deposits, corporate and municipal notes, United States, or U.S., treasury securities and U.S. government agency securities. Long-term investments include corporate notes, U.S. treasury securities and U.S. government agency securities. See Note B., “Investments,” for additional information.

Unrealized gains and temporary losses on investments are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Realized gains and losses, dividends, interest income, and declines in value judged to be

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other-than-temporary credit losses are included in other income (expense). Amortization of any premium or discount arising at purchase is included in interest income.

Concentration of Risk

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

Cubist’s accounts receivable at September 30, 2011 and December 31, 2010, primarily represent amounts due to the Company from wholesalers, including AmerisourceBergen Drug Corporation, Cardinal Health, Inc. and McKesson Corporation, as well as from Cubist’s international partners for CUBICIN® (daptomycin for injection). Cubist performs ongoing credit evaluations of its key wholesalers, distributors and other customers and generally does not require collateral. For the three and nine months ended September 30, 2011 and 2010, Cubist did not have any significant write-offs of accounts receivable, and its days sales outstanding has not significantly changed since December 31, 2010.

	Percentage of Total Accounts Receivable, Net as of
	September 30,	December 31,
	2011	2010
AmerisourceBergen Drug Corporation	21%	26%
Cardinal Health, Inc.	23%	24%
McKesson Corporation	18%	19%

	Percentage of Total Net Revenues for the Three Months Ended September 30,		Percentage of Total Net Revenues for the Nine Months Ended September 30,
	2011	2010	2011	2010
AmerisourceBergen Drug Corporation	20%	25%	22%	26%
Cardinal Health, Inc.	20%	23%	21%	22%
McKesson Corporation	17%	18%	17%	17%

Acquired In-process Research and Development

IPR&D acquired in a business combination is capitalized on the Company’s condensed consolidated balance sheets at its acquisition-date fair value. Until the underlying project is completed, IPR&D is accounted for as indefinite-lived intangible assets. Once the project is completed, the carrying value of the IPR&D is amortized over the estimated useful life of the asset. If a project becomes impaired or is abandoned, the carrying value of the IPR&D is written down to its revised fair value with the related impairment charge recognized in the period in which the impairment occurs. IPR&D is tested for impairment on an annual basis, or more frequently if an indicator of impairment is present, using a projected discounted cash flow model. The valuation techniques utilized in performing impairment tests incorporate significant assumptions and judgments to estimate the fair value. The use of different valuation techniques or different assumptions could result in materially different fair value estimates.

On December 16, 2009, Cubist acquired 100% of the outstanding stock of Calixa for an upfront cash payment of $99.2 million, as adjusted, and contingent consideration with an estimated acquisition-date fair value of $101.6 million, upon which Calixa became a wholly-owned subsidiary of Cubist. Calixa’s lead compound, CXA-201, is an intravenously-administered combination of a novel anti-pseudomonal cephalosporin, CXA-101, and the beta-lactamase inhibitor tazobactam. The transaction was accounted for as a business combination using the acquisition method. Accordingly, the tangible assets and identifiable intangible assets acquired and liabilities assumed were recorded at fair value, with the remaining purchase price recorded as goodwill. Of the identifiable assets acquired, $194.0 million are IPR&D assets relating to CXA-201. The fair value of the IPR&D acquired was determined using an income method approach, including discounted cash flow models that are probability-adjusted for assumptions the Company believes a market participant would make relating to the development and potential commercialization of CXA-201. CXA-201 as a potential treatment for pneumonia had an estimated fair value of $174.0 million and CXA-201 as a potential treatment for complicated urinary tract infections, or cUTI, and complicated intra-abdominal infections, or cIAI, had an estimated fair value of $20.0 million as of the acquisition date. Cubist has not recorded any impairment charges related to the IPR&D since the acquisition of the assets.

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If the Company experiences unfavorable data from any ongoing or future clinical trial, changes in assumptions that negatively impact projected cash flows, or because of any other information regarding the prospects of successfully developing or commercializing CXA-201 for any of these indications, then the fair value of CXA-201 would be potentially impaired and the Company would incur significant charges in the period in which the impairment occurs.

Revenue Recognition

Cubist’s principal sources of revenue are: (i) sales of CUBICIN in the U.S.; (ii) revenues derived from sales of CUBICIN by Cubist’s international distribution partners; (iii) license fees and milestone payments that are derived from collaboration, license and commercialization agreements with other biopharmaceutical companies; and (iv) service revenues derived from its co-promotion agreement with Optimer Pharmaceuticals, Inc., or Optimer, to co-promote DIFICIDTM in the U.S. In all instances, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, collectibility of the resulting receivable is reasonably assured and the Company has no further performance obligations.

U.S. Product Revenues, net

All U.S. product revenues are recognized upon delivery. All revenues from product sales are recorded net of applicable provisions for estimated returns, chargebacks, rebates, wholesaler management fees and discounts in the same period the related sales are recorded.

Certain product sales qualify for rebates or discounts from standard list pricing due to government-sponsored programs or other contractual agreements. Reserves for Medicaid rebates and coverage gap discount program rebates are included in accrued liabilities and were $12.8 million at September 30, 2011. Reserves for Medicaid rebates included in accrued liabilities were $6.3 million at December 31, 2010. The increase in the reserve at September 30, 2011, is a result of delayed billing for rebate claims by state authorities. Reserves for returns, discounts, chargebacks, and wholesaler management fees are offset against accounts receivable and were $6.3 million and $6.0 million at September 30, 2011 and December 31, 2010, respectively.

In the three and nine months ended September 30, 2011, provisions for sales returns, chargebacks, Medicaid rebates, coverage gap discount program rebates, wholesaler management fees and discounts that were offset against gross U.S. product revenues totaled $26.7 million and $71.7 million, respectively. In the three and nine months ended September 30, 2010, provisions for sales returns, chargebacks, Medicaid rebates, wholesaler management fees and discounts that were offset against gross U.S. product revenues totaled $19.3 million and $48.2 million, respectively. The increase in the amount of these provisions is primarily due to increases in pricing discounts, chargebacks and Medicaid reserves due to the 6.9% price increases in April 2010 and January 2011 and the 5.5% price increase in July 2011 and an increase in the number of vials sold of CUBICIN in the U.S. In addition, contractual rebates increased as a result of U.S. health care reform legislation enacted in March 2010, which increased the Medicaid rebate rate from 15.1% to 23.1%, the number of individuals eligible to participate in the Medicaid program and the amount of discounts from the coverage gap discount program.

International Product Revenues

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

Service Revenues

From July 2008 through June 2010, Cubist promoted and provided other support for MERREM® I.V. in the U.S. under a commercial services agreement with AstraZeneca Pharmaceuticals, LP, an indirect wholly-owned subsidiary of AstraZeneca PLC, or AstraZeneca. AstraZeneca provided marketing and commercial support for MERREM I.V. The agreement with AstraZeneca, as amended, expired in accordance with its terms on June 30, 2010. Service revenues relating to MERREM I.V. for the nine months ended September 30, 2010, were $8.5 million.

On April 5, 2011, the Company entered into a co-promotion agreement with Optimer pursuant to which Optimer engaged Cubist as its exclusive partner for the promotion of DIFICID in the U.S. DIFICID was approved by the U.S. Food and Drug Administration, or FDA, in May 2011 for the treatment of Clostridium difficile-associated diarrhea. Under the terms of the co-promotion agreement, Optimer and Cubist will co-promote DIFICID to physicians, hospitals, long-term care facilities and other health

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care institutions, participate on joint committees and jointly provide medical affairs support for DIFICID. In addition, Optimer will be responsible for the sale and distribution of DIFICID in the U.S. The initial term of the co-promotion agreement is approximately two years from the date of first commercial sale of DIFICID in the U.S., which occurred in July 2011. Optimer paid the Company a quarterly fee of $3.8 million in June 2011, of which $3.0 million was recognized as service revenue during the three and nine months ended September 30, 2011, and will pay the Company quarterly payments of $3.8 million, or $30.0 million in the aggregate, during the term of the agreement. The Company assessed the co-promotion agreement under the accounting guidance on revenue recognition for multiple-element arrangements. The deliverables under the co-promotion agreement with Optimer include co-promotion of DIFICID, participation in joint committees and providing medical affairs support for DIFICID. Each identified deliverable within the arrangement was determined to be a separate unit of accounting, and the performance period of each deliverable was deemed to be the term of the co-promotion agreement. There are no performance obligations extending beyond the term of the arrangement. As a result, the Company will recognize the service fees ratably over the performance period ending July 31, 2013.

Cubist is also eligible to receive: (a) an additional $5.0 million in the first year after first commercial sale and $12.5 million in the second year after first commercial sale if mutually agreed-upon annual sales targets are achieved; and (b) a portion of Optimer’s gross profits derived from net sales above the specified annual targets, if any. The co-promotion agreement may be renewed by mutual agreement of the parties for additional, consecutive one-year terms. Each of Optimer and Cubist may terminate the co-promotion agreement prior to expiration upon the uncured material breach of the co-promotion agreement by the other party, upon the bankruptcy or insolvency of the other party, or in the event that actual net sales during the first year of commercial sales of DIFICID in the U.S. are below specified levels, subject to certain limitations. Optimer may terminate the co-promotion agreement, subject to certain limitations, if (i) Optimer withdraws DIFICID from the market in the U.S., (ii) Cubist fails to comply with applicable laws in performing its obligations, (iii) Cubist undergoes a change of control, (iv) certain market events occur related to CUBICIN in the U.S., or (v) Cubist undertakes certain restructuring activities with respect to its sales force. Cubist may terminate the co-promotion agreement, subject to certain limitations, if (i) Optimer experiences certain supply failures in relation to the demand for DIFICID in the U.S., (ii) Optimer is acquired by certain types of entities, including competitors of Cubist, (iii) certain market events occur related to CUBICIN in the U.S., or (iv) Optimer fails to comply with applicable laws in performing its obligations.

Other Revenues

Other revenues include revenues related to upfront license payments, license fees and milestone payments received through Cubist’s license, collaboration and commercialization agreements. The Company analyzes its multiple-deliverable arrangements to determine whether the elements can be separated and accounted for individually as separate units of accounting.

Multiple-Element Arrangements

On January 1, 2011, the Company adopted new authoritative guidance on revenue recognition for multiple-element arrangements. The guidance, which applies to multiple-element arrangements entered into or materially modified on or after January 1, 2011, amends the criteria for separating and allocating consideration in a multiple-element arrangement by modifying the fair value requirements for revenue recognition and eliminating the use of the residual method. The fair value of deliverables under the arrangement may be derived using a “best estimate of selling price” if vendor-specific objective evidence and third-party evidence is not available. Deliverables under the arrangement will be separate units of accounting, provided (i) a delivered item has value to the customer on a standalone basis; and (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the Company. The Company entered into the co-promotion agreement with Optimer in April 2011, which was evaluated under the accounting guidance on revenue recognition for multiple-element arrangements, as noted above. Cubist’s other existing license and collaboration agreements continue to be accounted for under previously-issued revenue recognition guidance for multiple-element arrangements.

Milestones

On January 1, 2011, the Company adopted new authoritative guidance on revenue recognition for milestone payments related to arrangements under which the Company has continuing performance obligations. Consideration for events that meet the definition of a milestone in accordance with the accounting guidance for the milestone method of revenue recognition is recognized as revenue in its entirety in the period in which the milestone is achieved only if all of the following conditions are met: (i) the milestone is commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting from the Company’s performance to achieve the milestone; (ii) the consideration relates solely to past performance; and (iii) the amount of the milestone consideration is reasonable relative to all of the deliverables and payment terms, including other potential milestone consideration, within the arrangement. Otherwise, the milestone payments are not considered to be substantive and are therefore deferred and recognized as revenue over the term of the arrangement as the Company completes its performance obligations. The adoption of this guidance does not materially change the Company’s previous method of recognizing milestone payments. All potential future milestones under existing arrangements with licensing partners, as specified

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below, and any new arrangements with milestones, will be evaluated under the new revenue recognition guidance for milestone payments.

In March 2007, Cubist entered into a license agreement with Merck & Co., Inc., or Merck, for the development and commercialization of CUBICIN in Japan. On July 1, 2011, Merck received regulatory approval of CUBICIN in Japan, which triggered a $6.0 million milestone payment to Cubist. The milestone was assessed under the accounting guidance for the milestone method of revenue recognition and was not deemed to be substantive and, therefore, approximately $1.9 million was recognized as other revenue during the three months ended September 30, 2011. The remainder of the milestone payment will be amortized to other revenues over the performance period ending January 2021. Cubist may receive up to $32.5 million in additional payments upon Merck achieving certain sales milestones. Merck commenced the commercial launch of CUBICIN in September 2011 through its wholly-owned subsidiary, MSD Japan.

In December 2006, Cubist entered into a license agreement with AstraZeneca AB for the development and commercialization of CUBICIN in China and certain other countries in Asia (excluding Japan, Taiwan and Korea), the Middle East and Africa that had not been covered by previously-existing CUBICIN international partnering agreements. Cubist may receive payments of up to $4.5 million and $14.0 million upon AstraZeneca AB achieving certain regulatory and sales milestones, respectively.

Basic and Diluted Net Income Per Share

Basic net income per common share has been computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted net income per share has been computed by dividing diluted net income by the diluted number of shares outstanding during the period. Except where the result would be antidilutive to income from continuing operations, diluted net income per share has been computed assuming the conversion of convertible obligations and the elimination of the interest expense related to the Company’s 2.25% convertible subordinated notes, or 2.25% Notes, and 2.50% convertible senior notes, or 2.50% Notes, the exercise of stock options, and the vesting of restricted stock units, or RSUs, as well as their related income tax effects.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Net income, basic	$	24,235	$	31,228	$	26,205	$	79,775
Effect of dilutive securities:
Interest on 2.50% Notes, net of tax	772		—		2,368		—
Debt issuance costs related to 2.50% Notes, net of tax	125		—		374		—
Debt discount amortization related to 2.50% Notes, net of tax	1,091		—		3,219		—
Interest on 2.25% Notes, net of tax	157		1,022		—		3,020
Debt issuance costs related to 2.25% Notes, net of tax	28		136		—		402
Debt discount amortization related to 2.25% Notes, net of tax	471		2,194		—		6,348
Net income, diluted	$	26,879	$	34,580	$	32,166	$	89,545

Shares used in calculating basic net income per common share	61,238,131		59,047,880		60,411,324		58,621,263
Effect of dilutive securities:
Options to purchase shares of common stock and RSUs	2,317,230		982,750		1,999,326		942,156
2.50% Notes convertible into shares of common stock	15,424,155		—		15,424,155		—
2.25% Notes convertible into shares of common stock	3,549,377		9,749,430		—		9,749,430
Shares used in calculating diluted net income per common share	82,528,893		69,780,060		77,834,805		69,312,849

Net income per share, basic	$	0.40	$	0.53	$	0.43	$	1.36
Net income per share, diluted	$	0.33	$	0.50	$	0.41	$	1.29

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

	Three Months Ended September 30,		Nine Months Ended September 30,
	2011	2010	2011	2010

Options to purchase shares of common stock and RSUs	1,849,813	3,920,284	2,040,507	3,872,697
2.25% Notes convertible into shares of common stock	—	—	3,549,377	—

Comprehensive Income

During the three and nine months ended September 30, 2011 and 2010, comprehensive income included the Company’s net income as well as increases in unrealized gains and losses on the Company’s available-for-sale securities.

The following table summarizes the components of comprehensive income:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
	(in thousands)					(in thousands)
Net income	$	24,235		$	31,228	$	26,205		$	79,775
Increase in unrealized loss on auction rate securities	—			—		—			(237		)
Other unrealized investment (losses) gains	(333		)	548		(480		)	510
Total comprehensive income	$	23,902		$	31,776	$	25,725		$	80,048

Subsequent Events

Cubist considers events or transactions that have occurred after the balance sheet date of September 30, 2011, but prior to the filing of the financial statements with the SEC on this Form 10-Q to provide additional evidence relative to certain estimates or to identify matters that require additional recognition or disclosure. Subsequent events have been evaluated through the date of the filing with the SEC of this Quarterly Report on Form 10-Q. On October 24, 2011, Cubist entered into an Agreement and Plan of Merger, or Merger Agreement, to acquire all of the outstanding shares of Adolor Corporation, or Adolor, which occurred after September 30, 2011, and is considered a nonrecognizable subsequent event. See Note M., “Subsequent Event,” for additional information.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board, or FASB, issued amended accounting guidance for goodwill in order to simplify how companies test goodwill for impairment. The amendments permit a company to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, a company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if a company’s financial statements for the most recent annual or interim period have not yet been issued. The Company does not expect the adoption to have any impact on its consolidated financial statements.

In June 2011, the FASB issued an amendment to the accounting guidance for presentation of comprehensive income. Under the amended guidance, a company may present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In either case, a company is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of choice in presentation, a company is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. For public companies, the amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and shall be applied retrospectively. Early adoption is permitted. Other than a change in presentation, the adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

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In May 2011, the FASB amended the accounting guidance for fair value to develop common requirements between GAAP and International Financial Reporting Standards. The amendments clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and in some instances change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Notable changes under the amended guidance include: (i) application of the highest and best use and valuation premise concepts solely for non-financial assets and liabilities; (ii) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity; and (iii) disclosing quantitative information about unobservable inputs used in the fair value measurement within Level 3 of the fair value hierarchy. For public entities, the amendment is effective for interim and annual periods beginning after December 15, 2011. Early application is not permitted. The Company is currently evaluating the impact of these amendments on its financial statements and related disclosures.

B. INVESTMENTS

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

	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(in thousands)
Balance at September 30, 2011:
Bank deposits	$	81,008	$	—	$	—		$	81,008
U.S. treasury securities	102,146		68		(1		)	102,213
Federal agencies	51,549		—		(6		)	51,543
Corporate and municipal notes	446,874		4		(468		)	446,410
Total	$	681,577	$	72	$	(475	)	$	681,174

Balance at December 31, 2010:
Bank deposits	$	10,000	$	—	$	—		$	10,000
U.S. treasury securities	110,513		106		(6		)	110,613
Federal agencies	47,149		7		(2		)	47,154
Corporate notes	339,200		162		(186		)	339,176
Total	$	506,862	$	275	$	(194	)	$	506,943

The following table contains information regarding the range of contractual maturities of the Company’s short-term and long-term investments (in thousands):

	September 30, 2011				December 31, 2010
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Within 1 year	$	681,577	$	681,174	$	486,819	$	486,842
1-2 years	—		—		20,043		20,101
Total	$	681,577	$	681,174	$	506,862	$	506,943

Certain short-term debt securities with original maturities of less than 90 days are included in cash and cash equivalents on the condensed consolidated balance sheets and are not included in the tables above. In addition, certain bank deposits with original maturities of more than 90 days are not considered available-for-sale securities and are not included in the tables above. See Note A., “Basis of Presentation and Accounting Policies,” and Note C., “Fair Value Measurements,” for additional information.

C. FAIR VALUE MEASUREMENTS

The accounting standard for fair value measurements defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and requires detailed disclosures about fair value measurements. Under this standard, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily

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obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. This standard classifies these inputs into the following hierarchy:

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

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

Level 3 Inputs—Instruments with primarily unobservable value drivers.

There were no transfers between fair value measurement levels 1 and 2 during the three and nine months ended September 30, 2011.

The Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, are classified in the table below into one of the three categories described above:

	September 30, 2011
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Bank deposits	$	—	$	81,008	$	—	$	81,008
U.S. treasury securities	102,213		—		—		102,213
Federal agencies	51,543		—		—		51,543
Corporate and municipal notes	—		480,858		—		480,858
Total assets	$	153,756	$	561,866	$	—	$	715,622
Liabilities
Contingent consideration	$	—	$	—	$	131,480	$	131,480
Total liabilities	$	—	$	—	$	131,480	$	131,480

	December 31, 2010
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Bank deposits	$	—	$	10,000	$	—	$	10,000
U.S. treasury securities	150,111		—		—		150,111
Federal agencies	47,154		—		—		47,154
Corporate notes	—		391,027		—		391,027
Total assets	$	197,265	$	401,027	$	—	$	598,292
Liabilities
Contingent consideration	$	—	$	—	$	86,497	$	86,497
Total liabilities	$	—	$	—	$	86,497	$	86,497

The Company revised its fair value table as of December 31, 2010, to remove approximately $146.2 million of bank deposits classified as cash and cash equivalents that are not subject to the accounting guidance for fair value measurements. This revision had no impact on Cubist’s results of operations or financial condition as of September 30, 2011 and December 30, 2010.

Marketable Securities

The Company classifies its bank deposits and corporate and municipal notes as Level 2 under the fair value hierarchy. These assets have been valued by a third-party pricing service at each balance sheet date, using observable market inputs that may include trade information, broker or dealer quotes, bids, offers, or a combination of these data sources. The fair value hierarchy level is determined by asset class based on the lowest level of significant input.

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Level 3 Roll-forward

The table below provides a reconciliation of fair value for which the Company used Level 3 inputs:

	Contingent Consideration
	(in thousands)
Balance at December 31, 2010	$	86,497
Contingent consideration expense	84,983
Contingent consideration payment	(40,000		)
Balance at September 30, 2011	$	131,480

Contingent Consideration

Contingent consideration relates to potential amounts payable by the Company to the former stockholders of Calixa upon the achievement of certain development, regulatory and sales milestones with respect to CXA-201 in connection with the Company’s acquisition of Calixa. As of September 30, 2011 and December 31, 2010, the fair value of the contingent consideration liability was estimated to be $131.5 million and $86.5 million, respectively, and was determined based on a probability-weighted income approach. This valuation takes into account various assumptions, including the probabilities associated with successfully completing clinical trials, obtaining regulatory approval, the commercial success of the product and the period in which these milestones are achieved, as well as a discount rate of 5.25%, which represents a pre-tax working capital rate. This valuation was developed using assumptions the Company believes would be made by a market participant. The Company assesses these estimates on an on-going basis as additional data impacting the assumptions is obtained.

First patient enrollment in Phase 3 clinical trials for cUTI occurred in July 2011 and triggered a $40.0 million milestone payment, which Cubist paid to Calixa’s former stockholders during the three months ended September 30, 2011. Cubist may be required to make up to an additional $250.0 million of undiscounted payments to the former stockholders of Calixa, including a milestone payment of $30.0 million related to first patient enrollment in a Phase 3 clinical trial for cIAI, which is expected to be achieved in the fourth quarter of 2011. The decrease of $37.9 million in the fair value of the contingent consideration liability during the three months ended September 30, 2011, is the result of the $40.0 million milestone payment discussed above, partially offset by $2.1 million of contingent consideration expense recorded primarily as a result of the time value of money. The increase of $45.0 million in the fair value of the contingent consideration liability during the nine months ended September 30, 2011, is primarily the result of an increase in the probabilities of success of certain milestones during the second quarter of 2011, partially offset by the $40.0 million milestone payment. The probability of achieving the first patient enrollment milestone for the Phase 3 clinical trial for cUTI was increased to 100% as a result of the commencement of the trial, and the probability of achieving the first patient enrollment milestone for cIAI was increased to approximately 100%. The probabilities of success for subsequent associated milestones used in estimating fair value were also increased as a result of receiving positive top-line results from the Phase 2 clinical trial of CXA-201 as a potential treatment for cIAI. In addition, the probability of enrollment in a Phase 3 clinical trial of CXA-201 as a potential treatment for hospital-acquired and ventilator-associated bacterial pneumonia in 2012 and the resulting fair value of the associated milestone were increased. This milestone would be satisfied by enrollment in such a trial to support a filing for marketing approval in either the U.S. or the European Union.

Contingent consideration expense may change significantly as development of CXA-201 progresses and additional data is obtained, impacting the Company’s assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability. These assumptions require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. Such changes could materially impact the Company’s results of operations in future periods. In addition, any contingent consideration payments made in the future are largely not deductible for tax purposes.

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D. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following at:

	September 30,			December 31,
	2011			2010
	(in thousands)
Land and buildings	$	118,711		$	62,134
Leasehold improvements	—			11,650
Laboratory equipment	29,065			26,943
Furniture and fixtures	2,504			2,472
Computer hardware and software	21,250			20,009
Construction-in-progress	41,849			11,662
	213,379			134,870
Less: accumulated depreciation	(55,085		)	(52,436		)
Property and equipment, net	$	158,294		$	82,434

Depreciation expense was $2.2 million and $2.4 million for the three months ended September 30, 2011 and 2010, respectively. Depreciation expense was $7.0 million and $6.5 million for the nine months ended September 30, 2011 and 2010, respectively. Property and equipment additions during the three and nine months ended September 30, 2011, related to both the construction-in-progress for the continued expansion of the Company’s principal headquarters and research laboratory and related facilities at 65 Hayden Avenue in Lexington, Massachusetts, or 65 Hayden, and the purchase of the building and land at 45-55 Hayden Avenue, Lexington, Massachusetts, or 45-55 Hayden, that was acquired in July 2011.

The property at 45-55 Hayden, which consists of land and approximately 210,000 square feet of primarily office space, is adjacent to the property that Cubist owns at 65 Hayden. Prior to the acquisition, Cubist leased approximately 178,000 square feet of space in the 45-55 Hayden building. The leases terminated upon the closing of the acquisition. Pursuant to the agreement of purchase and sale, Cubist paid $53.5 million, before adjustments, to acquire 45-55 Hayden, which approximated its fair value. The Company allocated $12.1 million and $44.8 million of the total acquisition cost of $56.9 million, which includes a net adjustment for existing leasehold improvements that were incorporated in the total acquisition cost, to the land and building, respectively, based on the relative fair value at the date of acquisition. The acquisition was funded from the Company’s existing cash balances.

E. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

The Company’s goodwill balance remained unchanged as of September 30, 2011, as compared to December 31, 2010. As of September 30, 2011, there were no accumulated impairment losses. Goodwill has been assigned to the Company’s only reporting unit. See Note J., “Segment Information,” for additional information.

Other intangible assets, net consisted of the following at:

		September 30,			December 31,
		2011			2010
		(in thousands)
Patents		$	2,627		$	2,627
Manufacturing rights		2,500			2,500
Acquired technology rights		28,500			28,500
Intellectual property and processes and other intangible assets		5,388			5,388
		39,015			39,015
Less:	accumulated amortization – patents	(2,353		)	(2,307		)
	accumulated amortization – manufacturing rights	(2,500		)	(2,500		)
	accumulated amortization – acquired technology rights	(16,827		)	(14,983		)
	accumulated amortization – intellectual property	(5,388		)	(5,380		)
Intangible assets, net		$	11,947		$	13,845

Amortization expense was $0.6 million and $0.7 million for the three months ended September 30, 2011 and 2010, respectively, and $1.9 million and $2.2 million for the nine months ended September 30, 2011 and 2010, respectively. The estimated aggregate amortization of intangible assets as of September 30, 2011, for each of the five succeeding years and thereafter is as follows:

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	(in thousands)
Remainder of 2011	$	622
2012	2,521
2013	2,521
2014	2,521
2015	2,521
2016 and thereafter	1,241
	$	11,947

F. DEBT

Debt is comprised of the following amounts at:

	September 30,			December 31,
	2011			2010
	(in thousands)
Total 2.50% Notes outstanding at the end of the period	$	450,000		$	450,000
Unamortized discount	(99,314		)	(108,899		)
Net carrying amount of the liability component of the 2.50% Notes	350,686			341,101

Total 2.25% Notes outstanding at the end of the period	109,218			109,218
Unamortized discount	(10,397		)	(14,519		)
Net carrying amount of the liability component of the 2.25% Notes	98,821			94,699

Total carrying amount of the liability components of the 2.50% Notes and 2.25% Notes	$	449,507		$	435,800

2.50% Notes

In October 2010, Cubist issued $450.0 million aggregate principal amount of the 2.50% Notes due November 2017, resulting in net proceeds to Cubist, after debt issuance costs, of $436.0 million. The 2.50% Notes are convertible into common stock at an initial conversion rate of 34.2759 shares of common stock per $1,000 principal amount of convertible notes, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $29.18 per share of common stock. Holders of the 2.50% Notes may convert the 2.50% Notes at any time prior to the close of business on the business day immediately preceding May 1, 2017, only under the following circumstances: (i) during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Cubist’s common stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. Upon conversion, Cubist may deliver cash, common stock or a combination of cash and common stock, at Cubist’s option, to the note holders that requested the conversion. Interest is payable to the note holders on each May 1st and November 1st, beginning May 1, 2011. As of September 30, 2011, the “if-converted value” exceeded the principal amount of the 2.50% Notes by $94.8 million.

In accordance with accounting guidance for debt with conversion and other options, Cubist separately accounted for the liability and equity components of the 2.50% Notes in a manner that reflected its non-convertible debt borrowing rate of similar debt. The equity component of the 2.50% Notes was recognized as a debt discount and is amortized to the condensed consolidated statements of income over the expected life of a similar liability without the equity component. The Company determined this expected life to be equal to the seven-year term of the 2.50% Notes, resulting in an amortization period ending November 1, 2017. The net carrying value of the equity component of the 2.50% Notes as of both September 30, 2011 and December 31, 2010, was $66.4 million. The unamortized discount on the liability component is being amortized to interest expense using the effective interest method over the term of the 2.50% Notes. For the three and nine months ended September 30, 2011, the effective interest rate on the liability component of the 2.50% Notes was 7.0%. The fair value of the $450.0 million aggregate principal amount of the outstanding 2.50% Notes was estimated to be $614.3 million as of September 30, 2011, and was determined using a quoted market rate.

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2.25% Notes

In June 2006, Cubist completed the public offering of $350.0 million aggregate principal amount of its 2.25% Notes due June 2013. The 2.25% Notes are convertible at any time prior to maturity into common stock at an initial conversion rate of 32.4981 shares of common stock per $1,000 principal amount of 2.25% Notes, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $30.77 per share of common stock. Cubist may deliver cash or a combination of cash and common stock in lieu of shares of common stock at Cubist’s option. Interest is payable on each June 15th and December 15th. Cubist retains the right to redeem all or a portion of the 2.25% Notes at 100% of the principal amount plus accrued and unpaid interest if the closing price of Cubist’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the date one day prior to the day the Company gives a notice of redemption is greater than 150% of the conversion price on the date of such notice. In February 2008, Cubist repurchased $50.0 million in original principal amount of the 2.25% Notes, reducing the outstanding amount of the 2.25% Notes from $350.0 million to $300.0 million, at an average price of approximately $93.69 per $100 of debt. These repurchases, which were funded out of the Company’s working capital, reduced Cubist’s fully-diluted shares of common stock by approximately 1,624,905 shares.

In October 2010, the Company used a portion of the net proceeds from the issuance of the 2.50% Notes to repurchase, in privately negotiated transactions, $190.8 million aggregate principal amount of the 2.25% Notes at an average price of approximately $105.37 per $100 par value of debt plus accrued interest and transaction fees. These repurchases reduced Cubist’s fully-diluted shares of common stock by approximately 6,200,053 shares. The remaining shares attributable to the 2.25% Notes could potentially dilute the Company’s shares of common stock outstanding if converted. As of September 30, 2011, the “if-converted value” exceeded the principal amount of the 2.25% Notes by $16.1 million.

In accordance with accounting guidance for debt with conversion and other options, Cubist separately accounted for the liability and equity components of the 2.25% Notes in a manner that reflected its non-convertible debt borrowing rate of similar debt. The equity component was recognized as a debt discount and is amortized to the condensed consolidated statements of income over the expected life of a similar liability without the equity component. The Company determined this expected life to be equal to the seven-year term of the 2.25% Notes, resulting in an amortization period ending June 15, 2013. The net carrying value of the equity component of the 2.25% Notes as of September 30, 2011 and December 31, 2010, was $42.5 million. The unamortized discount on the liability component is being amortized to interest expense using the effective interest method over the term of the note. For the three and nine months ended September 30, 2011 and 2010, the effective interest rate on the liability component of the 2.25% Notes was approximately 8.4%. The fair value of the $109.2 million aggregate principal amount of the outstanding 2.25% Notes was estimated to be $137.3 million as of September 30, 2011, and was determined using a quoted market rate.

The table below summarizes the interest expense the Company incurred on its 2.50% Notes and 2.25% Notes for the periods presented:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
	(in thousands)					(in thousands)
Contractual interest coupon payment	$	3,427		$	1,687	$	10,290		$	5,063
Amortization of discount on debt	4,653			3,622		13,707			10,642
Amortization of the liability component of the debt issuance costs	457			225		1,371			674
Capitalized interest	(659		)	—		(1,783		)	—
Total interest expense	$	7,878		$	5,534	$	23,585		$	16,379

Credit Facility

In December 2008, Cubist entered into a $90.0 million revolving credit facility with RBS Citizens National Association, or RBS Citizens, for general corporate purposes. Under the revolving credit facility, Cubist may request to borrow at any time a minimum of $1.0 million up to the maximum of the available remaining credit. Any amounts borrowed under the facility will be secured by the pledge of a certificate of deposit issued by RBS Citizens and/or an RBS Citizens money market account equal to an aggregate of 102% of the outstanding principal amount of the loans, so long as such loans are outstanding. Interest expense on the borrowings can be based, at Cubist’s option, on LIBOR plus a margin or the prime rate. Any borrowings under the facility are due on demand or upon termination of the revolving credit agreement. There were no outstanding borrowings under the credit facility as of September 30, 2011 or December 31, 2010.

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G. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at:

	September 30,		December 31,
	2011		2010
	(in thousands)
Accrued royalty	$	32,349	$	49,212
Accrued Medicaid and Medicare rebates	12,834		6,279
Accrued benefit costs	6,372		4,499
Accrued bonus	9,266		10,187
Accrued clinical trials	6,487		4,338
Accrued incentive compensation	4,161		3,687
Accrued interest	5,392		2,153
Other accrued costs	16,878		13,172
Accrued liabilities	$	93,739	$	93,527

Accrued royalties are comprised of royalties owed on net sales of CUBICIN under Cubist’s license agreement with Eli Lilly & Co., or Eli Lilly. Accrued royalties decreased at September 30, 2011, as compared to December 31, 2010, due to the semi-annual royalty payment made to Eli Lilly in August 2011.

H. INVENTORY

Inventories consisted of the following at:

	September 30,		December 31,
	2011		2010
	(in thousands)
Raw materials	$	10,838	$	7,692
Work-in-process	6,251		7,056
Finished goods	4,651		9,076
Inventory	$	21,740	$	23,824

In September 2011, the Company was notified by one of its third-party, fill-finish manufacturers that certain inventory batches did not meet specification and were unsaleable. The Company disposed of the work-in-process inventory and recorded a write-off of $4.7 million, which was included within cost of product revenues for the three and nine months ended September 30, 2011.

I. EMPLOYEE STOCK BENEFIT PLANS

Summary of Stock-Based Compensation Expense

Stock-based compensation expense recorded in the condensed consolidated statements of income for the three and nine months ended September 30, 2011 and 2010, is as follows:

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)						(in thousands)
Stock-based compensation expense allocation:
Cost of product revenues	$	66		$	98		$	160		$	363
Research and development	1,875			1,300			4,675			3,774
Selling, general and administrative	3,534			2,629			9,135			7,801
Total stock-based compensation	5,475			4,027			13,970			11,938
Income tax effect	(2,081		)	(1,588		)	(5,308		)	(4,817		)
After-tax effect of stock-based compensation expense	$	3,394		$	2,439		$	8,662		$	7,121

General Option Information

A summary of option activity for the nine months ended September 30, 2011, is as follows:

	Number of shares		Weighted Average Exercise Price
Outstanding at December 31, 2010	9,319,258		$	19.40
Granted	1,830,450		$	33.82
Exercised	(1,774,174	)	$	18.56
Canceled	(296,713	)	$	25.27
Outstanding at September 30, 2011	9,078,821		$	22.28

Vested and exercisable at September 30, 2011	5,575,466		$	19.28

Weighted average grant-date fair value of options granted during the period			$	12.40

RSU Information

A summary of RSU activity for the nine months ended September 30, 2011, is as follows:

	Number of shares		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2010	411,322		$	19.86
Granted	366,904		$	34.80
Vested	(110,856	)	$	19.58
Forfeited	(24,133	)	$	21.17
Nonvested at September 30, 2011	643,237		$	28.38

J. SEGMENT INFORMATION

Cubist operates in one business segment, the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. The Company’s entire business is managed by a single management team, which reports to the Chief Executive Officer. Approximately 95% of the Company’s revenues are currently generated within the U.S.

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K. INCOME TAXES

The following table summarizes the Company’s effective tax rates and income tax provisions for the three and nine months ended September 30, 2011 and 2010:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands, except percentages)
Effective tax rate	61.1		%	39.3		%	61.8		%	39.5		%
Provision for income taxes	$	38,081		$	20,225		$	42,453		$	52,045

The effective tax rates of 61.1% and 61.8% for the three and nine months ended September 30, 2011, respectively, differ from the U.S. federal statutory income tax rate of 35.0% and from the effective tax rates of 39.3% and 39.5% for the three and nine months ended September 30, 2010, respectively, primarily due to the impact of non-deductible contingent consideration expense. Contingent consideration expense recorded during the three and nine months ended September 30, 2011, impacted the effective tax rates by approximately 24.4% and 24.5%, respectively. During the three months ended September 30, 2011, the Company also recorded a discrete tax benefit of $3.1 million net of federal tax, related to the reduction in deferred state tax liabilities, as discussed below.

Certain stock option exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant. Although these additional tax benefits, or “windfalls”, are reflected in the net operating loss carryforwards in tax returns, pursuant to the guidance for accounting for stock-based compensation, the additional tax benefit associated with the windfall is recorded as a credit to equity as the benefits result in a reduction of current taxes. In addition, the Company’s accounting policy is to treat windfall benefits as the last tax attributes utilized. Therefore, deferred tax assets at December 31, 2010, do not reflect approximately $8.1 million of federal and state tax benefits related to stock compensation deductions on the basis that these excess tax benefits did not result in a decrease in the Company’s tax liability as of December 31, 2010.

The Company expects to fully utilize all tax credit carryforwards in 2011 and, therefore, with the exception of certain state tax benefits, all tax benefits related to stock-based compensation deductions will have resulted in a reduction in current taxes. Accordingly, the Company has recorded a benefit of $13.2 million to additional paid-in capital related to these tax benefits during the nine months ended September 30, 2011, of which $5.3 million related to current year excess tax benefits in connection with stock-based compensation deductions.

During the first quarter of 2011, the Company made a decision to file amended state income tax returns for the years ended December 31, 2008 and 2009, and to file its 2010 state income tax returns using the same filing positions as the amended 2008 and 2009 returns. This decision resulted in an increase in the amount of uncertain tax positions of approximately $11.0 million for state tax purposes for the three months ended March 31, 2011. During the three months ended September 30, 2011, as a result of a change in circumstances impacting certain state tax filing positions related to years beginning in 2012, the Company reevaluated its uncertain tax positions and recognized a discrete tax benefit of $4.8 million, or $3.1 million net of federal tax, related to the reduction in deferred state tax liabilities, and maintained a reserve of approximately $5.4 million for uncertain tax positions as of September 30, 2011, related to prior years.

L. COMMITMENTS

Astellas Milestone

Cubist has an obligation to make milestone payments to Astellas Pharma, Inc., or Astellas, under the Astellas license agreement, as amended, in which the Company has exclusive rights to manufacture, market and sell any eventual products which incorporate CXA-101, including CXA-201, in all territories of the world except select Asia-Pacific and Middle Eastern territories and to develop such products in all territories of the world. Pursuant to the agreement, the Company made a $4.0 million development milestone payment to Astellas as a result of first patient enrollment in a Phase 3 clinical trial of CXA-201 for cUTI. This milestone payment was recorded as research and development expense within the condensed consolidated income statements for the three and nine months ended September 30, 2011. Remaining milestone payments to Astellas under the Astellas license agreement could total up to $40.0 million if certain specified development and sales events are achieved. The remaining potential development and sales milestone payments to Astellas will be expensed as incurred to research and development and cost of product revenues, respectively. In addition, if products covered by this license are successfully developed and commercialized in the territories, Cubist will be

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

· our expectations regarding our financial performance, including revenues, expenses, capital expenditures and income taxes;

· our expectations regarding the commercialization and manufacturing of CUBICIN® (daptomycin for injection);

· our expectations regarding the strength of our intellectual property portfolio protecting CUBICIN and our ability to enforce this intellectual property portfolio and prevent any third parties from marketing a generic version of CUBICIN in the United States, or U.S., before the earlier of the expiration of certain of the patents covering CUBICIN and the date Teva Parenteral Medicines, Inc., or Teva, is allowed to launch a generic version of CUBICIN under our settlement and license agreement, or settlement agreement, with Teva and its affiliates;

· our expectations regarding our drug candidates, including the anticipated timing and results of our clinical trials, timing of our meetings with regulatory authorities, and the development, regulatory review and commercial potential of such drug candidates and the costs and expenses related thereto;

· our expectations regarding advancing clinical development, filing for approval, including in which countries and regions we expect such filings to occur, and the commercialization of CXA-201 for its currently planned indications of complicated urinary tract infections, or cUTI, complicated intra-abdominal infections, or cIAI, hospital-acquired bacterial pneumonia, or HABP, and ventilator-associated bacterial pneumonia, or VABP, our characterization of results received to date, including receipt of positive top-line results from our recently completed Phase 2 clinical trial of CXA-201 as a potential treatment for cIAI, and our estimates of potential future milestone payments to the former stockholders of Calixa Therapeutics Inc., or Calixa, based on such advancement of CXA-201;

· our expectations regarding the commercial success of DIFICIDTM;

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

· our expectations regarding the closing, and the timing of closing, of our planned acquisition of Adolor Corporation, or Adolor;

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

· the liquidity and credit risk of securities that we hold as investments;

· the impact of current and new accounting pronouncements;

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· our expectations regarding the impact of U.S. health care reform legislation enacted in March 2010, or health care reform;

· our expectations regarding the timing and completion of the construction project to expand our principal headquarters and research laboratory and related facilities at 65 Hayden Avenue in Lexington, Massachusetts, or 65 Hayden;

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

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

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

· the U.S. Federal Trade Commission, or FTC, the U.S. Department of Justice, or DOJ, or a third party successfully challenging the settlement agreement with Teva and its affiliates;

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

· any changes in the current or anticipated market demand or medical need for CUBICIN, including as a result of the current flattened growth of the incidence of methicillin-resistant Staphylococcus aureus (S. aureus), or MRSA, skin and bloodstream infections or the economic conditions in the U.S. and around the world, which are leading to cost pressures at hospitals and other institutions where CUBICIN is prescribed and purchased;

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

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

· competition in the markets in which we and our partners market CUBICIN, including from existing products and new agents, such as Teflaro™ (ceftaroline fosamil), that have recently received marketing approval in the U.S.;

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

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

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

· in the case of our planned acquisition of Adolor, the failure to satisfy any of the closing conditions set forth in the Agreement and Plan of Merger, or Merger Agreement;

· the ability of our third-party manufacturers, including our single source provider of CUBICIN active pharmaceutical ingredient, or API, and our two finished drug product suppliers, to manufacture, store, release and deliver sufficient quantities of CUBICIN in accordance with Good Manufacturing Practices, or GMPs, which are guidelines required by the U.S. Food and Drug Administration, or FDA, and other requirements of the regulatory approvals for CUBICIN, which include adherence to strictly-specified processes, in order to meet market demand for our sales in the U.S. and for our supply obligations to our international CUBICIN distribution partners, and to do so at an acceptable cost;

· our ability to work successfully with Optimer Pharmaceuticals, Inc., or Optimer, with respect to promoting and supporting DIFICID in the U.S. and similar market and competitive factors with respect to DIFICID in the U.S. as those described above with respect to CUBICIN;

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

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· whether the FDA or comparable agencies around the world such as the European Medicines Agency, or EMA, issue guidelines that allow for a viable pathway for us to seek approvals for our drug candidates in the indications for which we hope to gain approvals; whether the FDA, EMA or comparable agencies around the world accept proposed clinical trial protocols in a timely manner for studies of our drug candidates; and our ability to execute successful, adequate and well-controlled clinical trials in a timely manner and other risks that may cause our trials to be delayed or stopped or compromise the integrity of the data from such trials;

· the impact of the results of ongoing or future trials for drug candidates that we currently are developing, including CXA-201 and CB-183,315, or may develop in the future, including the impact of unanticipated safety or efficacy data from such trials;

· our ability, and our partners’ ability, to protect the proprietary technologies and intellectual property related to CUBICIN and our product candidates;

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

· the impact of current and future health care reform, or changes to the existing legislation, and of other future legislative and policy changes in the U.S. and other jurisdictions where our products are sold, including price controls or taxes, that may affect our revenues or results of operations or the ease of getting a new product or a new indication approved;

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

· unanticipated changes in our expectations for revenues, expenses or capital expenditures, and the impact on our effective tax rates;

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

· our dependence upon collaborations and alliances, particularly our ability to work effectively with our partners and our partners’ ability to meet their obligations and perform effectively under our agreements and to do so in compliance with applicable laws, including laws in international jurisdictions and U.S. laws, such as the Foreign Corrupt Practices Act, or FCPA, that relate to activities in international markets;

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

· our ability to finance our operations;

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

· unexpected delays or expenses related to our pipeline programs or ongoing capital projects, including the expansion of our laboratories and related space at our 65 Hayden facility; and

· a variety of risks common to our industry, including ongoing regulatory review, public and investment community perception of the biopharmaceutical industry, statutory or regulatory changes including with respect to federal and state taxation, and our ability to attract and retain talented employees.

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

· Overview: This section provides a summary of our business, of our product pipeline and of our performance during the three and nine months ended September 30, 2011.

· Results of Operations: This section provides a review of our results of operations for the three and nine months ended September 30, 2011 and 2010, respectively.

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

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

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

Overview

We are a biopharmaceutical company headquartered in Lexington, Massachusetts, focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. CUBICIN is, and our current drug product candidates, if granted marketing approval, are expected to be, used in the U.S. approximately equally in hospitals and other acute care settings, including home infusion and outpatient clinics. Outside of the U.S., where outpatient infusion is a less established practice, the use of CUBICIN is primarily in the hospital setting.

We had a total of $975.2 million in cash, cash equivalents and investments as of September 30, 2011, as compared to $909.9 million in cash, cash equivalents and investments as of December 31, 2010. As of September 30, 2011, we had an accumulated deficit of $111.1 million.

On October 24, 2011, we entered into the Merger Agreement with Adolor, a publicly-held biopharmaceutical company specializing in the discovery, development and commercialization of novel prescription pain and pain management products, in a cash transaction valued at up to $415.0 million, net of estimated cash acquired, based upon Adolor’s cash balances at September 30, 2011. Under the terms of the Merger Agreement, we will commence a tender offer to purchase all of the outstanding shares of Adolor’s common stock at a price of $4.25 per share in cash, or approximately $190.0 million on a fully-diluted basis, net of cash acquired. The aggregate cash to be paid is subject to adjustment based upon Adolor’s cash balance at the time of closing of the acquisition. In addition to the upfront cash payment, each Adolor stockholder will receive one contingent payment right, entitling the holder to receive additional cash payments of up to $4.50 for each share they own if certain regulatory approvals and/or commercialization milestones for ADL5945, Adolor’s lead development program for the treatment of chronic opioid-induced constipation, are achieved.

Consummation of the pending acquisition of Adolor is subject to various customary closing conditions. The transaction, which has been unanimously approved by the Boards of Directors of both companies, is expected to close in the fourth quarter of 2011. We expect to fund the acquisition of Adolor, if consummated, with our existing cash balances. See Note M., “Subsequent Event,” in the accompanying notes to the condensed consolidated financial statements for additional information.

During the nine months ended September 30, 2011, we recognized $85.0 million of contingent consideration expense related to increasing the fair value of our contingent consideration liability, which resulted in a net loss of $20.6 million during the second quarter of 2011. See the “Results of Operations” and “Commitments and Contingencies” sections of this MD&A for additional information. The following table is a summary of our financial results for the periods presented:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(in millions, except per share data)
Net worldwide CUBICIN revenues	$	196.2	$	160.5	$	534.5	$	463.7
Net income	$	24.2	$	31.2	$	26.2	$	79.8
Basic net income per common share	$	0.40	$	0.53	$	0.43	$	1.36
Diluted net income per common share	$	0.33	$	0.50	$	0.41	$	1.29

CUBICIN. We currently derive substantially all of our revenues from CUBICIN, which we launched in the U.S. in November 2003. We commercialize CUBICIN on our own in the U.S. and have established distribution agreements with other companies for commercialization of CUBICIN in countries outside the U.S. CUBICIN is a once-daily, bactericidal, intravenous, or I.V., antibiotic with activity against certain Gram-positive organisms, including MRSA. CUBICIN is approved in the U.S. for the treatment of complicated skin and skin structure infections, or cSSSI, caused by S. aureus, and certain other Gram-positive bacteria, and for S. aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis, or RIE, caused by methicillin-susceptible and methicillin-resistant isolates. In the European Union, or EU, CUBICIN is approved for the treatment of complicated skin and soft tissue infections, or cSSTI, where the presence of susceptible Gram-positive bacteria is confirmed or suspected and for RIE due to S. aureus bacteremia and S. aureus bacteremia associated with RIE or cSSTI. CUBICIN has received similar approvals in other parts of the world as well and is now marketed in a total of 52 countries globally. In September 2011, Merck & Co., Inc., or Merck, commenced the commercial launch of CUBICIN in Japan through its wholly-owned subsidiary, MSD Japan.

We expect both net revenues from sales of CUBICIN in the U.S. and our revenues from CUBICIN sales outside the U.S. to continue to increase due primarily to increased vial sales, market penetration into a large market, and price increases we and our international partners may implement. There are a number of events, trends and uncertainties that are impacting or may impact our revenues from CUBICIN and the growth of such revenues. The more significant of these events, trends and uncertainties are described below, and these, and certain other risks and uncertainties applicable to CUBICIN, are set forth in Item 1A., “Risk Factors,” of this report:

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

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· price increases that we have implemented for CUBICIN, the lack of overall growth in the market for CUBICIN, and the evolving profile of competitors;

· persisting economic problems, which have led to increased efforts by hospitals and others to minimize expenditures by encouraging the purchase of lower-cost alternative therapies, including generic products like vancomycin, patients electing lower cost alternative therapies due to increased out-of-pocket costs, patients choosing to have fewer elective surgeries and other procedures, and lower overall admissions to hospitals;

· our ability to secure sufficient quantities of CUBICIN API and drug product to meet U.S. and worldwide demand, including our obligations to supply CUBICIN to our international distribution partners;

· changes in private and governmental reimbursement levels for CUBICIN; and

· higher discounts, rebate levels, branded drug fees and other payments for sales under federal government programs due to health care reform or other government initiatives.

On April 4, 2011, we entered into a settlement and license agreement, or settlement agreement, with Teva and its affiliates to resolve our patent infringement litigation with respect to CUBICIN. We originally filed the patent infringement lawsuit in March 2009 in response to the February 9, 2009, notification to us by Teva that it had submitted an Abbreviated New Drug application, or ANDA, to the FDA seeking approval to market a generic version of CUBICIN. The settlement agreement provides for a full settlement and release by both us and Teva of all claims that were or could have been asserted in the patent infringement litigation and all resulting damages or other remedies. Under the settlement agreement, we granted Teva a non-exclusive, royalty-free license to sell a generic daptomycin for injection product in the U.S. beginning on the later of (i) December 24, 2017, and (ii) if our daptomycin for injection product receives pediatric exclusivity, June 24, 2018. The license we granted to Teva would become effective prior to the later of these two dates if the patents that were the subject of the patent litigation with Teva are held invalid, unenforceable or not infringed with respect to a third party’s generic version of daptomycin for injection, if a third party sells a generic version of daptomycin for injection under a license or other authorization from us, or if there are no longer any unexpired patents listed in the FDA’s list of “Approved Drug Products with Therapeutic Equivalence Evaluations,” or the Orange Book, as applying to our New Drug Application, or NDA, covering CUBICIN. The license is granted under the patents that were the subject of the litigation, any other patents listed in the Orange Book as applying to Cubist’s NDA covering CUBICIN, and any other U.S. patents that we have the right to license and that cover Teva’s generic version of daptomycin for injection. The license terminates upon the expiration, or an unappealed or unappealable determination of invalidity or unenforceability, of all the licensed patents, including any pediatric or other exclusivity relating to the licensed patents or CUBICIN. Two of the three patents that were the subject of the litigation are currently due to expire on September 24, 2019, and the third is due to expire on June 15, 2016. In September 2011, we listed in the Orange Book under our NDA covering CUBICIN another patent, U.S. Patent 8,003,673, which was granted on August 23, 2011, and expires on September 4, 2028. Teva may also sell the daptomycin for injection supplied by CUBICIN upon specified types of “at risk” launches of a generic daptomycin for injection product by a third party.

The settlement agreement also provides that, for the period that our license to Teva is in effect, Teva will purchase its U.S. requirements of daptomycin for injection exclusively from us. We are required to use commercially reasonable efforts to satisfy Teva’s requirements. The supply terms provide that we will receive payments from Teva for product supplied by us reflecting two components: one based on the cost of goods sold plus a margin, and the other based on a specified percentage of gross margin (referred to as net profit in the supply terms) from Teva’s sales of daptomycin supplied by us. The supply terms also provide for a forecasting and ordering mechanism, and that Teva will determine the price at which any such daptomycin for injection will be resold and the trademark and name under which it is sold, which may not be confusingly similar to our trademarks. In addition, under the supply terms, Teva may instead supply on its own or from a third party and sell its generic daptomycin for injection product in the event of specified Cubist supply failures or if the arrangement is terminated due to Cubist’s uncured breach or bankruptcy.

The settlement agreement will remain in effect until the expiration of the term of the license granted by us to Teva and the expiration of a non-exclusive royalty-free license granted by Teva to us under any Teva U.S. patent rights that Teva has the right to license and that may be applicable to CUBICIN and the daptomycin for injection product to be supplied by us to Teva. Each of Cubist and Teva may terminate the settlement agreement in the event of a material breach by the other party. In addition, each party may terminate the license granted by it to the other party in the event of a challenge of the licensed patents by the other party. The FTC or the DOJ could seek to challenge our settlement with Teva, or a competitor, customer or other third-party could initiate a private action under antitrust or other laws challenging our settlement with Teva.

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DIFICID. On April 5, 2011, we entered into a co-promotion agreement with Optimer, pursuant to which Optimer engaged Cubist as its exclusive partner for the promotion of DIFICID in the U.S. DIFICID was approved by the FDA in May 2011 for the treatment of Clostridium difficile-associated diarrhea, or CDAD. Under the terms of the co-promotion agreement, Optimer and Cubist will co-promote DIFICID to physicians, hospitals, long-term care facilities and other health care institutions, participate on joint committees and jointly provide medical affairs support for DIFICID. Under the terms of the co-promotion agreement, Optimer will be responsible for the sale and distribution of DIFICID in the U.S. The initial term of the co-promotion agreement is approximately two years from the date of first commercial sale of DIFICID in the U.S., which occurred in July 2011. Optimer paid us a quarterly fee of $3.8 million in June 2011, of which $3.0 million was recognized as service revenue during the three and nine months ended September 30, 2011, and will pay us quarterly payments of $3.8 million, or $30.0 million in the aggregate, during the term of the agreement. Service fees under the co-promotion will be recognized ratably over the term of the co-promotion agreement ending July 31, 2013. Cubist is also eligible to receive: (a) an additional $5.0 million in the first year after first commercial sale and $12.5 million in the second year after first commercial sale if mutually agreed-upon annual sales targets are achieved; and (b) a portion of Optimer’s gross profits derived from net sales above the specified annual targets, if any. The co-promotion agreement may be renewed by mutual agreement of the parties for additional, consecutive one-year terms. Each of Optimer and Cubist may terminate the co-promotion agreement prior to expiration upon the uncured material breach of the co-promotion agreement by the other party, upon the bankruptcy or insolvency of the other party, or in the event that actual net sales during the first year of commercial sales of DIFICID in the U.S. are below specified levels, subject to certain limitations. Optimer may terminate the co-promotion agreement, subject to certain limitations, if (i) Optimer withdraws DIFICID from the market in the U.S., (ii) Cubist fails to comply with applicable laws in performing its obligations, (iii) Cubist undergoes a change of control, (iv) certain market events occur related to CUBICIN in the U.S., or (v) Cubist undertakes certain restructuring activities with respect to its sales force. Cubist may terminate the co-promotion agreement, subject to certain limitations, if (i) Optimer experiences certain supply failures in relation to the demand for DIFICID in the U.S., (ii) Optimer is acquired by certain types of entities, including competitors of Cubist, (iii) certain market events occur related to CUBICIN in the U.S., or (iv) Optimer fails to comply with applicable laws in performing its obligations.

Product Pipeline. We are building a pipeline of acute care therapies through our business development efforts and progressing compounds into clinical development that we have developed internally.

CXA-201. In December 2009, we acquired Calixa and with it, rights to CXA-201, an I.V. combination of a novel anti-pseudomonal cephalosporin, CXA-101, which Calixa licensed from Astellas Pharma, Inc., or Astellas, and the beta-lactamase inhibitor tazobactam. Under the Astellas license agreement, as amended, we have the exclusive rights to manufacture, market and sell any eventual products which incorporate CXA-101, including CXA-201, in all territories of the world except select Asia-Pacific and Middle Eastern territories, and to develop such products in all territories of the world. We are developing CXA-201 as a first-line therapy for the treatment of certain serious Gram-negative bacterial infections in the hospital, including those caused by multidrug resistant P. aeruginosa. In June 2011, we received positive top-line results from our recently-completed Phase 2 trial of CXA-201 as a potential treatment for cIAI. This multicenter, double-blind, randomized study compared the safety and efficacy of CXA-201 and metronidazole to an active comparator in patients with cIAI. In August 2011, we enrolled the first patient in the Phase 3 clinical trials of CXA-201as a potential treatment for cUTI, and we expect to enroll the first patient in Phase 3 clinical trials of CXA-201 as a potential treatment for cIAI in the fourth quarter of 2011. We plan to file an NDA for both cUTI and cIAI by the end of 2013, assuming positive Phase 3 clinical trial results in both indications. We also are planning to pursue the development of CXA-201 as a potential treatment for HABP and VABP and expect to begin Phase 3 clinical trials of CXA-201 in these indications in 2012.

CB-183,315. CB-183,315 is a potent, oral, bactericidal lipopeptide with rapid in vitro bactericidal activity against C. difficile, which is an opportunistic anaerobic Gram-positive bacterium which causes CDAD. In June 2011, we received positive top-line results from our Phase 2 clinical trial of CB-183,315 as a potential treatment for CDAD, and in September 2011, we made a decision to advance CB-183,315 into Phase 3 and expect to initiate these trials in the first half of 2012.

Pre-clinical programs. We also are working on several pre-clinical programs, addressing areas of significant medical needs in the acute care area. These include therapies to treat various serious bacterial infections and agents to treat acute pain.

Results of Operations for the Three Months Ended September 30, 2011 and 2010

Revenues

The following table sets forth revenues for the periods presented:

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	Three Months Ended September 30,
	2011		2010		% Change
	(in millions)
U.S. product revenues, net	$	186.4	$	154.5	21	%
International product revenues	9.8		6.0		63	%
Service revenues	3.0		—		N/A
Other revenues	2.5		1.6		59	%
Total revenues, net	$	201.7	$	162.1	24	%

Product Revenues, net

Cubist’s net revenues from sales of CUBICIN, which consist of U.S. product revenues, net, and international product revenues, were $196.2 million for the three months ended September 30, 2011, as compared to $160.5 million for the three months ended September 30, 2010. Gross U.S. product revenues totaled $213.1 million and $173.8 million for the three months ended September 30, 2011 and 2010, respectively. The $39.3 million increase in gross U.S. product revenues was due to price increases of 6.9% and 5.5% for CUBICIN in January and July 2011, respectively, which resulted in $23.9 million of additional gross U.S. product revenues and to an increase of approximately 8.9% in vial sales of CUBICIN in the U.S., which resulted in higher gross U.S. product revenues of $15.4 million. Gross U.S. product revenues are offset by provisions for sales returns, Medicaid rebates, chargebacks, discounts, wholesaler management fees and, commencing in January 2011, coverage gap discount program rebates, of $26.7 million and $19.3 million for the three months ended September 30, 2011 and 2010, respectively. The increase in provisions against gross product revenue was primarily driven by increases in Medicaid rebates, chargebacks and pricing discounts due to increased U.S. sales of CUBICIN and the price increases described above. In addition, contractual rebates also increased as a result of health care reform, which increased the Medicaid rebate rate from 15.1% to 23.1%, the number of individuals eligible to participate in the Medicaid program and the amount of discounts from the coverage gap discount program. International product revenues increased to $9.8 million for the three months ended September 30, 2011, from $6.0 million for the three months ended September 30, 2010, primarily related to an increase in amounts due to us from Novartis AG, or Novartis, for selling CUBICIN to Novartis for sale in the EU and royalty payments from Novartis based on CUBICIN net sales in the EU.

Service Revenues

For the three months ended September 30, 2011, service revenues were $3.0 million, which represents the ratable recognition of the service fee earned in accordance with the co-promotion agreement we entered into with Optimer in April 2011, as described in the “Overview” section of this MD&A.

Other Revenues

For the three months ended September 30, 2011, other revenues were $2.5 million, which includes a cumulative adjustment under the contingency-adjusted performance model of a $6.0 million milestone under our agreement with Merck related to the receipt of regulatory approval of CUBICIN in Japan. The remainder of the milestone payment was recognized as deferred revenue and will be amortized to other revenues over the performance period ending January 2021.

Costs and Expenses

The following table sets forth costs and expenses for the periods presented:

	Three Months Ended September 30,
	2011		2010		% Change
	(in millions)
Cost of product revenues	$	48.4	$	37.0	31	%
Research and development	46.2		36.9		25	%
Contingent consideration	2.1		1.1		89	%
Selling, general and administrative	35.9		34.9		3	%
Total costs and expenses	$	132.6	$	109.9	21	%

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Cost of Product Revenues

Cost of product revenues were $48.4 million and $37.0 million for the three months ended September 30, 2011 and 2010, respectively. Included in our cost of product revenues are royalties owed on worldwide net sales of CUBICIN under our license agreement with Eli Lilly & Co., or Eli Lilly, costs to procure, manufacture and distribute CUBICIN, and the amortization expense related to certain intangible assets. The increase in our cost of product revenues during the three months ended September 30, 2011, as compared to the three months ended September 30, 2010, is primarily attributable to the increase of sales of CUBICIN. Our gross margin for the three months ended September 30, 2011 and 2010, was 75% and 77%, respectively. The decrease in our gross margin during the three months ended September 30, 2011, was primarily the result of a net write-off of $4.7 million of work-in-process inventory identified by one of our third-party fill-finish manufacturers which did not meet specification and was unsaleable. The write-off was included within cost of product revenues during the three months ended September 30, 2011.

Research and Development Expense

Research and development expense was $46.2 million for the three months ended September 30, 2011, as compared to $36.9 million for the three months ended September 30, 2010. The increase in research and development expenses is due primarily to $4.0 million of milestone expense related to a development milestone we paid to Astellas as a result of first patient enrollment for cUTI, $3.2 million in clinical trial expenses primarily related to CXA-201and CUBICIN and $1.4 million in manufacturing process development expenses to support CXA-201 Phase 3 clinical trials and anticipated CB-183,315 Phase 3 clinical trials.

Contingent Consideration Expense

Contingent consideration expense was $2.1 million and $1.1 million for the three months ended September 30, 2011 and 2010, respectively. This expense represents the change in the fair value of the contingent consideration liability relating to potential amounts payable to Calixa’s former stockholders pursuant to our agreement to acquire Calixa in December 2009. The change in fair value for the three months ended September 30, 2011, is primarily due to the time value of money.

Contingent consideration expense may fluctuate significantly in future periods depending on changes in estimates, including probabilities associated with achieving the milestones and the period in which we estimate these milestones will be achieved. Such changes could materially impact our results of operations in future periods.

Selling, General and Administrative Expense

Selling, general and administrative expense for the three months ended September 30, 2011, was $35.9 million, as compared to $34.9 million for the three months ended September 30, 2010. The increase is primarily due to an increase of $2.4 million in employee-related expenses due to an increase in headcount, partially offset by a decrease in legal expenses as a result of the settlement of the patent infringement litigation with Teva and its affiliates in April 2011.

Other Income (Expense), net

The following table sets forth other income (expense), net for the periods presented:

	Three Months Ended September 30,
	2011			2010			% Change
	(in millions)
Interest income	$	0.6		$	1.0		-44	%
Interest expense	(7.9		)	(5.5		)	42	%
Other income	0.5			3.8			-88	%
Total other income (expense), net	$	(6.8	)	$	(0.7	)	905	%

Interest Income

Interest income for the three months ended September 30, 2011, was $0.6 million as compared to $1.0 million for the three months ended September 30, 2010. The decrease in interest income is primarily due to lower interest rates on our cash, cash equivalents and investments during the three months ended September 30, 2011, as compared to the three months ended September 30, 2010.

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Interest Expense

Interest expense for the three months ended September 30, 2011, was $7.9 million as compared to $5.5 million for the three months ended September 30, 2010. The increase in interest expense is due to the issuance of $450.0 million aggregate principal amount of our 2.50% convertible senior notes due in November 2017, or 2.50% Notes, in October 2010, which is accounted for under the accounting guidance for debt with conversion and other options, partially offset by the concurrent repurchase of $190.8 million aggregate principal amount of our 2.25% convertible subordinated notes due in June 2013, or 2.25% Notes. See Note F., “Debt,” in the accompanying notes to the condensed consolidated financial statements for additional information.

Other Income (Expense)

Other income (expense) was $0.5 million of income for the three months ended September 30, 2011, as compared to $3.8 million for the three months ended September 30, 2010. The decrease in other income primarily relates to unrealized gains from our auction rate securities we owned during the three months ended September 30, 2010, which we subsequently sold in December 2010.

Provision for Income Taxes

The following table summarizes the effective tax rates and income tax provisions for the periods presented:

	Three Months Ended September 30,
	2011			2010
	(in millions, except percentages)

Effective tax rate	61.1		%	39.3		%
Provision for income taxes	$	38.1		$	20.2

The effective tax rate of 61.1% for the three months ended September 30, 2011, differs from the U.S. federal statutory income tax rate of 35.0% and the effective tax rate of 39.3% for the three months ended September 30, 2010, primarily due to the impact of non-deductible contingent consideration expense. The impact of contingent consideration expense on the effective tax rate for the three months ended September 30, 2011, was approximately 24.4%. During the three months ended September 30, 2011, we also recorded a discrete tax benefit of $3.1 million, net of federal tax, related to the reduction in deferred state tax liabilities.

Results of Operations for the Nine Months Ended September 30, 2011 and 2010

Revenues

The following table sets forth revenues for the periods presented:

	Nine Months Ended September 30,
	2011		2010		% Change
	(in millions)
U.S. product revenues, net	$	508.7	$	444.7	14	%
International product revenues	25.8		19.0		36	%
Service revenues	3.0		8.5		-64	%
Other revenues	3.5		2.4		44	%
Total revenues, net	$	541.0	$	474.6	14	%

Product Revenues, net

Cubist’s net revenues from sales of CUBICIN, which consist of U.S. product revenues, net, and international product revenues, were $534.5 million for the nine months ended September 30, 2011, as compared to $463.7 million for the nine months ended September 30, 2010. Gross U.S. product revenues totaled $580.5 million and $492.9 million for the nine months ended September 30, 2011 and 2010, respectively. The $87.6 million increase in gross U.S. product revenues was due to price increases for CUBICIN of 6.9% in April 2010 and January 2011 and a price increase of 5.5% in July 2011, which resulted in $58.1 million of additional gross U.S. product revenues and to an increase of approximately 5.9% in vial sales of CUBICIN in the U.S., which resulted in higher gross U.S. product revenues of $29.5 million. Gross U.S. product revenues are offset by provisions for sales returns, Medicaid rebates, chargebacks, discounts, wholesaler management fees and, commencing in January 2011, coverage gap discount program rebates, of $71.8 million and $48.2 million for the nine months ended September 30, 2011 and 2010, respectively. The

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increase in provisions against gross product revenue was primarily driven by increases in Medicaid and coverage gap discount program rebates, chargebacks and pricing discounts due to increased U.S. sales of CUBICIN and the price increases described above. In addition, contractual rebates also increased as a result of health care reform, which increased the Medicaid rebate rate from 15.1% to 23.1%, the number of individuals eligible to participate in the Medicaid program and the amount of discounts from the coverage gap discount program. International product revenues increased to $25.8 million for the nine months ended September 30, 2011, from $19.0 million for the nine months ended September 30, 2010, primarily related to an increase in amounts due to us from Novartis for selling CUBICIN to Novartis for sale in the EU and royalty payments from Novartis based on CUBICIN net sales in the EU.

Service Revenues

For the nine months ended September 30, 2011, service revenues were $3.0 million, which represents the ratable recognition of the service fee earned in accordance with the co-promotion agreement with Optimer, as described in the “Overview” section of this MD&A. Service revenues of $8.5 million for the nine months ended September 30, 2010, related to our exclusive agreement with AstraZeneca Pharmaceuticals, LP, an indirect wholly-owned subsidiary of AstraZeneca PLC, or AstraZeneca, to promote and provide other support in the U.S. for MERREM® I.V. The agreement with AstraZeneca, as amended, expired in accordance with its terms at the end of June 2010.

Other Revenues

For the nine months ended September 30, 2011, other revenues were $3.5 million, which includes a cumulative adjustment under the contingency adjusted performance model of a $6.0 million milestone under our agreement with Merck related to the receipt of regulatory approval of CUBICIN in Japan. The remainder of the milestone payment was recognized as deferred revenue and will be amortized to other revenues over the performance period ending January 2021.

Costs and Expenses

The following table sets forth costs and expenses for the periods presented:

	Nine Months Ended September 30,
	2011		2010		% Change
	(in millions)
Cost of product revenues	$	123.9	$	105.2	18	%
Research and development	128.5		116.0		11	%
Contingent consideration	85.0		3.8		2143	%
Selling, general and administrative	114.4		106.5		7	%
Total costs and expenses	$	451.8	$	331.5	36	%

Cost of Product Revenues

Cost of product revenues were $123.9 million and $105.2 million for the nine months ended September 30, 2011 and 2010, respectively. Included in our cost of product revenues are royalties owed on worldwide net sales of CUBICIN under our license agreement with Eli Lilly, costs to procure, manufacture and distribute CUBICIN, and the amortization expense related to certain intangible assets. The increase in our cost of product revenues during the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010, is primarily attributable to the increase of sales of CUBICIN. Our gross margin for both the nine months ended September 30, 2011 and 2010, was 77%.

Research and Development Expense

Research and development expense was $128.5 million for the nine months ended September 30, 2011, as compared to $116.0 million for the nine months ended September 30, 2010. The increase in research and development expenses is due primarily to $5.5 million in clinical trial expenses related to CXA-201, $4.0 million of milestone expense related to a development milestone paid to Astellas as a result of first patient enrollment for cUTI, $2.9 million in manufacturing process development expenses to support CXA-201 Phase 3 clinical trials and anticipated CB-183,315 Phase 3 clinical trials and $2.4 million in employee-related expenses. These increases were partially offset by a decrease of $3.5 million in clinical studies primarily related to the discontinuation of our development of ecallantide in 2010.

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Contingent Consideration Expense

Contingent consideration expense was $85.0 million and $3.8 million for the nine months ended September 30, 2011 and 2010, respectively. This expense represents the change in the fair value of the contingent consideration liability relating to potential amounts payable to Calixa’s former stockholders pursuant to our agreement to acquire Calixa in December 2009. The change in fair value for the nine months ended September 30, 2011, is primarily due to an increase in the probability of achieving the first patient enrollment milestone for the Phase 3 clinical trial for cUTI to 100%, an increase in the probability of achieving the first patient enrollment milestone for the Phase 3 clinical trial for cIAI to approximately 100% and an increase in the probabilities of success for subsequent associated milestones, used in estimating fair value, in connection with receiving positive top-line results from our recently completed Phase 2 clinical trial of CXA-201 as a potential treatment for cIAI. In addition, the probability of enrollment in a Phase 3 clinical trial of CXA-201 as a potential treatment for HABP and VABP in 2012 and the resulting fair value of the associated milestone was increased.

Selling, General and Administrative Expense

Selling, general and administrative expense for the nine months ended September 30, 2011, was $114.4 million, as compared to $106.5 million for the nine months ended September 30, 2010. The increase is primarily due to an increase of $7.4 million in employee-related expenses due to an increase in headcount, partially offset by a decrease in promotional expenses.

Other Income (Expense), net

The following table sets forth other income (expense), net for the periods presented:

	Nine Months Ended September 30,
	2011			2010			% Change
	(in millions)
Interest income	$	2.0		$	3.7		-45	%
Interest expense	(23.6		)	(16.4		)	44	%
Other income	1.0			1.3			-26	%
Total other income (expense), net	$	(20.6	)	$	(11.4	)	81	%

Interest Income

Interest income for the nine months ended September 30, 2011, was $2.0 million, as compared to $3.7 million for the nine months ended September 30, 2010. The decrease in interest income is primarily due to a decrease of $4.2 million related to lower interest rates on our cash, cash equivalents and investments, partially offset by an increase of $2.5 million related to a higher average cash, cash equivalents and investments balance during the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010.

Interest Expense

Interest expense for the nine months ended September 30, 2011, was $23.6 million as compared to $16.4 million for the nine months ended September 30, 2010. The increase in interest expense is due to the issuance of $450.0 million aggregate principal amount of our 2.50% Notes in October 2010, which is accounted for under the accounting guidance for debt with conversion and other options, partially offset by the concurrent repurchase of $190.8 million aggregate principal amount of our 2.25% Notes.

Provision for Income Taxes

The following table summarizes the effective tax rates and income tax provisions for the periods presented:

	Nine Months Ended September 30,
	2011			2010
	(in millions, except percentages)

Effective tax rate	61.8		%	39.5		%
Provision for income taxes	$	42.5		$	52.0

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The effective tax rate of 61.8% for the nine months ended September 30, 2011, differs from the U.S. federal statutory income tax rate of 35.0% and the effective tax rate of 39.5% for the nine months ended September 30, 2010, primarily due to the impact of non-deductible contingent consideration expense. The impact of contingent consideration expense on the effective tax rate for the nine months ended September 30, 2011, was approximately 24.5%. During the nine months ended September 30, 2011, we also recorded a discrete tax benefit of $3.1 million, net of federal tax, related to the reduction in deferred state tax liabilities.

Liquidity and Capital Resources

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

· sales of CUBICIN in the U.S.;

· payments from our international CUBICIN partners, including payments related to license fees, royalty, transfer price for product supplied and milestone payments;

· payments from Optimer for our co-promotion of DIFICID in the U.S.; and

· equity and debt financings.

As of September 30, 2011, we had an accumulated deficit of $111.1 million. We expect to incur significant expenses in the future for the continued development and commercialization of CUBICIN; for the development of our other drug candidates, particularly CXA-201 and CB-183,315; for investments in other product opportunities; for our business development activities; to enforce our intellectual property rights; and for construction and other expenses related to the expansion of our facility at 65 Hayden.

In July 2011, we completed the acquisition of the building and land located at 45 and 55 Hayden Avenue in Lexington, Massachusetts, or 45-55 Hayden. This property, which consists of land and approximately 210,000 square feet of primarily office space, is adjacent to the building and land that Cubist owns at 65 Hayden. Prior to the acquisition, we leased approximately 178,000 square feet of space at 45-55 Hayden. We made deposits of $1.0 million upon entering into the purchase and sale agreement in June 2011 and paid the remaining $51.5 million, after adjustments, in July 2011 upon closing the acquisition, which we funded from our existing cash balances. See Note D., “Property and Equipment, Net,” in the accompanying notes to the condensed consolidated financial statements for additional information.

Our total cash, cash equivalents and investments at September 30, 2011, was $975.2 million as compared to $909.9 million at December 31, 2010. Based on our current business plan, we believe that our available cash, cash equivalents, investments and projected cash flows from revenues will be sufficient to fund our operating expenses; debt obligations of $559.2 million; contingent payments under our license and collaboration agreements and capital requirements for the foreseeable future. Certain economic or strategic factors may require that we seek to raise additional cash by selling debt or equity securities. However, such funds may not be available when needed, or we may not be able to obtain funding on favorable terms, or at all, particularly if the credit and financial markets were to be constrained at the time we require funding.

Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2011, was $128.6 million, as compared to $111.2 million for the nine months ended September 30, 2010. Net cash provided by operating activities for the nine months ended September 30, 2011, was impacted by a $40.0 million milestone payment to Calixa’s former stockholders as a result of first patient enrollment in Phase 3 clinical trials for cUTI, of which $23.2 million was included within net cash provided by operating activities, as it relates to an increase in the fair value of the milestone payment as compared to the acquisition-date fair value. Net cash provided by operating activities was also impacted by a $36.4 million increase in working capital, which is primarily due to a decrease of $16.3 million in prepaid income taxes as compared to the nine months ended September 30, 2010. Prepaid income taxes at September 30, 2010, related to a reduction of income taxes payable as a result of excess tax benefits related to stock-based awards. In addition, working capital was impacted by increases in accrued Medicaid rebates and accrued royalties due to an increase in sales of CUBICIN during the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2011 and 2010, was $310.1 million and $110.5 million, respectively. Net cash used in investing activities for the nine months ended September 30, 2011, primarily consisted of the

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purchase of $1.1 billion of investments, partially offset by proceeds of $879.0 million from our investments. In addition, net cash used in investing activities was impacted by $89.9 million of purchases of property and equipment primarily related to the acquisition of 45-55 Hayden and costs incurred for the expansion of our facility at 65 Hayden. Net cash used in investing activities for the nine months ended September 30, 2010, primarily consisted of the purchase of $414.9 million of investments, partially offset by proceeds of $316.2 million from our investments, as well as $11.8 million of purchases of property and equipment.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2011 and 2010, was $31.9 million and $13.1 million, respectively. Net cash provided by financing activities for the nine months ended September 30, 2011, included $35.5 million of cash received from employees’ exercise of stock options and purchases of common stock through our employee stock purchase plan, as well as a $13.2 million credit to additional paid-in capital relating to excess tax benefits from stock-based awards. This was partially offset by a $40.0 million milestone payment to Calixa’s former stockholders as a result of first patient enrollment in Phase 3 clinical trials for cUTI, of which the acquisition-date fair value of $16.8 million was included within net cash provided by financing activities. Net cash provided by financing activities for the nine months ended September 30, 2010, included $13.8 million of cash received from employees’ exercise of stock options and purchases of common stock through our employee stock purchase plan and a $19.3 million credit to additional paid-in capital relating to excess tax benefits from stock-based awards, partially offset by a $20.0 million milestone payment to Calixa’s former stockholders as a result of completing the Phase 2 clinical trial of CXA-101 for cUTI and meeting all study objectives. See the “Commitments and Contingencies — Contingent Consideration” section in this MD&A for additional information about our contingent consideration milestone payments and obligations.

Credit Facility

In December 2008, we entered into a $90.0 million revolving credit facility with RBS Citizens National Association, or RBS Citizens, for general corporate purposes. Under the revolving credit facility, we may request to borrow at any time a minimum of $1.0 million up to the maximum of the available remaining credit. Any amounts borrowed under the facility will be secured by the pledge of a certificate of deposit issued by RBS Citizens and/or an RBS Citizens money market account equal to an aggregate of 102% of the outstanding principal amount of the loans, so long as such loans are outstanding. Interest on the borrowings can be calculated, at our option, based on LIBOR plus a margin or the prime rate. Any borrowings under the facility are due on demand or upon termination of the revolving credit agreement. There were no outstanding borrowings under the credit facility as of September 30, 2011 or December 31, 2010.

Repurchases of Common Stock or 2.50% Notes and 2.25% Notes Outstanding

From time to time, our Board of Directors, or Board, may authorize us to repurchase shares of our common stock, our outstanding 2.25% Notes due in June 2013 and/or our 2.50% Notes due November 2017 in privately negotiated transactions, or publicly announced programs. If and when our Board should determine to authorize any such action, it would be on terms and under market conditions that the Board determines are in our best interests. Any such repurchases could deplete some of our cash resources.

Commitments and Contingencies

Legal Proceedings

On April 4, 2011, we entered into a settlement agreement with Teva and its affiliates to resolve our patent infringement litigation with respect to CUBICIN. We originally filed the patent infringement lawsuit in March 2009 in response to the February 9, 2009, notification to us by Teva that it had submitted an ANDA to the FDA seeking approval to market a generic version of CUBICIN. The settlement agreement provides for a full settlement and release by both us and Teva of all claims that were or could have been asserted in the patent infringement litigation and all resulting damages or other remedies. See the “Overview” section in this MD&A for additional information.

Business Agreements

On October 24, 2011, we entered into the Merger Agreement with Adolor, in which we agreed, subject to the satisfaction of the closing conditions set forth in the Merger Agreement, to purchase all of its issued and outstanding shares. See Note M., “Subsequent Event,” in the accompanying notes to the condensed consolidated financial statements for additional information.

Upon achievement of certain development, regulatory, or commercial milestones, we have committed to make potential future milestone payments to third parties as part of our various business agreements, including license, collaboration and commercialization agreements. Additional information regarding our business agreements can be found in Note C., “Business Agreements,” in the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2010, or 2010 Form 10-K.

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Contingent Consideration

If certain development, regulatory, or commercial milestones are achieved with respect to CXA-201, or other products that incorporate CXA-101, we have committed, under the terms of the merger agreement pursuant to which we acquired Calixa in December 2009, to make future milestone payments to the former stockholders of Calixa. In June 2010, we completed the Phase 2 clinical trial of CXA-101 for cUTI and all study objectives were met, resulting in our making a $20.0 million milestone payment to Calixa’s former stockholders. First patient enrollment in Phase 3 clinical trials for cUTI triggered a $40.0 million milestone payment, which we paid to Calixa’s former stockholders during the three months ended September 30, 2011. In accordance with accounting for business combinations guidance, this contingent consideration liability is required to be recognized on our condensed consolidated balance sheets at fair value. We may be required to make up to an additional $250.0 million of undiscounted payments to the former stockholders of Calixa, including a milestone payment of $30.0 million related to first patient enrollment in Phase 3 clinical trials for cIAI, which is expected to be achieved in the fourth quarter of 2011. See Note C., “Fair Value Measurements,” in the accompanying notes to the condensed consolidated financial statements for additional information.

Estimating the fair value of contingent consideration requires the use of significant assumptions primarily relating to expectations regarding the probability of achieving certain development, regulatory, and sales milestones, the expected timing in which these milestones will be achieved, and a discount rate. The use of different assumptions could result in a materially different estimate of fair value. As of September 30, 2011, the contingent consideration related to the Calixa acquisition is our only financial liability measured using Level 3 inputs in accordance with accounting guidance for fair value measurements and represents 100% of the total financial liabilities measured at fair value.

Pursuant to our license agreement with Astellas, we also made a $4.0 million development milestone payment to Astellas during the three months ended September 30, 2011, as a result of first patient enrollment in a Phase 3 clinical trial of CXA-201 for cUTI. Remaining milestone payments could total up to $40.0 million if certain specified development and sales events are achieved. See Note L., “Commitments,” in the accompanying notes to the condensed consolidated financial statements for additional information.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP. The preparation of consolidated financial statements requires estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates. The accounting policies that we believe are most critical to fully understand our consolidated financial statements include those relating to: revenue recognition; inventories; clinical research costs; investments; property and equipment; other intangible assets; income taxes; accounting for stock-based compensation and business combinations, which includes accounting for goodwill, in-process research and development, or IPR&D, and contingent consideration.

Revenue Recognition

Multiple-Element Arrangements

On January 1, 2011, we adopted new authoritative guidance on revenue recognition for multiple-element arrangements. The guidance, which applies to multiple-element arrangements entered into or materially modified on or after January 1, 2011, amends the criteria for separating and allocating consideration in a multiple-element arrangement by modifying the fair value requirements for revenue recognition and eliminating the use of the residual method. The fair value of deliverables under the arrangement may be derived using a “best estimate of selling price” if vendor-specific objective evidence and third-party evidence is not available. Deliverables under the arrangement will be separate units of accounting, provided (i) a delivered item has value to the customer on a standalone basis; and (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. We entered into the co-promotion agreement with Optimer in April 2011, which was evaluated under the accounting guidance on revenue recognition for multiple-element arrangements. See Note A., “Basis of Presentation and Accounting Policies,” in the accompanying notes to the condensed consolidated financial statements for additional information. Our existing license and collaboration agreements continue to be accounted for under previously-issued revenue recognition guidance for multiple-element arrangements.

Milestones

On January 1, 2011, we adopted new authoritative guidance on revenue recognition for milestone payments related to arrangements under which we have continuing performance obligations. Consideration for events that meet the definition of a milestone in accordance with the accounting guidance for the milestone method of revenue recognition is recognized as revenue in its

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entirety in the period in which the milestone is achieved only if all of the following conditions are met: (i) the milestone is commensurate with either Cubist’s performance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting from our performance to achieve the milestone; (ii) the consideration relates solely to past performance; and (iii) the amount of the milestone consideration is reasonable relative to all of the deliverables and payment terms, including other potential milestone consideration, within the arrangement. Otherwise, the milestone payments are not considered to be substantive and are therefore deferred and recognized as revenue over the term of the arrangement as we complete our performance obligations. The adoption of this guidance does not materially change our previous method of recognizing milestone payments. See Note A., “Basis of Presentation and Accounting Policies,” in the accompanying notes to the condensed consolidated financial statements for additional information.

Except as noted above, our critical accounting policies and the methodologies and assumptions we apply under them have not materially changed since February 23, 2011, the date we filed our 2010 Form 10-K. For more information on our critical accounting policies, refer to our 2010 Form 10-K.

Recent Accounting Standards

In September 2011, the Financial Accounting Standards Board, or FASB, issued amended accounting guidance for goodwill in order to simplify how companies test goodwill for impairment. The amendments permit a company to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, a company determines it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if a company’s financial statements for the most recent annual or interim period have not yet been issued. We do not expect the adoption to have any impact on our consolidated financial statements.

In May 2011, the FASB amended the accounting guidance for fair value to develop common requirements between GAAP and International Financial Reporting Standards. The amendments clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and in some instances change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Notable changes under the amended guidance include: (i) application of the highest and best use and valuation premise concepts solely for non-financial assets and liabilities; (ii) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity; and (iii) disclosing quantitative information about unobservable inputs used in the fair value measurement within Level 3 of the fair value hierarchy. For public entities, the amendment is effective for interim and annual periods beginning after December 15, 2011. Early application is not permitted. We are currently evaluating the impact of these amendments on our financial statements and related disclosures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in our exposure to market risk since December 31, 2010. For discussion of our market risk exposure, refer to Item 7A., “Quantitative and Qualitative Disclosures About Market Risk,” in our 2010 Form 10-K.

The potential change in the fair value of our fixed-rate investments has been assessed on a hypothetical 100 basis point adverse movement across all maturities. We estimate that such hypothetical adverse 100 basis point movement would result in a decrease in fair value of $1.7 million on our fixed-rate investments. In addition to interest risk, we are subject to liquidity and credit risk as it relates to these investments.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

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

Risks Related to Our Business

We depend heavily on the continued commercial success of CUBICIN.

For the foreseeable future, our ability to generate revenues will depend primarily on the commercial success of CUBICIN in the U.S., which depends upon our settlement with Teva and its affiliates withstanding any challenges by the FTC, the DOJ, or a competitor, customer or other third party, and upon CUBICIN’s continued acceptance by the medical community and the future market demand and medical need for CUBICIN. CUBICIN is approved in the U.S. as a treatment for cSSSI and S. aureus bloodstream infections (bacteremia), including those with RIE, caused by methicillin-susceptible and methicillin-resistant isolates.

We cannot be sure that CUBICIN will continue to be accepted by hospitals, physicians and other health care providers for its approved indications in the U.S., particularly as the market into which CUBICIN is sold has shown no growth recently, and economic problems persist, leading to increased efforts by hospitals and others to minimize expenditures by encouraging the purchase of lower-cost alternative therapies, including generic products like vancomycin, patients electing lower-cost alternative therapies due to increased out-of-pocket costs, patients choosing to have fewer elective surgeries and other procedures, and lower overall admissions to hospitals. CUBICIN also faces intense competition in the U.S. from a number of currently-approved antibiotic drugs manufactured and marketed by major pharmaceutical companies, including an inexpensive generic product in vancomycin and two recently approved drugs, one which was launched commercially in January 2011 by Forest Laboratories, Inc., or Forest. CUBICIN will likely in the future compete with other drugs that are currently in late-stage clinical development.

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

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

· target organisms developing resistance to CUBICIN;

· unanticipated adverse reactions to CUBICIN in patients;

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

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

· the ability to maintain or increase the opportunities for our sales force to provide clinical information to those physicians who treat patients for whom CUBICIN would be appropriate, particularly in the face of increasing restrictions on sales professionals’ access to physicians;

· the ability to maintain and enforce U.S. and foreign patent protection for CUBICIN;

· the ability to maintain and grow market share and vial sales as the price of CUBICIN increases in a market that has shown no recent growth;

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

· whether the FTC, DOJ or a third party is able to successfully challenge our settlement agreement with Teva and its affiliates;

· the impact on physicians’ perception and use of CUBICIN as a result of recently-published guidelines for the treatment of MRSA infections by the Infectious Diseases Society of America;

· the ability of our third-party manufacturers, including our single source provider of CUBICIN API and our two finished drug product suppliers, to manufacture, store, release and deliver sufficient quantities of CUBICIN in accordance with GMPs and other requirements of the regulatory approvals for CUBICIN and to do so in accordance with a schedule to meet demand for our sales in the U.S. and for our supply obligations to our international CUBICIN distribution partners and to do so at an acceptable cost;

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

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

· future legislative and policy changes in the U.S. and other jurisdictions where CUBICIN is sold, including any additional health care reform, or changes to the existing health care reform legislation, price controls or taxes on pharmaceutical sales;

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

· the cost containment efforts of hospitals, particularly with respect to CUBICIN, which often represents the top antibiotic expense for hospital pharmacies and is a significant cost to them; and

· our ability to continue to successfully sell CUBICIN and co-promote DIFICID in the U.S. using the same sales force.

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

As of September 30, 2011, CUBICIN had been approved or received an import license in more than 72 countries outside of the U.S. and is being marketed by our international partners in 51 of these countries, including countries in the EU. Our partners may not be successful in launching or marketing CUBICIN in their markets. For example, to date, EU sales have grown more slowly than U.S. sales did in the same period after launch due primarily to lower MRSA rates both in and outside the hospital in some EU countries, an additional glycopeptide competitor (teicoplanin), which is not approved in the U.S., the evolving commercialization strategy and mix of resources that our EU partner, Novartis, has been using to commercialize CUBICIN, as well as other factors. Even if our international partners are successful in commercializing CUBICIN, we only receive a portion of the revenues from non-U.S. sales of CUBICIN.

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

CUBICIN Patents/Teva Litigation Settlement. The primary composition of matter patent covering CUBICIN in the U.S. has expired. We own or have licensed rights to a limited number of patents directed toward methods of administration and methods of manufacture of CUBICIN. We cannot be sure that patents will be granted to us or to our international licensors or collaborators with respect to any of our or their pending patent applications for CUBICIN. Of particular concern for a company like ours that is dependent primarily upon one product, which in our case is CUBICIN, to generate revenues and profits, is that third parties may seek to market generic versions of CUBICIN by filing an ANDA with the FDA, in which they claim that patents protecting CUBICIN, owned or licensed by us and listed with the FDA in the Orange Book, are invalid, unenforceable and/or not infringed. On April 4, 2011, we entered into a settlement agreement with Teva and its affiliates to resolve our patent infringement litigation with respect to CUBICIN. We originally filed the patent infringement lawsuit in March 2009 in response to the February 9, 2009, notification to us by

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Teva that it had submitted an ANDA to the FDA seeking approval to market a generic version of CUBICIN. The settlement agreement provides for a full settlement and release by both us and Teva of all claims that were or could have been asserted in the patent infringement litigation and all resulting damages or other remedies. Under the settlement agreement, we granted Teva a non-exclusive, royalty-free license to sell a generic daptomycin for injection product in the U.S. beginning on the later of (i) December 24, 2017, and (ii) if our daptomycin for injection product receives pediatric exclusivity, June 24, 2018. The license we granted to Teva would become effective prior to the later of these two dates if the patents that were the subject of the patent litigation with Teva are held invalid, unenforceable or not infringed with respect to a third party’s generic version of daptomycin for injection, if a third party sells a generic version of daptomycin for injection under a license or other authorization from us, or if there are no longer any unexpired patents listed in the FDA’s Orange Book as applying to our NDA covering CUBICIN. The license is granted under the patents that were the subject of the litigation, any other patents listed in the Orange Book as applying to Cubist’s NDA covering CUBICIN, and any other U.S. patents that we have the right to license and that cover Teva’s generic version of daptomycin for injection. The license terminates upon the expiration, or an unappealed or unappealable determination of invalidity or unenforceability, of all the licensed patents, including any pediatric or other exclusivity relating to the licensed patents or CUBICIN. Two of the three patents that were the subject of the litigation are currently due to expire on September 24, 2019, and the third is due to expire on June 15, 2016. In September 2011, we listed in the Orange Book under our NDA covering CUBICIN another patent, U.S. Patent 8,003,673, which was granted on August 23, 2011, and expires on September 4, 2028. Teva may also sell the daptomycin for injection supplied by CUBICIN upon specified types of “at risk” launches of a generic daptomycin for injection product by a third party. The settlement agreement will remain in effect until the expiration of the term of the license granted by us to Teva and the expiration of a non-exclusive royalty-free license granted by Teva to us under any Teva U.S. patent rights that Teva has the right to license and that may be applicable to CUBICIN and the daptomycin for injection product to be supplied by us to Teva. Each of Cubist and Teva may terminate the settlement agreement in the event of a material breach by the other party. In addition, each party may terminate the license granted by it to the other party in the event of a challenge of the licensed patents by the other party. If this license becomes effective, or the license or settlement agreement terminates for the reasons stated in this paragraph, earlier than we anticipate, our business and results of operations could be materially impacted.

In addition, the FTC or the DOJ could seek to challenge our settlement with Teva, or a competitor, customer or other third-party could initiate a private action under antitrust or other laws challenging our settlement with Teva. While we believe our settlement is lawful, we may not prevail in any such challenges or litigation, in which case the other party might obtain injunctive relief, remedial relief, or such other relief as a court may order. In any event, we may incur significant costs in the event of an investigation or in defending any such action and our business and results of operations could be materially impacted if we fail to prevail against any such challenges.

General Proprietary Rights. Our commercial success will depend in part on obtaining and maintaining U.S. and foreign patent protection for CUBICIN, our drug candidates, and our research technologies and successfully enforcing and defending these patents against third-party challenges, including with respect to generic challenges or our partners or collaborators doing the same for partnerships or collaborations under which we rely on our partner’s or collaborator’s proprietary rights.

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

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

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

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

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

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

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such inventions and if such named applicants or inventors were not the first to invent or file, our ability to protect our rights in technologies that underlie such patent applications may be limited;

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

· the coverage claimed in a patent application can be significantly reduced before the patent is issued, and, as a consequence, our and our partners’ patent applications may result in patents with narrower coverage than we desire.

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

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

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

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

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

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

CUBICIN. We do not have the capability to manufacture our own CUBICIN API or CUBICIN finished drug product. We contract with ACS Dobfar SpA, or ACSD, to manufacture and supply us with CUBICIN API for commercial purposes in the U.S. and in order to allow us to fulfill our obligations to supply our international CUBICIN partners. ACSD is our sole provider of our commercial supply of CUBICIN API worldwide. Our CUBICIN API must be stored in a temperature-controlled environment. ACSD currently stores some CUBICIN API at its facilities in Italy. In order to offset the risk of a single-source API supplier, we currently hold a supply of safety stock of API in addition to what is stored at ACSD at the Integrated Commercialization Solutions, Inc., or ICS, warehouse/distribution center in Kentucky. Any disaster at the facilities where we hold this safety stock, such as a fire or loss of power, that causes a loss of this safety stock would heighten the risk that we face from having only one supplier of API. ACSD recently completed the process of expanding and making certain improvements to its CUBICIN API manufacturing facility to increase production capacity.

We contract with both Hospira Worldwide, Inc., or Hospira, and Oso Biopharmaceuticals Manufacturing, LLC, or Oso, to manufacture and supply to us finished CUBICIN drug product for our use in the U.S. and our international partners’ use in other markets outside the U.S. Taking the CUBICIN API and turning it into finished drug product is a complex, carefully-specified process.

If Hospira, Oso, or, in particular, ACSD because they are our sole CUBICIN API supplier, experience any significant difficulties in their respective manufacturing processes, including any difficulties with their raw materials or supplies or any delays in obtaining any necessary regulatory approvals in connection with changes to their respective manufacturing processes, if they have significant problems with their businesses, including lack of capacity, whether as a result of the constrained credit and financial

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markets or otherwise, if they experience staffing difficulties or slow-downs in their systems, including extended periods where any of these manufacturers may need to shut down their facilities for scheduled maintenance or otherwise, if they are unable to successfully manufacture CUBICIN API or finished drug product in accordance with GMPs and the specified procedures mandated by regulatory requirements, if they fail, for any other reason, including because of competing demands from other customers, to deliver CUBICIN API or finished drug product to us in order to meet demand for our sales in the U.S. and for our supply obligations to our international CUBICIN distribution partners, or if our relationship with any of these manufacturers terminates, we could experience significant interruptions in the supply of CUBICIN. Any such supply interruptions could impair our ability to supply CUBICIN at levels to meet U.S. market demand or to satisfy our contractual obligations to supply our international CUBICIN partners, which could, particularly with respect to U.S. sales, have a material adverse effect on our results of operations and financial condition. Because of the significant U.S. and international regulatory requirements that we would need to satisfy in order to qualify a new API or finished drug product supplier, we could experience significant interruptions in the supply of CUBICIN if we needed to transfer the manufacture of CUBICIN API or the finished drug product to one or more other suppliers in an effort to address these or any other difficulties with our current suppliers.

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

Other Products. Under our agreement with Optimer for DIFICID, we do not have the capability to manufacture and supply DIFICID ourselves. Any interruption in supply of DIFICID would likely cause us to fail to generate the revenues that we expect from our co-promotion of DIFICID. In addition, if the third-party suppliers of our pipeline products fail to supply us with sufficient quantities of bulk or finished products to meet our development needs, our development of these products could be stopped, delayed or impeded.

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

We face significant competition from other biotechnology and pharmaceutical companies and, particularly with respect to CUBICIN, will likely face additional competition in the future from third-party drug candidates under development, and may face competition in the future from generic versions of CUBICIN, including from Teva.

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

Competition in the market for therapeutic products that address serious Gram-positive bacterial infections is intense. CUBICIN faces competition in the U.S. from commercially available drugs such as vancomycin, marketed generically by Abbott Laboratories, Shionogi & Co., Ltd. and others, Zyvox®, marketed by Pfizer, Inc., or Pfizer, Synercid®, marketed by King Pharmaceuticals, Inc., and Tygacil®, marketed by Wyeth, a wholly-owned subsidiary of Pfizer. In particular, vancomycin has been a widely used and well known antibiotic for over 40 years and is sold in a relatively inexpensive generic form. CUBICIN also faces

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competition in the U.S. from VIBATIV® (telavancin), which was approved by the FDA in September 2009 as a treatment for cSSSI and is co-marketed in the U.S. by Astellas US and Theravance, Inc., and Teflaro, (ceftaroline fosamil), which is being commercialized by Forest. Teflaro is a broad-spectrum bactericidal cephalosporin with activity against both Gram-positive and Gram-negative microorganisms, which was approved by the FDA in October 2010 for the treatment of community-acquired bacterial pneumonia, including cases caused by Streptococcus pneumoniae bacteremia, and acute bacterial skin and skin structure infection, or ABSSSI (the term the FDA is currently using for cSSSI), including cases caused by MRSA. Forest launched Teflaro in the U.S. in January 2011.

CUBICIN will likely face competition in the future from drug candidates currently in clinical development, including late-stage drug candidates being developed as treatments for ABSSSI. Such drug candidates include oritavancin, which is being developed by The Medicines Company, torezolid phosphate, which is being developed by Trius Therapeutics, Inc., ceftobiprole, which is being developed by Basilea Pharmaceutica Ltd., and dalbavancin, which is being developed by Durata Therapeutics, Inc.

In addition, our settlement agreement with Teva and its affiliates grants Teva a non-exclusive, royalty-free license to sell a generic daptomycin for injection product in the U.S. beginning on the later of (i) December 24, 2017, and (ii) if our daptomycin for injection product receives pediatric exclusivity, June 24, 2018. The license we granted to Teva would become effective prior to the later of these two dates if the patents that were the subject of the patent litigation with Teva are held invalid, unenforceable or not infringed with respect to a third party’s generic version of daptomycin for injection, if a third party sells a generic version of daptomycin for injection under a license or other authorization from us, or if there are no longer any unexpired patents listed in the FDA’s Orange Book as applying to our NDA covering CUBICIN. The license is granted under the patents that were the subject of the litigation, any other patents listed in the Orange Book as applying to Cubist’s NDA covering CUBICIN, and any other U.S. patents that we have the right to license and that cover Teva’s generic version of daptomycin for injection. As a result, CUBICIN is expected to face competition in the U.S. from generic versions of CUBICIN marketed by Teva under the terms of the settlement agreement.

DIFICID faces competition in the U.S. from commercially available drugs such as Vancocin® (oral vancomycin), marketed by ViroPharma Incorporated, as well as Flagyl® (metronidazole), marketed by Pfizer and Sanofi-Aventis and which is also available in an inexpensive generic form. DIFICID also will likely face competition in the future from drug candidates currently in clinical development for C. difficile.

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

We need to manage our growth and the increased breadth of our activities effectively and the ways that we have chosen, or may choose, to manage this growth may expose us to additional risk.

We have expanded the scope of our business significantly in recent years, having recently added DIFICID as a product that we are co-promoting with Optimer, having acquired and in-licensed several drug candidates and having progressed pre-clinical and multiple clinical stage drug candidates. We recently initiated Phase 3 clinical trials of CXA-201 as a potential treatment for cUTI and expect to initiate Phase 3 clinical trials for cIAI by the end of 2011. As a result, our activity in this area has been taking up increasing time and attention of our business. We also have grown our employee base substantially, particularly in research and development and sales. We plan to continue adding products and drug candidates through internal development, in-licensing and acquisition over the next several years and to continue developing our existing drug candidates that demonstrate the requisite efficacy and safety to advance into and through clinical trials. Our ability to develop and grow the commercialization of our products, achieve our research and development objectives, add and integrate new products, and satisfy our commitments under our collaboration and acquisition agreements depends on our ability to respond effectively to these demands and expand our internal organization and infrastructure to accommodate additional anticipated growth. To manage the existing and planned future growth and the increasing breadth and complexity of our activities, including the acquisition of Adolor, if consummated, we will need to continue building our organization and making significant additional investments in personnel, infrastructure, information management systems and resources.

As we advance our drug candidates through development, the size and scope of the clinical trials we conduct increase significantly, including increases in the number of patients, types of medical conditions being studied, clinical sites and number of countries where the trials will be implemented. Additionally, these trials also have risks associated with the increasing trial design complexity related to both generating data relevant to the clinical settings in various countries and aligning with the guidance of various regulatory bodies that will permit the approval of our drugs in those countries. The latter has associated risks since clinical practices vary in the global setting and there is a lack of harmonization between the guidance provided by various regulatory bodies of different regions and countries. At a trial implementation level, we accommodate some of this increased global clinical development activity through increased utilization of vendors, such as our increasing use of contract research organizations, or CROs, contract investigational drug labeling and distribution providers, and regional and central laboratories to help manage operational aspects of our clinical trials, rather than addressing capacity demands through internal growth. As a result, many key operational aspects of our clinical trial process, which is integral to our business, have been and will be out of our direct control. If the CROs and other third

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parties that we rely on for patient enrollment and other support services related to portions of our clinical trials fail to perform the clinical trials in a timely and satisfactory manner and in compliance with applicable U.S. and foreign regulations, we could face significant delays in completing our clinical trials, or we may be unable to rely in the future on the clinical data generated. These clinical investigators, CROs and other vendors may not carry out their contractual duties or obligations, they may fail to meet expected deadlines, or the quality or accuracy of the clinical data they obtain may be compromised due to their failure to adhere to our clinical protocols, regulatory requirements or for other reasons. If these, or other problems occur, our clinical trials may be extended, delayed or terminated, we may be required to repeat one or more of our clinical trials and we may be unable to obtain or maintain regulatory approval for or successfully commercialize our products. If we are unable to effectively manage and progress some or all of these activities, our ability to maximize the value of one or more of our products or drug candidates could suffer, which could materially adversely affect our business.

In addition, we are currently engaged in construction to expand the laboratory space at our headquarters in Lexington, Massachusetts. If we are unable to expand according to our projected timeline, we may not be able to sufficiently grow our research and development organization and this could have a material adverse impact on our business.

In general, we may not select the optimal balance between growing internally and increasing our use of outside vendors. On the one hand, too much relative internal growth could end up costing us more in recruiting, hiring and infrastructure expansion, such as our expanded laboratory space and could lead to underutilized employees and space if we do not grow our business as much or as quickly as expected. On the other hand, too much relative use of vendors could end up costing us more in negotiating and administering contracts and in vendor fees, and the ensuing relationships give us less control over projects that are important to our business and could result in disputes with the vendors if the relationships do not progress as one or the other of us anticipated.

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

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

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

We have made significant investments in research and development and have, over the past few years, increased our research and development workforce. However, before CB-182,804 for which we discontinued development in September 2010, after reviewing Phase 1 clinical trial results, and CB-183,315, for which we recently decided to advance to late-stage clinical trials beginning in the first half of 2012, none of our internally-discovered product candidates had ever reached the clinical development stage. We cannot assure you that we will reach this stage for any additional internally-discovered drug candidates or that there will be clinical benefits supporting the further advancement demonstrated by these or any other drug candidates that we do initiate or advance in clinical trials.

Except for CB-183,315, all of our drug candidates that have progressed to or beyond Phase 2 clinical trials, including CUBICIN, were not internally developed. We obtained the rights to these drugs through the in-licensing or acquisition of patents, patent rights, product candidates and/or technologies from third parties. These types of activities represent a significant expense, as they generally require us to pay upfront payments, development and commercialization milestone payments and royalties on product sales to other parties. In addition, we may structure our in-licensing arrangements as cost and profit sharing arrangements, in which case we would share development and commercialization costs, as well as any resulting profits, with a third party.

We may not be able to acquire, in-license or otherwise obtain rights to additional desirable drug candidates or marketed drug products on acceptable terms or at all. In fact, we have faced and will continue to face significant competition for these types of drug candidates and marketed products from a variety of other companies with interest in the anti-infective and acute care marketplace, many of which have significantly more experience than we have in pharmaceutical development and sales and significantly more financial resources than we have. Because of the intense competition for these types of drug candidates and marketed products, the cost of acquiring, in-licensing or otherwise obtaining rights to such candidates and products has grown dramatically in recent years

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and are often at levels that we cannot afford or that we believe are not justified by market potential. Such competition and higher prices are most pronounced for late-stage candidates and marketed products, which have the lowest risk and would have the most immediate impact on our financial performance. If we need additional capital to fund our acquisition, in-licensing or otherwise obtaining rights to a drug candidate or marketed product, we would need to seek financing by borrowing funds or through the capital markets. Given the current state of the financial and credit markets, it may be difficult for us to acquire the capital that we would need at an acceptable cost.

If we are unable to discover or acquire additional promising candidates or to develop successfully the candidates we have, we will not be able to implement our business strategy. Even if we succeed in discovering or acquiring drug candidates, there can be no assurance that we will be successful in developing them or any of our current candidates and achieve approval for use in humans, that they can be manufactured economically, that they can be successfully commercialized or that they will be widely accepted in the marketplace. Because of the long development timelines and the fact that most drug candidates that make it into clinical development are not ultimately approved for commercialization, none of the drug candidates that we currently are developing would generate revenues for several years, if at all. If we are unable to bring any of our current or future drug candidates to market or to acquire or obtain other rights to any additional marketed drug products, this could have a material adverse effect on our long term business, operating results and financial condition and our ability to create long-term shareholder value may be limited.

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

As noted above, one of the ways we intend to grow our pipeline and business is through acquisitions. We have limited experience in acquiring businesses. Acquisitions involve a number of particular risks, including: diversion of management’s attention from current operations; disruption of our ongoing business; difficulties in integrating and retaining all or part of the acquired business, its customers and its personnel; assumption of disclosed and undisclosed liabilities; and uncertainty about the effectiveness of the acquired company’s internal controls and procedures. The individual or combined effect of these risks could have a material adverse effect on our business. Because the price paid for acquiring businesses often exceeds the book value of the acquired company, the successful realization of value from an acquisition typically derives from capitalizing on synergies between the acquiror and acquiree. If we are unable to realize such synergies, we may not be able to justify the price paid for such an acquisition. Also, in paying for acquisitions and/or funding the development and commercialization of drug products that we acquire through acquisitions, we may deplete our cash resources or need to raise additional funds through public or private debt or equity financings, which would result in dilution for stockholders or the incurrence of indebtedness, and we may not be able to raise such funds on favorable or desirable terms or at all, especially if the credit and financial markets were to be constrained at the time we require funding. Furthermore, there is the risk that our technical and valuation assumptions and our models for an acquired product or business may turn out to be erroneous or inappropriate due to foreseen or unforeseen circumstances and thereby cause us to have overvalued an acquisition target or result in the accounting effect of the acquisition being different than what we had anticipated. We also may have to adjust certain aspects of the accounting for acquisitions, such as goodwill, IPR&D, other intangible assets and contingent consideration over time as events or circumstances occur, which could have a material adverse effect on our results of operations.

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

The FDA and other competent authorities worldwide may change their approval requirements or policies for antibiotics, or apply interpretations to their requirements or policies, in a manner that could delay, increase development costs or prevent commercialization of our antibiotic product candidates.

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

In October 2007, the FDA issued draft guidance on the use of non-inferiority studies to support approval of antibiotics. Under this draft guidance, the FDA recommended that for some antibiotic indications, sponsor companies carefully consider study designs other than non-inferiority, such as placebo-controlled trials demonstrating the superiority of a drug candidate to placebo. In November 2008, an FDA Anti-Infective Drugs Advisory Committee, or AIDAC, concluded that non-inferiority trials are acceptable for cSSSI indications and that a 10% non-inferiority margin may be acceptable if certain abscess types of cSSSI infections are excluded and the

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antibiotic provides safety, cost, or antimicrobial benefits. In August 2010, the FDA issued draft guidance on drug development for ABSSSI, in which the agency confirmed that non-inferiority trials are acceptable to support serious skin infection indications but did not specify what non-inferiority margin should be used. In October 2010, the FDA approved Teflaro for treatment of ABSSSI based on a pre-specified non-inferiority margin of 10% against standard therapy in the product’s Phase 3 clinical studies. Although this approval may provide some indication of the FDA’s approach, the lack of clear guidance from the FDA concerning the appropriate non-inferiority margin and, more particularly, to which study end point this should be applied, continues to leave uncertainties about the standards for approval of antibiotics in the U.S. In November 2010, the FDA also issued a final guidance on the use of non-inferiority trials to support the approval of antibacterial drugs. Although this guidance provides no further information on the acceptable range of non-inferiority margins, the FDA suggests that, in light of the final guidance, companies should re-evaluate non-inferiority study protocols previously reviewed.

In November 2010, the FDA also released draft guidance for nosocomial pneumonia (now referred to by the FDA as HABP and VABP) and is currently considering updating its guidance for cIAI and cUTI. Our plan is to seek approval for CXA-201 for the treatment of HABP and VABP in the U.S. and EU. However, if the FDA’s requirements for our Phase 3 clinical trial protocols for HABP and VABP are consistent with the draft guidance, we may not have a viable path to run Phase 3 trials for CXA-201 for HABP or VABP in order to seek approval for these indications in the U.S. Even if we agree with the FDA on protocols for the Phase 3 trials, the protocols may require us to conduct our Phase 3 trials of CXA-201 for HABP and VABP in a manner and size different from our currently-planned designs or to change our trial design during Phase 3 trials, which could delay the completion of the trials and significantly increase our development costs.

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

The factors described above could increase our development costs or delay for several years or ultimately prevent commercialization of any new antibiotic product candidates that we are developing or may seek to develop, such as CXA-201 and CB-183,315. This would likely have a material adverse effect on our business and results of operations.

Any consequences that the evolving FDA approach has for CUBICIN or any of the antibiotic product candidates that we are developing or may seek to develop may also be reflected in the approach adopted towards these products by the competent authorities in other countries. Furthermore, differing regulatory approval requirements in different countries complicates our ability to conduct unified global trials, which can lead to increased development costs and marketing delays or non-viability.

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

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

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

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

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

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

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· Optimer may not provide the level of support that it is required to provide under our agreement with respect to DIFICID or may not support our co-promotion of DIFICID to the degree that we would like, leading us to receive lower than expected revenues from this collaboration;

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

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

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

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

· we may fail to satisfy our contractual obligations to our partners, including obligations to supply our international CUBICIN partners with finished CUBICIN drug product, and certain failures to satisfy such obligations could subject us to claims for damages by our partners or allow a partner to terminate our agreement;

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

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

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

· our collaborators could merge with or be acquired by another company or experience financial or other setbacks unrelated to our collaboration that could cause them to de-prioritize their efforts on our collaboration.

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

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

We invest our cash in a variety of financial instruments, principally securities issued by the U.S. government and its agencies, investment grade corporate bonds, and money market instruments. All of these investments are subject to credit, liquidity, market and interest rate risk. These risks have been heightened in today’s tightened and fluctuating credit and financial markets. Such risks, including the failure or severe financial distress of the financial institutions that hold our cash, cash equivalents and investments, may result in a loss of liquidity, impairment to our investments, realization of substantial future losses, or a complete loss of the investments in the long-term, which may have a material adverse effect on our business, results of operations, liquidity and financial condition. In addition, we own real estate primarily consisting of buildings that contain research laboratories and office space. If we determine that the fair value of any of our owned properties, including any properties we may classify as held for sale, is lower than their book value we may not realize the full investment in these properties and incur significant impairment charges.

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We have incurred substantial losses in the past and may incur additional losses or fail to increase our profit.

Despite our recent sustained profitability, we may have lower levels of profitability or incur operating losses in future periods as a result of, among other things, revenues growing more slowly or declining, increased spending on the development of our drug candidates or investments in product opportunities. In particular, as we progress our current pipeline of product candidates, our spending on clinical trials and the contingent consideration due to former stockholders of Calixa is expected to increase significantly. Lower levels of profitability and/or operating losses may negatively impact our stock price and could have a material impact on our business and results of operations.

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

In October 2010, we closed the issuance of $450.0 million aggregate principal amount of the 2.50% Notes. We used a portion of the proceeds from the offering of the 2.50% Notes to repurchase, in privately negotiated transactions, approximately $190.8 million of the principal amount of the $300.0 million aggregate outstanding principal amount of the 2.25% Notes. Despite the net proceeds that we realized from the offering of the 2.50% Notes, we may be required to seek additional funds in the future due to economic and strategic factors. We expect capital outlays and operating expenditures to increase over the next several years as we continue our commercialization of CUBICIN, develop our existing and any newly-acquired drug candidates, actively seek to acquire companies with marketed products or product candidates, acquire or in-license additional products or product candidates, expand our research and development activities and infrastructure, and enforce our intellectual property rights. We may need to spend more money than currently expected because of unforeseen circumstances or circumstances beyond our control. In addition, if not repurchased or redeemed earlier, the remaining $109.2 million aggregate principal amount of the 2.25% Notes will become due in June 2013 and the $450.0 million of aggregate principal amount of the 2.50% Notes will become due in November 2017. Other than our $90.0 million credit facility with RBS Citizens, we have no other committed sources of capital and do not know whether additional financing will be available when and if needed, or, if available, that the terms will be favorable to our stockholders or us, particularly if the credit and financial markets were to be constrained at the time we require funding.

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

Our annual debt service obligations on our outstanding 2.25% Notes, after taking into account our repurchase of approximately $190.8 million of the principal amount of such notes, are approximately $2.5 million per year in interest payments, and our annual debt service obligations on our 2.50% Notes are approximately $11.3 million per year in interest payments. We may add additional lease lines to finance capital expenditures and may obtain additional long-term debt and lines of credit. If we issue other debt securities in the future, our debt service obligations will increase further. If we are unable to generate sufficient cash to meet these obligations and need to use existing cash or liquidate investments in order to fund our debt service obligations or to repay our debt, we may be forced to delay or terminate clinical trials or curtail operations. We may also be forced to obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights to CUBICIN or our product candidates in certain markets or grant licenses on terms that are not favorable to us. If we fail to obtain additional capital when we need it, we will not be able to execute our current business plan successfully.

Changes in our effective income tax rate could adversely affect our results of operations, particularly once we utilize our remaining federal and state net operating loss, or NOL, carryforwards.

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

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Risks Related to Our Industry

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

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

· if third parties file ANDAs with the FDA seeking to market generic versions of our products prior to the earlier of expiration of relevant patents owned or licensed by us or the date Teva is allowed to launch a generic version of CUBICIN under our settlement agreement with Teva and its affiliates, we may need to defend our patents, including by filing lawsuits alleging patent infringement, as we did in the Teva litigation that we recently settled;

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

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

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

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

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

An adverse outcome in any litigation or other proceeding could subject us to significant liabilities to third parties and require us to cease using the technology that is at issue or to license the technology from third parties. We may not be able to obtain any required licenses on commercially acceptable terms or at all. For the reasons stated in this “Risk Factors” section above regarding the possibility that we may not be able to obtain, maintain or protect our proprietary rights, our stock price may decline. The cost of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Some of our competitors may be able to sustain the cost of similar litigation and proceedings more effectively than we can because of their substantially greater resources.

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

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

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

· The statutory requirement that Medicare may not make a higher payment for inpatient services that are necessitated by hospital-acquired medical conditions, or HACs, arising after a patient is admitted to a hospital may affect the rate of reimbursement for CUBICIN. Although MRSA has not been designated as a HAC, it is implicated by this statutory requirement in situations where MRSA triggers another condition that is itself a HAC. In addition, MRSA may be added

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as a HAC in the future. As a result of this policy, in certain circumstances, hospitals may receive less reimbursement for Medicare patients that develop a HAC and such patients may have been treated with CUBICIN.

· The Medicare Part B payment rate to physicians and hospital outpatient departments for CUBICIN is set on a quarterly basis based upon the average sales price, or ASP, for a previous quarter. Significant downward fluctuations in such reimbursement rate could negatively affect revenues from CUBICIN both in the Medicare market and in the private insurance market since private payors are increasingly using ASP for determining their payments for drugs. While hospital outpatient rates can change through regulatory or legislative action, the Medicare Part B payment methodology for physicians, which is ASP plus six percent, can only change through legislation. As a result of the budgetary pressures resulting from the Budget Control Act of 2011, enacted August 2, 2011, or the Budget Control Act, a legislative reduction in the ASP plus six percent payment methodology is being considered and, if adopted, could negatively affect our revenues from CUBICIN.

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

· Under the Medicaid rebate program, we pay a rebate for each unit of product reimbursed by Medicaid under a fee-for-service benefit. The amount of the rebate for each product is set by law and is required to be recomputed each quarter based on our report of current average manufacturer price, or AMP, and best price for CUBICIN to the Centers for Medicare and Medicaid Services, or CMS. The terms of our participation in the program imposes a requirement for us to report revisions to AMP or best price within three years of when such data originally were due, and such revisions could have the impact of increasing or decreasing our rebate liability for prior quarters, depending on the direction of the revision. Health care reform altered the Medicaid rebate amount formula in a manner that increased our rebate liability starting in 2010 by increasing the applicable rebate percentage for most innovator drugs to 23.1%, which has and will negatively impact CUBICIN revenues and will negatively impact revenues from other products that we may sell in the future. Upon enactment, health care reform also expanded the universe of Medicaid utilization subject to rebates to include all utilization that occurs under a capitated benefit structure, which also may reduce our revenues. In addition, health care reform provides additional conditions, to be phased in between 2010 and 2014, under which individuals may qualify for the Medicaid program and its drug benefit; these changes will increase the number of individuals eligible for the Medicaid drug benefit. Separate from the federal health care reform requirements, individual states have the ability to request waivers from the federal government to institute expansions of Medicaid benefits to larger populations than currently allowed under their Medicaid eligibility rules. Expanded Medicaid eligibility, whether from federal requirements or individual state initiatives, could impact CUBICIN sales, as well as the portion of those sales that are subject to Medicaid rebates, and therefore our revenues. Health care reform and additional legislation passed in August 2010 also change the definition of AMP effective October 2010, which may impact our Medicaid rebate liability and, as a result, impact our revenues. A proposed rule on the definition of AMP is expected to be released in 2011, which could have an adverse impact on CUBICIN revenues or products we may commercialize in the future. The proposed rule is expected to address other changes to the Medicaid drug rebate program made by health reform legislation. The magnitude of these various Medicaid-related impacts will be difficult to project with accuracy. The key reasons for this uncertainty relating to the Medicaid program are that (i) the size and health-related demographics of expanded Medicaid populations will not be specifically known; and (ii) a significant amount of key information must be provided by the 51 participating Medicaid entities (the 50 states plus the District of Columbia). The timing and completeness of this information could be inconsistent due to budgetary challenges and a lack of centralized guidelines and directives on many of the new, detailed administrative processes.

· The availability of federal funds to pay for CUBICIN under the Medicaid and Medicare Part B programs requires that we extend discounts under the 340B/PHS drug pricing program. The 340B/ PHS drug pricing program extends discounts on outpatient drugs to a variety of community health clinics, outpatient departments of disproportionate share hospitals and other entities that receive health services grants from the Public Health Service, or PHS, as well as hospitals that serve a disproportionate share of Medicaid and low income Medicare beneficiaries. The required discount is calculated based on the reported AMP and Medicaid rebate amount for CUBICIN. The revisions to the Medicaid rebate formula and AMP definition enacted by health care reform and subsequent legislation could cause this required discount to increase. Health care reform extended the discounts to new types of entities in 2010. In addition, health care reform requires, beginning in 2014, substantial reductions to the special federal Medicare funding that hospitals with disproportionate share status

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receive; this reduced funding and the anticipation of it could cause such hospitals to re-evaluate their purchases of branded pharmaceuticals, including CUBICIN.

· We also make our products available for purchase by authorized users of the Federal Supply Schedule, or FSS, of the General Services Administration pursuant to our FSS contract with the Department of Veterans Affairs. Under the Veterans Health Care Act of 1992, or VHCA, we are required to extend deeply discounted FSS contract pricing to four federal agencies—the Department of Veterans Affairs, the Department of Defense, or DoD, the Coast Guard and the PHS (including the Indian Health Service)—for federal funding to be made available for reimbursement of any of our products under the Medicaid program, Medicare Part B, and for our products to be eligible to be purchased by those four federal agencies and certain federal grantees. FSS pricing to those four federal agencies must be equal to or less than the “Federal Ceiling Price,” which is, at a minimum, 24% off the Non-Federal Average Manufacturer Price, or “Non-FAMP”, for the prior fiscal year. In addition, the VHCA pricing program, and its implementing Master Agreement, provide that knowing submission of false information in connection with this program may result in civil monetary penalties of not to exceed $100,000 per item of false information in addition to other penalties available to the government.

· We may incur additional rebate liabilities related to the TRICARE Retail Prescription program, or TRRx, agreement we entered into with the DoD, which manages the TRRx program for military dependents. This program requires participating pharmaceutical manufacturers whose products are dispensed to TRICARE beneficiaries through TRRx network retail pharmacy channels to extend rebates to DoD. Owing to CUBICIN’s extremely limited volume through retail pharmacies, we have not incurred, nor do we expect to incur in the future, any substantial liabilities for CUBICIN under our CUBICIN TRRx agreement.

· Health care reform requires pharmaceutical manufacturers, such as Cubist, to pay a new, annual Branded Drug Fee to the federal government beginning in 2011. Each individual pharmaceutical manufacturer will pay a prorated share of the overall Branded Drug Fee, which for 2011 is $2.5 billion (and set to increase in ensuing years), based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. The amount of our annual share of the Branded Drug Fee for 2011 is $0.2 million, subject to what is expected to be a minor “true up” adjustment (to be calculated and billed by the federal government in 2012) to correct time period inconsistencies in the government’s calculation of the Branded Drug Fee. However, the amount of this annual payment could increase in future years due to both higher eligible Cubist sales and the increasing amount of the overall fee assessed across manufacturers.

· “Bundled” payment to hospitals, physicians, and other providers, under which payment for all products and services for an episode of care are combined in a capitated arrangement, has been selectively adopted by government payors. In addition, health care reform includes specific provisions to fund pilot projects involving bundled Medicare and Medicaid payments. Such reimbursement methodologies could impact the way providers evaluate CUBICIN and other brand name drugs for purchase.

· The Budget Control Act imposed cuts and caps on discretionary spending over the next ten years. Such spending reductions may adversely affect the FDA, potentially producing additional backlogs in the approval process that could affect any future drugs we may market. The Budget Control Act also created a new Joint Select Committee on Deficit Reduction, or the Joint Committee, to propose further deficit reduction with a goal of reducing the deficit by $1.5 trillion over the next 10 years. The Joint Committee will consider a range of cuts to health entitlement spending that could affect reimbursement policy. If legislation proposed by the Joint Committee does not achieve at least $1.2 trillion in savings over 10 years, the Budget Control Act provides for automatic procedures to reduce spending by as much as $1.2 trillion over the same time period. Medicaid would be exempt from these automatic cuts, and reductions in Medicare spending would be limited to payments to Medicare Advantage plans, Medicare Part D plans and providers, including but not limited to, hospitals and physicians. These payment reductions cannot exceed two percent. Nonetheless, the Medicare cuts could indirectly affect demand for CUBICIN by increasing budgetary pressures on these Medicare plans and providers.

· The increasing tendency of competent authorities to impose on physicians and pharmacists obligatory substitution of generics as opposed to innovative products such as CUBICIN.

In addition to these existing legislative and regulatory mandates, future legislation or regulatory actions altering these mandates or imposing new ones may have a significant effect on our business. In the U.S. and elsewhere, there have been, and we expect there will continue to be, legislative and regulatory actions and proposals to control and reduce health care costs, including those that use financial rewards or penalties to incentivize cost reductions and increase the quality of patient care.

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In response to certain legal actions and business pressures, both government payors (e.g., state Medicaid programs) and private payors have begun to move away from drug reimbursement based on average wholesale price. An increasing number of payors are instead adopting reimbursement based on new measures, such as ASP, AMP and actual acquisition cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates, and CMS has stated its intention to begin making pharmacy National Average Drug Acquisition Cost data publicly available on at least a monthly basis by the end of 2011. Therefore, it may be difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover CUBICIN and the willingness of providers to purchase it.

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

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

Finally, outside the U.S., certain countries, including some countries in the EU, set prices as part of the regulatory process concerning pricing and reimbursement with limited, if any, participation in the process by marketing authorization holders. We cannot be sure that such prices will be acceptable to us or our collaborators. Such prices may negatively impact our revenues from sales by our collaborators in those countries. An increasing number of countries are taking initiatives to attempt to reduce large budget deficits by focusing cost-cutting efforts on pharmaceuticals for their state-run health care systems. These international price control efforts have impacted all regions of the world, but have been most drastic in the EU. Major proposed or actual price reductions for branded pharmaceuticals occurred during 2010 in Germany, Italy, Spain, France, and Greece. Greece imposed the most severe measures, with price cuts in excess of 20% for many drugs and the implementation of permanent government oversight of future price changes. Further, a number of EU countries use drug prices from other EU Member States as “reference prices” to help determine pricing in their own countries. Consequently, a downward trend in drug prices for some countries could contribute to similar occurrences elsewhere. In addition, the current budgetary difficulties faced by a number of EU Member States, including Greece and Spain, has led to substantial delays in payment by regulatory authorities for medicinal products supplied by manufacturers and distributors.

In another international trend, various countries also are investigating completely new drug reimbursement methodologies, under which prices would be set largely on the basis of assumptions on a drug’s pharmaco-economic value. For example, in 2010 the United Kingdom announced that, by 2014, it will begin determining reimbursement rates for new drug products based in large part on an assessment of the overall value of each drug’s benefits. The impact on reimbursement for CUBICIN or any future drug product we may market, incremental resources needed to manage submissions in such a regulatory environment, and the potential for other countries adopting similar approaches are difficult to predict at this time.

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

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

Some of the drug candidates that we are developing are in the pre-clinical stage. In order for a drug candidate to move from this stage to human clinical trials, we must submit an Investigational New Drug Application, or IND, to the FDA or a similar document to competent health authorities outside the U.S. The FDA and other countries’ authorities will allow us to begin clinical trials under an IND or similar document in other countries only if we demonstrate in our submission that a potential drug candidate will not expose humans to unreasonable risks and that the compound has pharmacological activity that justifies clinical development.

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It takes significant time and expense to generate the requisite data to support an IND or similar document. In many cases, companies spend the time and resources only to discover that the data are not sufficient to support an IND or similar document and therefore are unable to enter clinical trials. In the past, we have had pre-clinical drug candidates for which we did not have the requisite data to file for an IND or similar document and proceed with clinical trials, and this likely will happen again in the future.

Once a drug candidate enters human clinical trials, the trials must be carried out under protocols that are acceptable to regulatory authorities and to the independent committees responsible for the ethical review of clinical studies (e.g., Institutional Review Boards, or IRBs, and/or Independent Ethics Committees, or IECs). There may be delays in preparing protocols or receiving approval for them that may delay either or both the start and the finish of the clinical trials. Feedback from regulatory authorities, IRBs, IECs, or safety monitoring boards or results from earlier stage and/or concurrent clinical studies might require modifications or delays in later stage clinical trials or could cause a termination or suspension of an entire drug development program. These types of delays or suspensions can result in increased development costs, delays in marketing approvals, and/or abandoning future development activities. Furthermore, there are a number of additional factors that may cause our clinical trials to be delayed, prematurely terminated or deemed inadequate to support regulatory approval, such as:

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

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

· inadequate efficacy observed in the clinical trials;

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

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

· the impact of the results of other clinical trials on the drug candidates that we are developing, including by other parties who have rights to develop drug candidates being developed by us in other indications or other jurisdictions, such as clinical trials of CXA-101 or CXA-201 that may be conducted by Astellas or any other licensees that it may engage for development in territories for which we do not have commercial rights;

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

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

· the difficulties and complexity of testing our drug candidates in clinical trials with pediatric patients as subjects, particularly with respect to CUBICIN, for which we are pursuing a regulatory filing to gain an additional six months of exclusivity based on safety and efficacy in children, for which additional clinical trials will be required;

· the failure of third-party CROs and other third-party service providers and independent clinical investigators that we have engaged to manage and conduct the trials with appropriate quality and in compliance with regulatory requirements to perform their oversight of the trials, to meet expected deadlines or to complete any of the other activities that we have contracted such third parties to complete;

· the failure of our clinical investigational sites, and related facilities and the records kept at such sites, and clinical trial data to be in compliance with the FDA’s Good Clinical Practices, or EU legislation governing good clinical practice, including the failure to pass FDA, EMA, or EU Member State inspections of clinical trials—such failure at even one site in a multi-site clinical trial can impact the results or success of the entire trial;

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

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

· any concern at the FDA, or the competent national authorities of EU Member States, with accepting the results of trials that have been conducted in countries for which the industry and regulatory authorities only have recent experience with and which may be seen to have less stringent compliance standards;

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

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

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

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

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

Even if regulatory approval to market a drug product is granted, the approval may impose limitations on the indicated use for which the drug product may be marketed as well as additional post-approval requirements. Our commercialization of an approved drug product is impacted by the design and results of the trials that we or others conducted for the drug because such design and results determine what will be included on the drug label approved by regulatory authorities, and the label governs how we are allowed to promote the drug. The FDA, or an equivalent competent authority of another country, may determine that a risk evaluation and mitigation strategy, or REMS, is necessary to ensure that the benefits of a new product continue to outweigh its risks once on the

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market. If required, a REMS may include various elements, such as publication of a medication guide, patient package insert, a communication plan to educate health care providers of the drug’s risks, limitations on who may prescribe or dispense the drug, or other measures that the FDA deems necessary to assure the safe use of the drug. Therefore, we may seek to conduct clinical studies for a drug in a manner that we think will increase the chances of commercial success or design trials in such a way, for example by increasing the trial size, that we believe will reduce the chances of unfavorable information in the drug’s label or a REMS. This approach may make clinical development of our drug candidates more expensive, and possibly increase our risk of failure. Even if our drug products are approved for marketing and commercialization, we may need to comply with post-approval clinical study commitments in order to maintain certain aspects of the approval of such products. For example, in connection with our U.S. marketing approvals for CUBICIN, we have made certain Phase 4 clinical study commitments to the FDA, including for studies of renal-compromised patients, pediatric patients, and a study of CUBICIN with and without gentamicin combination therapy in the treatment of RIE caused by S. aureus. Our business could be seriously harmed if we either do not complete these studies at all or within the time limits imposed by the FDA and, as a result, the FDA requires us to change related sections of the marketing label for CUBICIN or imposes monetary fines on us.

Adverse medical events that occur during clinical trials or during commercial marketing of CUBICIN could result in legal claims against us and the temporary or permanent withdrawal of CUBICIN from commercial marketing, which could seriously harm our business and cause our stock price to decline.

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

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

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

Compliance/Fraud and Abuse. We are subject to extensive and complex laws and regulation, including but not limited to, health care “fraud and abuse” laws, such as the federal False Claims Act, the federal Anti-Kickback Statute, and other state and federal laws and regulations. While we have developed and implemented a corporate compliance program designed to promote compliance with applicable U.S. laws and regulations, we cannot guarantee that this program will protect us from governmental investigations or other actions or lawsuits stemming from a failure or alleged failure to be in compliance with such laws or regulations. There appears to be a heightened risk of such investigations in the current environment, as evidenced by recent enforcement activity and pronouncements by the Office of Inspector General of the Department of Health and Human Services that it intends to continue to vigorously pursue fraud and abuse violations by pharmaceutical companies, including through the use of a legal doctrine that could impose criminal penalties on pharmaceutical company executives. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions. Other countries also have developed an array of legislative and regulatory provisions to combat fraud and abuse. Our partners responsible for authorization and marketing of CUBICIN in other countries have developed pricing, distribution and contracting procedures that are independent of our compliance program and over which we have no control. Our partners may have inadequate compliance programs or may fail to respect the laws and guidance of the territories in which they are promoting the product. Compliance violations by our distribution partners could have a negative effect on the revenues that we receive from sales of CUBICIN in these countries. Optimer co-promotes DIFICID along with us and, except for our co-promotion rights and our joint rights to review and approve promotional and medical affairs materials, is responsible for all aspects of the commercialization of DIFICID, including pricing, distribution and contracting, and will maintain a compliance program that is

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entirely independent of our compliance program. Any governmental or other actions brought against Optimer with respect to the commercialization of DIFICID could have a significant impact on our ability to successfully co-promote DIFICID and could subject us to investigation or other government actions.

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

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

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

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

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

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

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

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

Employment and Human Resources. The laws and regulations applicable to our relationships with our employees and contractors are complex, extensive and fluid and are subject to evolving interpretations by regulatory and judicial authorities. The failure to comply with these laws and regulations could result in significant damages, orders and/or fines and therefore could adversely affect our operations. For example, a 2010 decision by the U.S. Court of Appeals for the Second Circuit, In re Novartis Wage & Hour Litigation, in a split from an earlier decision from the U.S. Court of Appeals for the Third Circuit, held that pharmaceutical sales representatives were non-exempt employees under the Fair Labor Standards Act. The Second Circuit’s decision may trigger additional litigation against pharmaceutical companies, including us. An adverse result in any such litigation could result in significant damages to us and could therefore have a material adverse effect on our business and results of operations.

Credit and financial market conditions may exacerbate certain risks affecting our business.

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

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

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

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

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

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

Risks Related to Ownership of Our Common Stock

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

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

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

· actual or anticipated variations in our quarterly operating results;

· whether additional third parties file ANDAs with the FDA seeking to market generic versions of our products prior to expiration of relevant patents owned or licensed by us and the results of any litigation that we file to defend and/or assert our patents against such third parties;

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

· third-party reports of our sales figures or revenues;

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· changes in the market, medical need or demand for CUBICIN, including as a result of the CUBICIN-related risk factors described in this “Risk Factors” section;

· the level of the medical community’s acceptance and use of DIFICID;

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

· the announcements of clinical trial results, regulatory filings, acquisitions, strategic partnerships, collaborations, joint ventures or capital commitments by us or our competitors;

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

· litigation, including stockholder or patent litigation;

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

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

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

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

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

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

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

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

· advance notice is required for nomination of candidates for election as a director and for a stockholder proposal at an annual meeting.

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

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

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

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

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

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

10.1* 2010 Equity Incentive Plan.

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

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

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

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

101** The following materials from Cubist Pharmaceuticals, Inc.’s Form 10-Q for the quarter ended September 30, 2011, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) Notes to the Condensed Consolidated Financial Statements.

* Management contract or compensatory plan or arrangement

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

	CUBIST PHARMACEUTICALS, INC.


	November 2, 2011
	By:
		/s/ David W.J. McGirr
		David W.J. McGirr
		Senior Vice President and Chief Financial Officer
		(Authorized Officer and Principal Finance and Accounting Officer)

Item		Page

PART I. Financial information		3

1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010	3
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010	5
	Notes to the Condensed Consolidated Financial Statements	6
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
3.	Quantitative and Qualitative Disclosures About Market Risk	36
4.	Controls and Procedures	37

PART II. Other Information		38

1.	Legal Proceedings	38
1A.	Risk Factors	38
2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
3.	Defaults Upon Senior Securities	59
4.	Removed and Reserved	59
5.	Other Information	59
6.	Exhibits	59
	Signatures	60