CUBIST PHARMACEUTICALS INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended: DECEMBER 31, 2000

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

For the transition period from: _________________ to _________________

Commission file number: 0-21379

CUBIST PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 22-3192085
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

24 EMILY STREET, CAMBRIDGE, MA 02139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ( ZIP CODE)

Registrant's telephone number,
including area code: (617) 576-1999

Securities registered pursuant to
Section 12(b) of the Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-X is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

The aggregate market value of the registrant's common stock, $.001 par
value per share ("Common Stock"), held by non-affiliates of the registrant as
of March 28, 2001 was approximately $654,799,928, based on 26,932,091 shares
held by such non-affiliates at the closing price of a share of Common Stock
of $24.313 as reported on the Nasdaq National Market on such date. Affiliates
of the Company (defined as officers, directors and owners of 10 percent or
more of the outstanding share of Common Stock) owned 1,026,363 shares of
Common Stock outstanding on such date. The number of outstanding shares of
Common Stock of the Company on March 28, 2001 was 27,958,454.

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CUBIST PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

ITEM PAGE
PART I

1. Business 3
2. Description of Property 28
3. Legal Proceedings 29
4. Submission of Matters to a Vote of Security Holders 29

PART II

5. Market For Registrant's Common Stock and Related Stockholder Matters 29
6. Selected Financial Data 30
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 31
7A. Quantitative and Qualitative Disclosures About Market Risk 37
8. Financial Statements and Supplementary Data 38
9. Changes in and Disagreements With Accountants on Accounting And Financial
Disclosure 63

PART III

10. Directors and Executive Officers of the Registrant 63
11. Executive Compensation 63
12. Security Ownership of Certain Beneficial Owners Management 63
13. Certain Relationships and Related Transactions 63

PART IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures 63

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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This annual report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding our drug development and
discovery programs, clinical trials, receipt of regulatory approval, capital
needs, collaborative agreements, intellectual property, expectations and
intentions. Forward-looking statements may be identified or qualified by words
such as "likely," "will," "suggests," "may," "would," "could," "should,"
"expects," "anticipates," "estimates," "plans," "projects," "believes," or
similar expressions and variants of those words or expressions.

Forward-looking statements necessarily involve risks and uncertainties, and
our actual results could differ materially from those anticipated in the
forward-looking statements due to a number of factors, including those set forth
above under "Risk Factors" and elsewhere in this annual report. The factors set
forth above in the "Risk Factors" section and other cautionary statements made
in this annual report should be read and understood as being applicable to all
related forward-looking statements wherever they appear in this annual report.
The forward-looking statements contained in this annual report represent our
judgment as of the date of this annual report. We caution readers not to place
undue reliance on such statements. We undertake no obligation to update publicly
any forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.

Information regarding market and industry statistics contained in this
annual report is included based on information available to us that we believe
is accurate. It is generally based on academic and other publications. We have
not independently verified all data and cannot assure you of the accuracy of the
data we have included.

PART I

PART I

ITEM 1. BUSINESS

CORPORATE OVERVIEW

Cubist Pharmaceuticals, Inc. is a specialty pharmaceutical company
focused on the research, development and commercialization of novel
antimicrobial drugs to combat serious and life-threatening bacterial and
fungal infections. Cidecin (daptomycin for injection), our lead product
candidate and the first in a new class of antimicrobial drug candidates
called lipopeptides, has demonstrated the unique ability IN VITRO to rapidly
kill virtually all clinically significant Gram-positive bacteria, including
those that have become resistant to current therapies. Multiple Phase III
trials are currently underway examining the safety and efficacy of Cidecin in
the treatment of complicated skin and soft tissue infection,
community-acquired pneumonia and complicated urinary tract infection. An
open-label Phase II trial using Cidecin for the treatment of bacteremia was
recently completed and future trials are planned in the treatment of
endocarditis and certain resistant infections. Assuming the successful
completion of Phase III clinical trials, we plan to file with the United
States Food and Drug Administration by mid-2002 a New Drug Application.

We recently expanded our product pipeline by announcing the development of
an oral formulation of daptomycin and by acquiring the worldwide rights to
research, develop, manufacture and sell oral ceftriaxone, the first orally
active version of Rocephin, the largest-selling intravenous antibiotic
worldwide. Each of these programs is in the pre-clinical stage of development.
In addition, our internal research and drug discovery activities are focused on
the discovery of new drug candidates from the lipopeptide class, including a
'next generation' daptomycin, and entirely new classes of antimicrobial drug
candidates, while we continue to be involved in multiple, strategic partnerships
with other pharmaceutical companies, including Novartis Pharma AG and Merck &
Co., for the discovery and development of novel antiinfectives.

We utilize our VITA, ChemInformatics, NatGen, NatChem and BioDiversity
technologies to identify additional novel compounds with a broad spectrum of
activity against a variety of infections.

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OVERVIEW OF INFECTIOUS DISEASE AND DRUG RESISTANCE

Infectious diseases are caused by pathogens present in the environment,
such as bacteria and fungi, that enter the body through the skin or mucous
membranes of the lungs, nasal passages or gastrointestinal tract, and overwhelm
the body's immune system. These pathogens then establish themselves in various
tissues and organs throughout the body and cause a number of serious and, in
some cases, lethal infections, including those of the bloodstream, skin and soft
tissue, heart, lung and urinary tract.

According to The World Health Report, 1999, infectious diseases remained
the leading cause of death worldwide. According to industry sources, in 1999 the
global systemic antibiotic market was estimated to be valued at $25 billion and
there were at least 13 branded antimicrobials with more than $300 million in
annual sales worldwide. Emerging infections contribute substantially to the
ongoing burden of infectious disease in the U.S. According to a 1994 CDC report,
infectious diseases account for 25% of all visits to physicians each year, and
antimicrobial agents are the second most frequently prescribed class of drugs.
Over the past several years, there has been a rise in the incidence of
infectious diseases caused by bacteria and fungi that have developed resistance
to existing antimicrobial drugs. The increasing prevalence of drug-resistant
bacterial and fungal pathogens has led to significantly higher mortality rates,
prolonged hospitalizations, and higher health care costs from infectious
disease.

Antimicrobial drugs have, in many cases, proven highly successful in
controlling the serious morbidity and mortality that accompany these infections.
These drugs work by binding to specific targets in a bacterial or fungal
pathogen, thereby inhibiting a cell function essential to the cell's survival.
During the 1970's and the 1980's, many antimicrobials were developed and
introduced into the market. Most of these antimicrobials were from existing
antimicrobial classes such as semi-synthetic penicillins, cephalosporins,
macrolides, quinolones and carbapenems. Many of these antimicrobials proved to
be effective in treating infectious diseases and pharmaceutical companies
shifted their resources to other areas of drug discovery and development. As a
result, only one new antimicrobial agent has been introduced from a new chemical
class in the past 25 years.

Over the past several years, there has been a rise in the incidence of
serious and life-threatening infections caused by Gram-positive bacteria,
particularly in hospitalized patients. Gram-positive and Gram-negative bacteria
have fundamentally different cell surface characteristics. These cell surface
characteristics greatly affect the ability of an antibiotic to penetrate the
bacteria and reach its target site. The rising incidence of serious and
life-threatening infections in hospitals is believed to be caused by the
changing nature of the hospital patient population and by the emergence of
bacteria and fungi that are resistant to existing antimicrobial drugs.

In recent years, the proportion of hospital patients that have compromised
immune systems has risen sharply. This trend is the result of, among other
things, the rising incidence of cancer and the associated use of chemotherapy,
the general aging of the patient population and the increased use of complex
surgical procedures such as organ transplants. Hospital patients with
compromised immune systems are more susceptible to serious and life-threatening
infections.

The rise in the incidence of infectious diseases caused by bacteria and
fungi that have developed resistance to existing antimicrobial drugs is a
natural outcome of the use and overuse of antimicrobial drugs. When bacteria or
fungi are exposed to an antimicrobial drug, the drug kills or inhibits the
growth of the susceptible pathogen. However, any variant in the bacterial
population that has spontaneously undergone a genetic change that confers drug
resistance will have a selective growth advantage, known in evolutionary terms
as natural selection. Thus, the antimicrobial drug does not cause the resistance
but creates an environment in which the resistant pathogen can multiply in the
presence of the drug, increasing the population of the resistant pathogen and
making it the predominant pathogen. These resistant pathogens can then spread
rapidly throughout the community.

Certain pathogens have developed resistance to all currently available
drugs. Examples of such Gram-positive resistant pathogens include:

o METHICILLIN RESISTANT STAPHYLOCOCCUS AUREUS, OR MRSA: STAPHYLOCOCCUS
AUREUS is a common bacterial pathogen that causes serious and
life-threatening infections, and routinely acquires characteristics of
drug resistance, virulence and toxicity. MRSA strains can cause severe
tissue damage to existing wounds and can cause bacteremia, both of
which have a high mortality rate.

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o VANCOMYCIN RESISTANT ENTEROCOCCI, OR VRE: The emergence of VRE strains
in the 1990's has led to infections for which only very limited
commercially available therapy exists. Hospital-based VRE has
continued to rapidly rise in the United States, resulting in increased
mortality rates.

o GLYCOPEPTIDE INTERMEDIATELY SUSCEPTIBLE STAPHYLOCOCCUS AUREUS, OR
GISA: The first reports of STAPHYLOCOCCUS AUREUS infections with
decreased susceptibility to vancomycin occurred in 1998. Such
bacterial strains have been found in a wide geographical area
throughout Japan and North America and have recently emerged in
Europe. The medical community expects that fully drug-resistant
STAPHYLOCOCCUS AUREUS strains will emerge from GISA as additional
resistance to vancomycin develops.

SHORTCOMINGS OF CURRENT THERAPIES

Current therapies do not provide adequate treatment for some serious and
life-threatening infections for the following reasons:

o Some existing antimicrobial drugs do not kill the pathogens that cause
the infection but merely inhibit their growth (called bacteriostatic
agents) thereby allowing the immune system to destroy the pathogen.
Bacteriostatic drugs are less effective in immunocompromised patients
than antimicrobial drugs that kill the pathogens (called bactericidal
agents) because their weakened immune systems cannot rid their bodies
of the pathogens.

o Many antimicrobials are effective against some serious and
life-threatening infections but not others. This may be because the
antimicrobial drug is not active against a particular type of pathogen
or because a strain of this pathogen has developed resistance to the
antimicrobial drug. Many of the serious and life-threatening
infections occur in hospital patients whose immune systems are
compromised. These infections are complicated and may be caused by
more than one kind of pathogen. In addition, since these infections
are life threatening, physicians treating these patients cannot wait
for the test results necessary to identify the exact nature of the
pathogen or pathogens causing the infection.

o Some pathogens have become resistant to all antimicrobials and there
are no available antimicrobial drugs to effectively treat the
infections caused by these drug-resistant pathogens. Vancomycin is the
current treatment of choice for patients that have serious and
life-threatening infections that have failed to respond to all other
antimicrobials. However, it has been widely reported in recent years
that several strains of enterococci have developed resistance to
vancomycin. Currently, there are limited commercially available
therapeutic alternatives to treat these strains of VRE.

o Many existing antimicrobial drugs used to treat serious and
life-threatening infections are difficult or inconvenient to
administer. Most of these antimicrobial drugs must be administered
multiple times a day in order to be effective, are not well tolerated
by patients or require lengthy infusion times when administered in a
single daily dose. Moreover, intravenous administration of some of
these antimicrobial drugs does not occur through the veins in the arm
but through catheters in the central venous system. The difficulty or
inconvenience of administration of these drugs make them less
attractive choices for home therapy or other therapy outside the
hospital. Existing antimicrobial drugs may cause side effects in some
patients, such as severe allergic reaction, lower blood pressure,
inflammation and swelling at the site of injection and headaches. Some
of these side effects may be significant enough to require that
therapy be discontinued.

OUR BUSINESS STRATEGY

Our objective is to be a worldwide leader in the research, development
and commercialization of new antimicrobial drugs to combat serious and
life-threatening Gram-positive bacterial and fungal infections, including
those caused by drug-resistant pathogens. The principal elements of our
strategy to achieve this objective include the following:

DEVELOP AND COMMERCIALIZE CIDECIN. We are developing Cidecin (daptomycin
for injection) to treat serious and life-threatening bacterial infections,
including those caused by drug-resistant pathogens. Assuming the successful
completion of Phase III human clinical trials, we intend to file a new drug
application with the FDA by mid-2002. We have the exclusive right to develop,
manufacture and market Cidecin and are evaluating strategies for its worldwide
commercialization.

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DEVELOP PRE-CLINICAL CANDIDATES. As a result of corporate development
efforts in 2000, we now have two drug candidates in pre-clinical development: an
oral formulation of daptomycin and an oral formulation of ceftriaxone, the first
orally active version of Rocephin, the largest-selling intravenous antibiotic
worldwide. If the pre-clinical studies planned throughout 2001 are successful,
we anticipate filing Investigational New Drug Applications, or IND's, with the
FDA and beginning human clinical trials on oral ceftriaxone and oral daptomycin
in 2002.

LICENSE NEW DRUGS AND NEW DRUG CANDIDATES. Our internal expertise allows us
to recognize viable licensing opportunities and to save time and money in
successfully developing antimicrobials by capitalizing on research initially
conducted and funded by others. We intend to continue to review and acquire
compounds with promising characteristics as antimicrobial drug candidates.

DISCOVER AND DEVELOP NEW ANTIMICROBIAL DRUGS. We focus our research and
drug discovery activities on identifying new classes of antimicrobial drugs and
on developing one or more antimicrobial drugs from each of these new classes. We
believe that antimicrobial drugs from new classes will be effective against
drug-resistant bacterial and fungal pathogens because these pathogens have not
had an opportunity to develop resistance specific to these drugs. We have a
research and development effort underway focused on a new class of
antimicrobials called lipopeptides. Daptomycin is a member of the lipopeptide
class and, as a result of our work with daptomycin, we have developed expertise
in the chemistry and biology of lipopeptides. Our proprietary lipopeptide
program is focused on identifying new lipopeptide antimicrobial compounds for
the treatment of a broad spectrum of serious and life-threatening bacterial
infections.

UTILIZE OUR VITA FUNCTIONAL GENOMICS, NATURAL PRODUCTS AND CHEMINFORMATICS
TECHNOLOGIES TO ACCELERATE THE DISCOVERY OF ANTIMICROBIAL DRUGS. We utilize our
VITA, Natural Products and ChemInformatics technologies in our internal research
programs to identify novel compounds with a broad spectrum of activity against
life-threatening infectious organisms including resistant strains such as MRSA
and VRE. Our technologies attempt to accelerate the generation of leads for
medicinal chemistry programs resulting in faster development of antimicrobial
drugs and lower costs by efficiently using resources throughout the drug
discovery process.

LICENSE OUR VITA FUNCTIONAL GENOMICS AND OTHER TECHNOLOGIES TO
PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES. We plan to continue to generate
revenues by licensing our VITA functional genomics, our natural products and
other technologies as drug discovery platforms.

DEVELOPMENT PIPELINE

I. CIDECIN (DAPTOMYCIN FOR INJECTION)

OVERVIEW. Daptomycin is the first member of a new class of antimicrobial
drugs called lipopeptides. Under laboratory conditions, or IN VITRO,
daptomycin rapidly kills virtually all clinically significant Gram-positive
bacteria, including the resistant strains of VRE, MRSA and GISA. The
Gram-positive bacteria targeted by daptomycin cause serious infections,
including endocarditis or infection of the valves of the heart, osteomyelitis
or infection of bone or bone marrow, complicated skin and soft tissue
infections, bacteremia, complicated urinary tract infections and pneumoniae.
In November 1997, we licensed from Eli Lilly & Company the exclusive rights
to manufacture and market daptomycin. We are currently evaluating the
efficacy and safety of an intravenous version of daptomycin, which we have
branded as "Cidecin", in a clinical program with Phase I, Phase II and Phase
III trials currently underway.

CIDECIN ADVANTAGES. We believe that Cidecin could provide the following key
benefits:

o ACTIVE AGAINST GRAM-POSITIVE BACTERIA. Cidecin is effective IN VITRO
against virtually all clinically significant Gram-positive bacteria,
including VRE, MRSA and GISA. We believe that Cidecin's broad spectrum
of IN VITRO activity could give it a clinical therapeutic advantage in
treating serious and life-threatening infections because Cidecin could
be used to treat these infections regardless of which Gram-positive
bacterium is causing the infection.

o RAPIDLY KILLS BACTERIA (BACTERICIDAL). Cidecin rapidly kills virtually
all clinically significant Gram-positive bacteria IN VITRO. We believe
this could give Cidecin a clinical therapeutic advantage in treating
serious and life-threatening infections, particularly in patients that
have compromised immune systems, as compared to other drugs that do
not kill the bacteria but rather only inhibit their growth and rely on
the immune system to destroy the

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bacteria. Use of the growth-inhibiting rather than bacteria-killing
drugs to treat serious and life-threatening infections is riskier
because, even if the growth-inhibiting drug works, it is possible that
the immune system will not be able to destroy the bacteria causing the
infection.

o EFFECTIVE AGAINST DRUG-RESISTANT BACTERIA. Studies have shown that
Cidecin is effective IN VITRO against drug-resistant bacteria,
including VRE and GISA. Vancomycin, a glycopeptide, we believe
could become the treatment of choice for patients that have serious
Gram-positive infections that have failed to respond to all other
drugs. Recently, however, several strains of enterococci have
developed resistance to vancomycin and strains of STAPHYLOCOCCUS
AUREUS have become intermediately susceptible to vancomycin.
Currently, there are limited therapeutic alternatives to treat VRE
and GISA strains. We believe that Cidecin will become the therapy
of choice to treat infections caused by drug-resistant
Gram-positive bacteria.

o EASE OF ADMINISTRATION. In our current clinical trials, Cidecin is
administered in a single daily dose, intravenously, over approximately
30 minutes. Cidecin should have an advantage over several other
antimicrobial drugs that require administration in multiple doses each
day, that take longer than 30 minutes to administer or that are
administered through a central venous catheter located in parts of the
body other than the arm.

CIDECIN CLINICAL DATA. In the late 1980's Eli Lilly conducted 19 Phase I
safety trials and 2 Phase II efficacy and dosing trials of intravenous
daptomycin for the treatment of skin and soft tissue infections and bacteremia.
A total of 352 patients participated in these trials.

On the basis of daptomycin's IN VITRO activity against clinically
significant bacteria, its bacteria-killing mode of action and its promising
profile in the Eli Lilly Phase I and Phase II trials, we began further clinical
evaluation of intravenous daptomycin. In December 1998, we filed an IND with the
FDA and began Phase II and Phase III trials in February 1999 in order to
evaluate the safety and efficacy of intravenous daptomycin in patients with
complicated skin and soft tissue infections and in patients with bacteremia.

On March 5, 2000, we presented the results from two dose-ranging Phase II
open-label trials at the CDC's conference on Nocosomial and
Healthcare-Associated Infections. The objective of these Phase II trials was to
investigate dose selection based on clinical efficacy and safety. The first
trial was focused on patients diagnosed with bacteremia. The second trial was
focused on patients who had failed or were unable to tolerate other therapies
for the treatment of serious Gram-positive infections, including bacteremia,
complicated skin and soft tissue, complicated urinary tract infection,
intra-abdominal infection and pneumonia, which we call the RRC study. The Phase
II trial data combined for both studies included 56 patients and showed that
Cidecin administered once-a-day at 4 mg/kg had a 91% clinical success rate. In
addition, Cidecin administered once-a-day at 4 mg/kg demonstrated an 86%
clinical success rate in the subset of patients infected with a
vancomycin-resistant pathogen or who were refractory or intolerant to
vancomycin. Cidecin also had a safety profile similar to standard therapies.

On May 31, 2000, additional data were presented from the two ongoing Phase
II open-label trials at the European Congress of Clinical Microbiology and
Infectious Diseases. The combined data included 101 enrolled patients. At a dose
of 4 mg/kg in a once-daily regimen, Cidecin had an overall clinical success rate
of 92% in the modified intent-to-treat population and 100% on the clinically
evaluable patients. In terms of microbiologic eradication, Cidecin demonstrated
a 75% success rate in the modified intent-to-treat population and a 93% success
rate in microbiologically evaluable patients. Notably, the data show that in the
RRC study, Cidecin demonstrated a clinical success rate of 86%. As a result of
the data collected thus far, a dose of 4 mg/kg was chosen for all Phase III
pivotal trials.

On September 18, 2000, further data were presented at the Interscience
Conference on Antimicrobial Agents and Chemotherapy combining the data from the
4 mg/kg once-daily dosing regimens in the bacteremia and RRC studies completed
to date. Cidecin had an overall clinical success rate of 93% in the modified
intent-to-treat population and 100% on the clinically evaluable patients. In
terms of microbiologic eradication, Cidecin demonstrated a 75% success rate in
the modified intent-to-treat population and a 100% success rate in
microbiologically evaluable patients. Comparable vancomycin data in the
bacteremia trial demonstrated a 64% clinical success rate in the modified
intent-to-treat population. These additional data presented were consistent with
the data announced earlier in the year.

Also at the Interscience Conference on Antimicrobial Agents and
Chemotherapy, results were announced from a Cidecin Phase I dose escalation
study intended to assess the safety, tolerability and pharmacokinetics of
Cidecin given once a

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day at increasing doses. In the study, volunteers received once-daily doses of
Cidecin at 4 mg/kg, 6 mg/kg or 8 mg/kg for up to 14 days. The results of the
study showed that no serious adverse events occurred in any patients at any of
the doses studied.

On March 14, 2001, we announced preliminary results from our first, pivotal
Phase III trial examining the safety and efficacy of Cidecin in the treatment of
complicated skin and soft tissue infection caused by Gram-positive bacteria. We
were able to announce that the primary endpoint of demonstrating equivalency to
comparator agents was achieved as per the protocol previously reviewed by the
FDA. More detailed results from this study will be available after April 3,
2001, when the safety and efficacy data are expected to be presented at the
European Congress of Clinical Microbiology and Infectious Diseases in Istanbul,
Turkey.

CIDECIN SAFETY PROFILE. In our clinical trials to date, observed side
effects in patients treated with Cidecin have been comparable to those observed
in patients treated with standard therapies.

CIDECIN CLINICAL PLAN. The clinical plan for Cidecin is designed to enroll
a sufficient number of patients necessary for the safety and efficacy analysis
to obtain FDA approval. The following table shows our clinical studies currently
completed, underway and planned.

GEOGRAPHIC
INFECTION STATUS TIMING SCOPE

Bacteremia Phase II Completed in 4Q:00 U.S.

Resistant, Refractory Phase II Completed in 3Q:00 U.S.
or Contraindicated

Complicated Skin Phase III Completed in 1Q:01 International
and Soft Tissue Infection

Complicated Skin Phase III Commenced in 2Q:99 Worldwide
and Soft Tissue Infection

Community-Acquired Phase III Commenced in 1Q:01 Worldwide
Pneumonia (CAP 1)

Community Acquired Phase III Expected to Commence Worldwide
Pneumonia (CAP 2) in 2Q:01

Complicated Urinary Tract Phase III Commenced in 4Q:00 Worldwide
Infection

Endocarditis Phase II/III Expected to Commence U.S.
in mid-2001

VRE Infection Phase III Expected to Commence U.S.
in mid-2001

We are considering additional clinical trials designed to expand the
indications and commercial opportunity for Cidecin to other clinical
applications, including osteomyelitis.

II. ORAL CEFTRIAXONE

In late November 2000, we announced that we had acquired worldwide rights
to research, develop, manufacture and sell oral ceftriaxone from International
Health Management Associates, Inc., a privately held company located in
Illinois. The formulation is the first orally active version of the
largest-selling intravenous (IV) antibiotic worldwide, Hoffmann-LaRoche's
Rocephin, which had sales of over $1.2 billion in 1999. Terms of the acquisition
were not disclosed.

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Gram-positive and Gram-negative bacteria are responsible for the majority
of community-based infections, which include upper and lower respiratory tract
infections (including otitis media, sinusitis, bronchitis and community-acquired
pneumonia) and skin and soft tissue infections. These infections result in
nearly 80 million treated patients annually in the United States.

Intravenous ceftriaxone is a third-generation cephalosporin and has
demonstrated a broad spectrum of bactericidal antimicrobial activity against
Gram-positive and Gram-negative bacteria. To date, intravenous ceftriaxone has
been primarily used to treat hospital in-patients due to the lack of an oral
version. Nonetheless, intravenous ceftriaxone has been successfully and safely
prescribed for over 15 years in both adults and children. If successfully
developed, we believe that an oral formulation could greatly expand the utility
and revenue potential of ceftriaxone through community-based prescribing. In
addition, we believe oral ceftriaxone could also be used for the continuation of
antibiotic therapy by converting intravenous therapy to oral therapy, otherwise
known as step-down therapy. Step-down therapy provides multiple benefits,
including convenience and cost savings, potential earlier hospital discharge,
the reduction of associated healthcare costs and increased physician confidence
in an optimal therapeutic outcome given that a discharged patient is receiving
the same therapy that was taken intravenously in the hospital setting.

Our oral formulation of ceftriaxone is currently in pre-clinical
development. If pre-clinical studies proceed positively, we expect to file an
IND to begin human clinical trials during the first half of 2002.

III. ORAL DAPTOMYCIN

In November 2000, Cubist and Emisphere Technologies of Tarrytown, New
York, announced a research agreement to develop an oral formulation of
daptomycin. The agreement followed successful completion of
proof-of-principle feasibility studies using Emisphere carrier molecules and
daptomycin. At that time, we announced that we had been able to show that
after oral administration, the degree to which oral daptomycin became
available was sufficient to achieve efficacy in an infected rodent model.

If successfully developed, oral daptomycin would enable Cubist to
compete in the market for step-down therapy from IV to oral, should the IV
formulation also receive FDA approval. The ability to treat infected patients
with daptomycin on an outpatient basis could be an important contributor to a
reduction in healthcare costs.

Pre-clinical testing of oral daptomycin is ongoing. If development
continues with positive results, we anticipate filing an IND to begin human
clinical trials in the first half of 2002.

IV. LIPOPEPTIDE PROGRAM

Daptomycin is the first member of a new class of chemical molecules called
lipopeptides. With traditional classes of antimicrobials, such as the
penicillins, multiple antimicrobial drugs have been developed. Therefore, we
expect there will be additional clinically useful lipopeptides with the
potential for commercialization. We are engaged in a comprehensive lipopeptide
drug discovery and development program based on our expertise on the chemistry
and biology of lipopeptides that we have acquired through our development work
with daptomycin. We have initiated a research program focused on the design,
synthesis and evaluation of new lipopeptides with improved properties over
daptomycin including increased IN VITRO potency, particularly against the
enterococcus, and with the ability to kill laboratory-developed
daptomycin-resistant strains of bacteria. We have filed multiple patent
applications on several different series of novel analogs. We expect to select a
novel lipopeptide IND candidate by mid-2001.

OUR DRUG DISCOVERY PROGRAMS AND TECHNOLOGIES

Our drug discovery technologies are an integral part of our mission to
accelerate the discovery of novel antiinfectives. Through experience and
acquisition, we have amassed a comprehensive portfolio of proprietary methods
for both discovering novel pharmaceuticals and also validating novel
antiinfective targets. Through our acquisition of TerraGen Discovery Inc. of
Vancouver, British Columbia, we have increased our focus on the use of
biodiversity as a means of natural product drug discovery, while also using
traditional ChemInformatics techniques.

Over 40% of the largest-selling pharmaceuticals on the market today are
derived from naturally existing substances. In the area of antiinfectives, there
are four natural products with annual sales over $1 billion--Augmentin,
Zithromax, Biaxin and

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Rocephin. The majority of these natural products have been derived from
microorganisms called microbes that live in soil and other environments. As part
of their daily existence, microbes produce substances--both proteins and small
molecules--that are known to have a variety of functions, including signaling to
other microbes and as defense mechanisms against other species. It is these
substances that are of interest pharmaceutically, because they are already
biologically active by definition.

Due to previous technical limitations, only about 1% of existing microbes
has been accessible to scientists for evaluation. However, this 1% is
responsible for tens of billions of dollars in annual pharmaceutical sales. The
technology we acquired from TerraGen Discovery enables the evaluation of the
remaining 99% of microbes; an untapped pool of natural diversity that we hope
will prove to be a rich source of pharmaceutical leads and products.

We have developed and continue to implement novel technologies to
accelerate the process of drug discovery. To discover new antimicrobials for
clinical development, our discovery platform integrates the scientific
disciplines and technologies required for target validation and assay
development, high-throughput screening and medicinal chemistry.

OUR PROPRIETARY NATURAL PRODUCTS DRUG DISCOVERY TECHNOLOGIES

As a result of the acquisition by Cubist of TerraGen Discovery Inc, a
privately held company headquartered in Vancouver, BC, Canada, in October 2000,
we acquired multiple proprietary technologies in the area of natural products
drug discovery. These technologies create a comprehensive portfolio of drug
discovery technologies, that, when used in conjunction with sophisticated
fermentation and extraction methods, quickly eliminate the bottlenecks that
currently exist in the natural products drug discovery process. This technology
portfolio includes natural products technologies including NatPure, NatChem,
NatGen, and biosynthesis technologies, which encompass capabilities including
chemical library generation, high-throughput screening and chemical analysis to
generate purified, fully chemically characterized lead compounds with biological
activity against specific therapeutic targets.

o NAT PURE. The NatPure library contains semi-purified extracts derived
from our NatChem and NatGen libraries. The advantage of this library
arises from its ability to reduce the time required to advance from
hit to identification of a lead structure. Extracts are selected for
inclusion on the basis of chemical profile, biological activity and
taxonomy.

o NATCHEM. Our NatChem library comprises compound extracts from a unique
collection of rare, diverse fungi and actinomycetes. Designed for
maximum chemical diversity, a range of fermentation conditions are
employed for each organism. The resource is continually evaluated and
improved by replacing the most heavily screened extracts with new
extracts derived from previously unexploited organisms. The library
consists of 54,000 partially characterized extracts.

o NATGEN. Our NatGen library is under continuous construction. Using
proprietary technologies, large fragments of DNA that encode metabolic
pathways from both uncultivable and cultivable organisms are cloned
into surrogate hosts to generate recombinant strains producing novel
secondary metabolites. These novel metabolites may result entirely
from the randomly cloned metabolic pathway or by Combinatorial
Biosynthesis, where interactions of the cloned metabolic pathway with
the host's own metabolic pathways yield novel chemical compounds that
are not found in Nature.

o DIRECTED BIOSYNTHESIS. Using Directed Biosynthesis the metabolic
pathway for a specific natural product is genetically modified to
produce novel natural product analogs. This directed evolution of
metabolic pathways also produces new chemical classes of compounds not
found in Nature.

OUR PROPRIETARY VITA FUNCTIONAL GENOMICS TECHNOLOGY

Our Validation IN VIVO of Targets and Assays for Antiinfectives, or VITA,
technology is a functional genomics tool that quickly generates biological
information useful for identifying the most valuable drug discovery targets from
clinically important pathogens such as STAPHYLOCOCCUS AUREUS. The technology
allows validated targets to be rapidly enabled for high-throughput

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screening assays used for the identification of quality lead compounds for
medicinal chemistry programs. VITA is broadly applicable to both validation IN
VIVO and screening IN VITRO of drug discovery targets with diverse functions,
including those targets that the scientific community has not previously been
able to screen.

An antimicrobial drug acts during an infection by binding to a specific
target and inhibiting its function. Target inhibition leads to impaired pathogen
growth or pathogen cell death; consequently the infected subject survives the
infection. The method by which novel targets are validated using the VITA
technology is analogous to how an antibiotic inhibits its target during an
established infection. A target is validated if a causal link is established
between the target and a cellular response important in a disease process.
Utilizing VITA, a target is validated by initially identifying a peptide that
specifically binds to the target and subsequently regulating the production of
the peptide in the pathogen during an established infection in mice. If the
target is essential for pathogen survival, production of the peptide will
inhibit target function and prevent pathogen growth, and the mice will survive.
If the inhibition of the target is not essential for pathogen survival, the
pathogen will continue to thrive and the mice will die from the infection. The
peptide used to specifically inhibit the target can then be used in a
high-throughput screening assay to identify small molecule compounds. We have
filed patent applications in connection with our VITA technology. In February
1999, we entered into a collaborative research and license agreement with
Novartis in which we granted Novartis a non-exclusive license to the VITA
technology. As of this filing, two novel, validated antiinfective targets and
screening assays had been delivered to Novartis, triggering milestone payments
to Cubist by Novartis.

OUR PROPRIETARY CHEMINFORMATICS TECHNOLOGY

To enhance our ability to use high-throughput screening and data from
target-based assays, we have designed and implemented a discovery approach
called ChemInformatics. Industry-wide experience has demonstrated that having
high-throughput screening assays and large numbers of compounds to screen does
not consistently yield lead compounds suitable for medicinal chemistry. This
problem is especially acute in antimicrobials where, to be effective, lead
compounds need to be active against multiple pathogen species and to have
properties that permit pathogen cell-wall penetration. Our ChemInformatics
approach bridges the gap between high-throughput screening and medicinal
chemistry and serves as the drug discovery engine that fuels our medicinal
chemistry programs. ChemInformatics integrates high-throughput screening,
enzymology, combinatorial chemistry and computational chemistry to generate
three-dimensional models that are predictive for biological activity. Using
these models, many novel series of compounds can be designed to have the proper
chemical properties to be antimicrobial agents. We are currently applying our
ChemInformatics technology to a number of different target-based programs that
utilize high-throughput screening. Our ChemInformatics technology has produced
two classes of novel antimicrobial compounds that have been exclusively licensed
to Merck.

HIGH-THROUGHPUT SCREENING

We utilize automation, robotics and assay technologies to perform
high-throughput screening of compound libraries to identify novel inhibitors.
Thousands of compounds a day may be screened in VITA-generated target-based and
whole cell assays. Inhibitors may be further characterized using our secondary
screening assays where increasingly stringent selection criteria are applied to
identify lead candidates with the greatest potential for successful medicinal
chemistry programs.

In natural products screening, our proprietary macrodroplet screening
technology eliminates the need to ferment, extract and assay individual
cultures. The technology is a miniaturized ultra high-throughput system that
integrates library production and screening into one system. It can efficiently
screen millions of recombinant strains annually against a broad panel of
antibacterial and antifungal bioassays and can be adapted for different host
organisms for a wide range of applications. The technology provides for the
rapid determination of desired biological activities, temporal and spatial
detection of secondary metabolite synthesis, easy recovery of active recombinant
clones, application of mammalian cell-based assays, and further automation for
clone detection and sorting.

MEDICINAL CHEMISTRY

Medicinal chemistry refers to an iterative process where lead series of
compounds are optimized to yield new drug candidates. We have implemented
systems that allow for the optimization of many series of compounds for any
given target. In each compound series, we place an emphasis on extensively
evaluating the profile of compounds including microbiological and IN VIVO
properties. Our integrated chemistry and biology teams focus on the key
parameters that need improvement for a series to advance to drug development. By
utilizing many chemical series for each target, we increase the chances that
these series will

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overcome the IN VIVO hurdles to pre-clinical development. To accelerate this
process, we have put into place high-throughput systems for preparing, purifying
and testing compounds.

OUR COLLABORATIVE AGREEMENTS

We seek to enter into drug discovery and development collaboration
agreements to discover, develop and commercialize novel antimicrobials. In
addition to providing us with funding, our collaborations give us access to
libraries of diverse compounds and to the clinical development, manufacturing
and commercialization capabilities of the partners.

NOVARTIS

In February 1999 we announced the signing of a research and license
collaboration agreement with Novartis Pharma to use our proprietary VITA
technology to validate and develop assays for antiinfective targets and to
identify new compounds for development as antiinfective agents. Novartis was
granted a non-exclusive license to the VITA technology and exclusive licenses to
specific targets, assays and compounds. Under certain circumstances, we will
have co-exclusive rights with Novartis to particular targets and assays.

Upon the signing of the collaboration, Novartis made an up-front, $4
million equity investment in us. The collaboration agreement contemplated that
Novartis would provide us with research funding annually for three years, with
an option to terminate at the end of two years. The total value of the
collaboration to Cubist based on the equity investment, research funding and
potential milestone payments could exceed $33 million, assuming that two
products are ultimately developed. In addition, we will receive royalties on net
sales of each product stemming from the collaboration.

In October 2000, we announced the achievement of the first milestone in the
collaboration with Novartis and received a payment of $500,000 for the delivery
of a validated target and a high-throughput screening assay for antiinfective
drug discovery. Shortly thereafter, as a result of the success of the
collaboration, in November 2000, Novartis agreed to extend the collaboration to
its full three years, or until February 2002. Then in January 2001, we announced
the achievement of a second milestone in the collaboration through the delivery
of another validated antiinfective target and high-throughput screening assay.

Both parties are screening their respective compound libraries against the
assays developed in the collaboration. Novartis will optimize any candidates and
will conduct appropriate pre-clinical testing. The work conducted under the
collaboration is reviewed by a management committee composed of representatives
from both companies. Products resulting from this effort will be clinically
developed and commercialized worldwide by Novartis.

MERCK

In June 1996, Merck and Cubist signed a partnership to discover novel
antibiotics targeting specific aminoacyl-tRNA synthetase enzymes. These enzymes,
which are required for protein synthesis, are essential for bacterial survival.
In the first phase of the alliance, Cubist and Merck screened certain Merck
chemical libraries to identify inhibitors of specific aminoacyl-tRNA synthetase
targets. Merck paid an up-front technology license fee and provided research
funding to us throughout the three years of the agreement.

In October 1997, we announced the expansion of the alliance to include
additional Cubist drug targets and Merck's natural products compound library.
The expanded agreement added three Cubist synthetase targets, bringing the total
to six, and expanded the screening libraries to include Merck's collection of
natural extracts in addition to prototypical small molecules. Merck began paying
additional research support beyond the original agreement.

In May 1998, the agreement was again expanded to enable Merck to license
Cubist compounds and data for inclusion in the collaborative research program.
It was agreed that we could contribute compounds we had discovered independently
in our internal drug discovery programs to the collaboration for further
optimization and development. Cubist could also conduct medicinal chemistry and
perform pre-clinical development of compounds active against bacterial pathogens
utilizing Merck's proprietary database mining tools and compound collection.

In August 1999, we received an undisclosed milestone payment from Merck for
achieving a medicinal chemistry research milestone under the agreement. We also
announced that we had exclusively licensed to Merck two chemical classes of

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novel, antiinfective compounds for a second undisclosed payment. The parties
amended the existing agreement to incorporate these compounds into the
collaboration.

From that point on, Merck has conducted all of the medicinal chemistry
efforts, with Cubist providing technical support. Merck is funding all of the
research and clinical development efforts. Merck has exclusive, worldwide rights
to manufacture and sell compounds resulting from the collaboration and will pay
Cubist a royalty on drug sales if successfully developed.

BIOTECHNOLOGY ALLIANCES

To expand our access to novel small molecule libraries and other
technologies for screening, target and drug discovery, we have formed and are
currently engaged in alliances with biotechnology companies including Neurogen
Corporation, Phylos, Cetek Corporation, Coelacanth Corporation and Xenogen
Corporation.

PATENTS AND PROPRIETARY TECHNOLOGY

We seek to protect our cloned targets, expressed proteins, assays, organic
synthetic processes, lead compounds, screening technology and other technologies
by, among other things, filing, or causing to be filed on our behalf, patent
applications. We have 22 issued U.S. patents, 35 pending U.S. patent
applications, 18 issued foreign patents and 56 pending foreign patent
applications. We have licensed, from the Massachusetts Institute of Technology,
three U.S. patents related to research technologies. We have licensed from Eli
Lilly a portfolio of eight issued U.S. patents and 17 foreign patents related to
the composition, manufacture, administration and use of daptomycin. In addition,
Eli Lilly has agreed to assign to Cubist an additional two U.S. issued patents,
62 issued foreign patents and two pending foreign patent applications. This
portfolio also covers the composition, manufacture and use of daptomycin. We
have also filed a number of patent applications in our name relating to the
composition, manufacture, administration and use of daptomycin and other
lipopeptides. We cannot be sure that patents will be granted with respect to any
of our pending patent applications or with respect to any patent applications
filed by us in the future, nor can we be sure that any of our existing patents
or any patents that may be granted to us in the future will be commercially
useful in protecting our technology.

Our commercial success will depend in part on not infringing patents or
proprietary rights of others. We cannot be sure that we will be able to obtain a
license to any third-party technology we may require to conduct our business or
that if obtainable, such technology can be licensed at reasonable cost. Failure
by us to obtain a license to technology that we may require to utilize our
technologies or commercialize our products may have a material adverse effect on
our business, operating results and financial condition. In some cases,
litigation or other proceedings may be necessary to defend against or assert
claims of infringement, to enforce patents issued to us, to protect our trade
secrets, know-how or other intellectual property rights, or to determine the
scope and validity of the proprietary rights of third parties. Any potential
litigation could result in substantial costs to us and diversion of our
resources and could have a material adverse effect on our business, operating
results and financial condition. We cannot be sure that any of our issued or
licensed patents would ultimately be held valid and enforceable or that efforts
to defend any of our patents, trade secrets, know-how or other intellectual
property rights would be successful. An adverse outcome in any such litigation
or proceeding could affect our commercial success, subject us to significant
liabilities, require us to cease using the subject technology or require us to
license the subject technology from the third party, which license may not be
available, all of which could have a material adverse effect on our business,
operating results and financial condition.

Much of the know-how of importance to our technology and many of our
processes are dependent upon the knowledge, experience and skills, which are not
patentable, of key scientific and technical personnel. To protect our rights to
and to maintain the confidentiality of trade secrets and proprietary
information, we require employees, advisors, consultants and collaborators to
execute confidentiality and invention assignment agreements upon commencement of
a relationship with us. These agreements prohibit the disclosure of confidential
information to anyone outside our company and require disclosure and assignment
to us of ideas, developments, discoveries and inventions made by employees,
advisors, consultants and collaborators. We cannot be sure, however, that these
agreements will not be breached or that our trade secrets or proprietary
information will not otherwise become known or developed independently by
others.

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MANUFACTURING

We currently engage ACS Dobfar of Italy to manufacture bulk clinical grade
daptomycin drug substance for our clinical trials. We currently obtain our
finished clinical grade vialed formulation of daptomycin from Abbott
Laboratories (Hospital Products Division) and Cook Sterile Solutions, Inc.

In April 2000, we entered into a development and supply agreement with
Abbott Laboratories (Abbott) pursuant to which Abbott has agreed to assist
Cubist in the development of daptomycin as a parenteral formulation and to
manufacture and sell exclusively to Cubist, daptomycin as a parenteral
formulation. Under the terms of this agreement, Cubist has agreed to make
certain milestone payments to Abbott for their development efforts and
assistance in obtaining an approved New Drug Application, or an NDA, for
daptomycin. If the FDA approves the daptomycin NDA, Cubist will purchase
minimum annual quantities of drug product from Abbott over a five year period
beginning in 2002.

In June 2000, Cubist entered into a services agreement with
Gist-brocades Holding A.G. (DSM), an affiliated company of DSM Capua pursuant
to which DSM has agreed to provide supervisory and advisory services to
Cubist relating to the equipping of the manufacturing facility at DSM Capua.
Cubist has also entered into a manufacturing and supply agreement with DSM
Capua pursuant to which DSM Capua has agreed to manufacture and supply to
Cubist bulk daptomycin drug substance for commercial purposes. Under the
terms of the manufacturing and supply agreement, DSM Capua is required to
prepare its manufacturing facility in Italy to manufacture bulk daptomycin
drug substance in accordance with Good Manufacturing Practices standards.
Under the terms of the service agreements, Cubist will make a series of
scheduled payments to DSM over a five year period beginning in 2000 in order
to reimburse DSM for certain costs to be incurred by DSM Capua in connection
with the preparation, testing and validation of its manufacturing facility.
In addition, in consideration for the implementation of the Cubist technology
in the facility by DSM Capua, Cubist has agreed to make milestone payments to
DSM if specific phases of the preparation of its manufacturing facility are
completed within specified periods of time. Cubist is accruing these
milestone payments on a quarterly basis. Upon completion of the preparation
of DSM Capua's manufacturing facility and a determination by the FDA that the
manufacturing facility complies with Good Manufacturing Practices standards,
Cubist will purchase minimum annual quantities of bulk daptomycin drug
substance from DSM over a five-year period beginning in 2002.

We have no experience in clinical or commercial scale manufacture of
daptomycin, or any other drug. We currently rely on ACS Dobfar, Abbott and Cook
Sterile Solutions, Inc. for the manufacture of daptomycin for our clinical
trials. Commercial daptomycin and any other drugs we may commercialize will have
to be manufactured in facilities and by processes that comply with FDA and other
regulations. It may take substantial time to begin producing antimicrobial drugs
in compliance with such regulations. If we are unable to establish and maintain
compliant manufacturing facilities within a planned time frame and cost
parameters, the development and sales of our products and our financial
performance may be adversely affected.

SALES AND MARKETING

We have the exclusive worldwide rights to commercialize daptomycin, in both
intravenous and oral formulations, and any analogs of daptomycin to which we
have intellectual property rights, and oral ceftriaxone. While it is too early
to begin developing commercialization strategies for our pre-clinical
development programs, we are evaluating various strategies for the worldwide
commercialization of Cidecin (daptomycin for injection).

In January 2001, Cubist and Gilead Sciences jointly announced the signing
of a licensing agreement for the exclusive rights to commercialize Cidecin and
an oral formulation of daptomycin in 16 European countries following regulatory
approval. Gilead paid us an up-front licensing fee of $13 million, and we are
entitled to receive additional cash payments of up to $31 million upon
achievement of certain clinical and regulatory milestones. Gilead will also pay
us a fixed royalty on net sales. We will continue to be responsible for
worldwide clinical development of Cidecin, while Gilead will be responsible for
any regulatory filings in the covered territories. Gilead's sales force will
market the products in Europe. We will provide Cubist-employed European medical
science liaisons to support the product by providing medical education services
to infectious disease specialists and other international opinion leaders.

We are currently investigating commercialization strategies for Cidecin in
Asia and the rest of the world. We expect to be able to announce our marketing
strategy for the U.S. in mid-2001. The strategic alternatives being considered
in the U.S. include:

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o Partnering with a pharmaceutical company with an established sales
force
o Partnering with a contract sales organization with an established
sales force
o Partnering with a contract sales organization to establish a sales
force
o Establishing a Cubist sales force

In the U.S., it is our plan to establish a medical science liaison team of
20-30 representatives to provide medical education services to infectious
disease specialists and other opinion leaders. To this end, in February 2001, we
announced the hiring of 10 medical science liaisons. Should Cidecin gain FDA
approval, this team will form the basis for the larger educational marketing
team. Until such time, the team is leveraging its current relationships with
thought leaders in the antiinfective space to aid in the recruitment and
education of clinical trial physicians involved in the development of Cidecin.
The group is also playing a key role in the strategic direction of
Cubist--identifying antibiotic resistance and trends, initiating medical affairs
efforts, providing input on Phase IIIb/Phase IV clinical studies, guiding the
advancement of early-stage clinical candidates and assisting in the assessment
of potential product and technology acquisitions.

GOVERNMENT REGULATION

OVERVIEW

The development, manufacture and marketing of drugs, including antibiotics,
developed by us or our collaborative partners are subject to regulation by
numerous governmental agencies in the U.S., principally the FDA, by state and
local governments, and in some instances by foreign governments. Pursuant to the
Federal Food, Drug, and Cosmetic Act, and the regulations promulgated
thereunder, the FDA regulates the pre-clinical and clinical trials, safety,
effectiveness, manufacture, labeling, storage, record keeping, distribution, and
promotion of drugs. Product development and approval within the FDA regulatory
framework usually takes a significant number of years, involves the expenditure
of substantial capital resources and is uncertain.

FDA PROCESS

Before testing in the United States of any compounds with potential
therapeutic value in human subjects may begin, stringent government requirements
for pre-clinical data must be satisfied. Pre-clinical testing includes both IN
VITRO and IN VIVO laboratory evaluation and characterization of the safety and
efficacy of a drug and its formulation. Pre-clinical testing results obtained
from studies in several animal species, as well as from IN VITRO studies, are
submitted to the FDA as part of an IND (Investigational New Drug Application)
and are reviewed by the FDA prior to the commencement of human clinical trials.
These pre-clinical data must provide an adequate basis for evaluating both the
safety and the scientific rationale for the initial studies in human volunteers.
Unless the FDA objects to an IND, the IND becomes effective 30 days following
its receipt by the FDA. Once trials have commenced, the FDA may stop the trials
by placing them on "clinical hold" because of concerns about, for example, the
safety of the product being tested.

Clinical trials involve the administration of the drug to healthy human
volunteers or to patients under the supervision of a qualified investigator,
usually a physician, pursuant to an FDA-reviewed protocol. Human clinical trials
are typically conducted in three sequential phases, although the phases may
overlap with one another. Clinical trials must be conducted under protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Each clinical trial must be conducted under the
auspices of an Institutional Review Board that considers, among other things,
ethical factors, the safety of human subjects, the possible liability of the
institution and the informed consent disclosure which must be made to
participants in the clinical trial.

Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety, dose tolerance,
absorption, biodistribution, metabolism, excretion and clinical pharmacology
and, if possible, to gain early evidence regarding efficacy.

Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose response and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.

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Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for product
labeling. The Phase III clinical development program consists of expanded,
large-scale studies of patients with the target disease or disorder, to obtain
definitive statistical evidence of the efficacy and safety of the proposed
product and dosing regimen. All of the phases of clinical studies must be
conducted in conformance with the FDA's bioresearch monitoring regulations.

All data obtained from a comprehensive development program including
research and product development, manufacturing, pre clinical and clinical
trials and related information are submitted in an NDA to the FDA and the
corresponding agencies in other countries for review and approval. In addition
to reports of the trials conducted under the IND application, the NDA includes
information pertaining to the preparation of the new drug or antibiotic,
analytical methods, details of the manufacture of finished products and proposed
product packaging and labeling. Although the FDC Act requires the FDA to review
NDAs within 180 days of their filing, in practice, longer times may be required.
The FDA also frequently requests that additional information be submitted,
requiring significant additional review time. Any of our proposed products
likely would be subject to demanding and time-consuming NDA approval procedures
in virtually all countries where marketing of the products is intended. These
regulations define not only the form and content of safety and efficacy data
regarding the proposed product but also impose specific requirements regarding
manufacture of the product, quality assurance, packaging, storage, documentation
and record keeping, labeling, advertising and marketing procedures.

In some cases, drug approvals may proceed under the accelerated approval or
"fast track" provisions of the Food and Drug Administration Modernization Act.
The accelerated approval provisions largely codified FDA's accelerated approval
regulations. While the statutory provisions expand upon the regulations, the FDA
continues to rely on its regulations to implement the statutory provision. The
accelerated approval regulations apply to products used in the treatment of
serious or life-threatening illnesses that appear to provide meaningful
therapeutic benefits over existing treatments. These regulations permit approval
of such products before clinical research is completed based on the product's
effect on a clinical endpoint or surrogate endpoint. When a product is approved
under the accelerated approval regulations, the sponsor may be required to
conduct additional adequate and well-controlled studies to verify that the
effect the surrogate endpoint correlates with improved clinical outcome or to
otherwise verify the clinical benefit. In the event such post-marketing studies
do not verify the drug's anticipated clinical benefit, or if there is other
evidence that the drug product is not shown to be safe and effective, expedited
withdrawal procedures permit the FDA, after a hearing, to remove a product from
the market. Significant uncertainty exists as to the extent to which these
accelerated approval regulations will result in accelerated review and approval.
The FDA retains considerable discretion to determine eligibility for accelerated
review and approval.

OTHER REGULATORY PROCESSES

We are also subject to regulation under other federal laws and regulation
under state and local laws, including laws relating to occupational safety,
laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although we
believe that our safety procedures for handling and disposing of radioactive
compounds and other hazardous materials used in our research and development
activities comply with the standards prescribed by federal, state and local
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of any such accident, we could be
held liable for any damages that result and any such liability could exceed our
resources.

OUR EMPLOYEES

As of March 26, 2001, we had 176 full-time employees, 135 of whom were
engaged in research and development and 41 of whom were engaged in
management, marketing, administration and finance. Doctorates are held by 54
of our employees. Our employees are not covered by a collective bargaining
agreement. We have never experienced an employment-related work stoppage and
we consider our employee relations to be good.

OUR FACILITIES

We are headquartered at 24 Emily Street in Cambridge, Massachusetts, where
we lease approximately 24,000 square feet of commercial space pursuant to a term
lease that expires in September 2003, subject to a 5-year renewal option. We
have leased an additional 11,000 square feet of commercial space at 125 Sidney
Street in Cambridge, Massachusetts, pursuant to a

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term lease that expires in December 2003. We have also leased an additional
15,000 square feet of commercial space at 148 Sidney Street in Cambridge
Massachusetts, pursuant to a term lease that expires in October 2010.

In September 2000, we acquired a new corporate headquarters containing
88,000 square feet of commercial office and laboratory space in Lexington,
Massachusetts pursuant to a purchase and sale agreement. We plan to relocate to
the facility during the third quarter of 2001. The facilities in Lexington are
adequate for our current business requirements.

In connection with the acquisition of TerraGen Discovery in October 2000,
we acquired the office space of former TerraGen subsidiaries in Canada and the
United Kingdom. We currently lease 9,265 square feet of commercial office and
laboratory space in Vancouver, Canada pursuant to a term lease that expires May
2001. In addition, we also lease 18,000 square feet of commercial office and
laboratory space in Slough, England pursuant to a term lease that expires in
April 2002.

LEGAL PROCEEDINGS

We are not party to any material legal proceedings.

OUR EXECUTIVE OFFICERS AND DIRECTORS

Our directors and executive officers and their ages as of March 30, 2001
are as follows:

Scott M. Rocklage, Ph.D. 46 Chairman of Board of Directors and Chief Executive Officer

Dinendra "Dinu" Sen 51 President and Chief Operating Officer

Francis P. Tally, M.D. 60 Executive Vice President, Scientific Affairs

Julian M. Davies, Ph.D. 69 Executive Vice President, Technology Development

Robert J. McCormack, Ph.D. 47 Senior Vice President, Drug Development

Alan D. Watson, Ph.D., M.B.A. 48 Senior Vice President, Corporate Development

Thomas A. Shea, M.B.A. 41 Vice President, Finance & Administration, Chief Financial
Officer and Treasurer

Michael F. DeBruin, M.D. 46 Vice President, Clinical Research

Dennis D. Keith, Ph.D. 57 Vice President, Chemical Development

Frederick B. Oleson, Jr., D.Sc. 51 Vice President, Pre-Clinical Development

George H. Shimer, Jr., Ph.D. 48 Vice President, Research

Thomas J. Slater 45 Vice President, Commercial Development

Susan Bayh 41 Director

Barry Bloom, Ph.D.(1) 72 Director

John K. Clarke(2) 47 Director

David W. Martin, Jr., M.D.(2) 60 Director

Walter Maupay(2) 62 Director

Paul R. Schimmel, Ph.D.(1) 60 Director

John Zabriskie, Ph.D.(1) 61 Director

- -----------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee

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DR. ROCKLAGE was elected Chairman of the Board of Directors in March 2000.
Dr. Rocklage has served as our Chief Executive Officer and as a member of the
board of directors since July 1994. He served as our President from July 1994
until March 2001. From 1990 to 1994, Dr. Rocklage served as President and Chief
Executive Officer of Nycomed Salutar, Inc., a diagnostic imaging company. From
1992 to 1994, he also served as President and Chief Executive Officer and
Chairman of Nycomed Interventional, Inc., a medical device company. From 1986 to
1990, he served in various positions at Nycomed Salutar, Inc. and was
responsible for designing and implementing research and development programs
that resulted in three drug products in human clinical trials, including the
approved drugs Omniscan and Teslascan. Dr. Rocklage received his B.S. in
Chemistry from the University of California, Berkeley and his Ph.D. in Chemistry
from the Massachusetts Institute of Technology.

MR. SEN has served as our President and Chief Operating Officer since March
2001. From January 2000 to December 2000, Mr. Sen served as Senior Vice
President, Sales and Marketing at Pathogenesis Corporation, which was acquired
by Chiron Corporation in October 2000. From early 1998 through 1999, Mr. Sen was
Vice President, Marketing and Sales at Schwarz Pharma. Prior to that, he held
several senior marketing positions from 1992 to 1998 at Amgen, Inc., where he
played a role in the marketing of Epogen and Neupogen, which are considered by
most to be the first successfully commercialized biotechnology products. From
1990 to 1992, Mr. Sen was a Consultant at The Alexander Group, a firm
specializing in marketing and sales effectiveness and sales force compensation.
Mr. Sen has also held a variety of marketing and finance positions at Abbott
Laboratories. Mr. Sen is a fellow of the Institute of Chartered Accountants of
England and Wales. He received his BA from the University of Delhi in India and
his Master's Degree in Management from Northwestern University's Kellogg
Graduate School of Management.

DR. TALLY has served as our Executive Vice President, Scientific Affairs
since January 1997. From March 1995 to January 1997, he served as our Vice
President of Research and Development. From 1986 to February 1995, Dr. Tally
served as Executive Director of Infectious Disease, Molecular Biology and
Natural Products Research at the Lederle Laboratories of American
Cyanamid/American Home Products, where he was responsible for worldwide clinical
studies for piperacillin/tazobactam which was registered for sales in Europe in
1992, approved by the FDA in 1993 and marketed as Zosyn. From 1975 to 1986, he
served as Senior Physician in Infectious Disease at the New England Medical
Center and Associate Professor of Medicine at Tufts Medical Center. Dr. Tally
received his A.B. in Biology from Providence College and his M.D. from George
Washington University School of Medicine.

DR. DAVIES was appointed Executive Vice President of Technology Development
following Cubist's October 2000 acquisition of TerraGen Discovery Inc. Dr.
Davies founded TerraGen in 1996 where he served as Chief Scientific Officer.
From 1992 to 1996, he served as Head of Microbiology and Immunology at the
University of British Columbia and was Research Director and President of Biogen
(Geneva) from 1980 to 1985. Dr. Davies has held academic positions at the
University of Wisconsin, University of Geneva and Institut Pasteur and is a past
President of the American Society of Microbiology. He is a Fellow of the Royal
Society (London) and the Royal Society of Canada and Emeritus Professor of
Microbiology and Immunology. Dr. Davies received a B.Sc. and Ph.D. in Chemistry
from the University of Nottingham.

DR. MCCORMACK has served as our Senior Vice President of Drug Development
since March 2000. From 1997 until 2000, Dr. McCormack was Vice President,
Regulatory Affairs at Target Research Associates. Prior to that, he served as
Vice President, Regulatory Affairs from 1993 to 1997 and as Director, Regulatory
Affairs from 1987 to 1993 at Oxford Research International Corporation, a large
contract research organization. Dr. McCormack has also served in various
positions at Knoll Pharmaceuticals, Morristown Memorial Hospital and Sandoz,
Inc. During his career, Dr. McCormack has participated in gaining approval for
drugs in the CNS, cardiovascular, dermatological and oncological therapeutic
areas. He has a B.A. in Biology from William Patterson College and a Ph.D. in
Molecular Immunology from Rutgers University.

DR. WATSON has served as our Senior Vice President, Corporate Development
since September 1999. From October 1997 to August 1999, he served as Senior Vice
President, Intellectual Property and Licensing at Nycomed Amersham plc., a
diagnostic imaging and life sciences company. From January 1995 to September
1997, he served as Senior Vice President,

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Technology Development at Nycomed ASA. From January 1994 to June 1995, he served
as Senior Vice President, Research and Development at Nycomed Salutar, Inc.
where he also served as a Board Director. Prior to 1994, Dr. Watson served in
various senior positions at Salutar, Inc. From 1983 to 1986 while at DuPont
Pharmaceuticals, Dr. Watson invented the stroke-imaging drug Neurolite. Dr.
Watson received his B.Sc. from the University of U.S.W., Sydney, Australia; his
M.B.A. from Northeastern University; and his Ph.D. in Bioinorganic Chemistry
from the Australia National University.

MR. SHEA has served as our Vice President, Finance and Administration and
Chief Financial Officer since December 1998. He has also served as our Treasurer
and Chief Accounting Officer since June 1996. From December 1997 to December
1998 he served as our Senior Director of Finance and Administration, and from
1993 to November 1997, as our Director of Finance and Administration. From 1987
to 1993, he served as Manager of Accounting/MIS and Budget and Financial Analyst
at ImmuLogic Pharmaceutical Corporation, a biotechnology company. Mr. Shea
received his B.S. in Accounting/Law from Babson College and his M.B.A. from
Suffolk University.

DR. DEBRUIN has served as our Vice President, Clinical Research since
September 1999. From March 1998 to May 1999, he served as Therapeutic Area
Head-Infectious Diseases at Wyeth-Ayerst Research and Genetics Institute. From
March 1993 to February 1998, he served as Director of Clinical Development at
Genetics Institute. From 1988 to 1993, Dr. DeBruin served in various positions
at Pfizer, Inc. Dr. DeBruin was on the faculty at the University of Connecticut
School of Medicine, and was also in private practice treating infectious
diseases from 1988 to 1991. Dr. DeBruin received his B.A. from Cornell
University and his M.D. from New York Medical College.

DR. KEITH has served as our Vice President, Chemical Development since July
2000. From October 1997 to July 2000, he served as our Vice President, Drug
Discovery. From 1971 to October 1997, Dr. Keith was with Hoffman-La Roche Inc.
where he served in various positions, including Director of Antiinfective
Chemistry, Senior Director of Medicinal Chemistry and Research Director of
Oncology. Dr. Keith received his B.S. in Chemistry from Bates College and his
Ph.D. in Organic Chemistry from Yale University.

DR. OLESON has served as our Vice President, Pre-Clinical Development since
July 2000. From November 1997 to July 2000, he served as our Vice President,
Drug Development. Prior to joining us, Dr. Oleson was an independent consultant
from June 1997 to November 1997. From January 1997 to June 1997, Dr. Oleson
served as Director of Preclinical Research at AutoImmune, Inc., a biotechnology
company. From 1992 to January 1997, Dr. Oleson served as Director, Toxicology
and Preclinical Pharmacology at Biogen, Inc., a biotechnology company. Dr.
Oleson also held various positions at Bristol-Myers Squibb from 1983 to 1992.
Dr. Oleson was a key contributor in the development of the Biogen drug Avonex
and a key consultant in the development of Angiomax for The Medicines Company.
Dr. Oleson received his B.S. in Biochemistry from Princeton University and a
Doctor of Science in Physiology/ Radiation Biology from Harvard University
School of Public Health.

DR. SHIMER has served as our Vice President, Research since July 2000. From
January 2000 to July 2000, he served as our Vice President, Biology. Prior to
joining us, Dr. Shimer was Senior Director, Pathogen Genomics at Genome
Therapeutics Corp. from February 1995 through January 2000. Dr. Shimer received
his B.S. in Biochemistry from North Carolina State University and his Ph.D. in
Biochemistry from Colorado State University.

MR. SLATER has served as our Vice President, Commercial Development since
May 1999. From July 1998 to April 1999, he served as Senior Vice President of
Business Development for Newport Strategies, a consulting company. From January
1996 to June 1998, he served as Vice President, Biomaterials Business for
Genzyme Corporation, a biotechnology company. From 1988 to January 1996, Mr.
Slater served in various sales and marketing positions for Genzyme Corporation.
Prior to 1988, Mr. Slater served in marketing and sales positions for
pharmaceutical companies Hoffmann LaRoche and Upjohn. Mr. Slater received his
B.S. in Biology from Upsala College.

MS. BAYH has served as one of our directors since June 2000. From 1994 to
present, Ms. Bayh has served as the Commissioner of the International Joint
Commission (IJC), a bi-national organization between the United States and
Canada focusing on environmental issues of the Great Lakes. Ms. Bayh served as
an attorney in Eli Lilly's Pharmaceutical Division handling federal regulatory
issues for marketing and medical clients from 1989 to 1994 and, from 1984 until
1989, Ms. Bayh practiced law, focusing on litigation, utility and corporate law,
and antitrust. She is also a director of Anthem, Inc., (a Blue Cross/Blue Shield
company), Corvas International, Inc., a biotechnology company, Emmis
Communications, and Golden State Foods. Ms. Bayh has a B.A. from the University
of California at Berkeley and a J.D. from the University of Southern California
Law Center.

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DR. BLOOM has served as a one of our directors since September 1993. Dr.
Bloom has more than 40 years experience in the pharmaceutical industry. From
1952 to 1993, Dr. Bloom served in various positions at Pfizer Inc., including
Executive Vice President of Research & Development. He is a director of Vertex
Pharmaceuticals, Inc. and Neurogen Corp., biotechnology companies; Microbia, a
biotechnology company; and Incyte Pharmaceuticals, Inc., a genomics company. Dr.
Bloom received his S.B. in Chemistry and his Ph.D. in Organic Chemistry from the
Massachusetts Institute of Technology.

MR. CLARKE is one of our founders and served as Chairman of the Board of
Directors from our incorporation to March 2000. Mr. Clarke has served as one of
our directors since our incorporation. From 1992 to 1994, Mr. Clarke served as
our acting President and Chief Executive Officer. Since 1982, he has been a
general partner of DSV Management in Princeton, New Jersey, the general partner
of DSV Partners IV. He is a founder and director of Alkermes, Inc. and a
director of VISICU, Inc., Parkstone Medical Information Systems, Inc.,
MedContrax, Inc., Molecular Mining, Inc. and TechRx, Inc. Mr. Clarke is the
Managing General Partner for Cardinal Partners, founded in 1997. Mr. Clarke
received his B.A. in Biology and Economics from Harvard College and his M.B.A.
from The Wharton School of the University of Pennsylvania.

DR. MARTIN has served as one of our directors since October 1997. Since
July 1997, Dr. Martin has served as President, Chief Executive Officer and a
founder of Eos Biotechnology, Inc. Dr. Martin was a Professor of Medicine,
Professor of Biochemistry and an Investigator of the Howard Hughes Medical
Institute at the University of California San Francisco until 1983 when he
became the first Vice President and subsequently Senior Vice President of
Research and Development at Genentech, Inc., a position he held until 1990.
He was Executive Vice President of DuPont Merck Pharmaceutical Company from
1991 through 1993 and then returned to California in 1994 where he was Senior
Vice-President of Chiron Corp., a biotechnology company, and President of
Chiron Therapeutics. In May 1995, he assumed the position of President and
Chief Executive Officer of Lynx Therapeutics, Inc., a biotechnology company,
and served until November 1996. Dr. Martin is also a Director of Varian
Medical Systems, Inc., a medical equipment and software supplier, and of
Talik, Inc., a biopharmaceutical development company.

MR. MAUPAY has served as one of our directors since June 1999. Since 1988,
Mr. Maupay has served as President of Calgon Vestal Laboratories, a division of
Merck & Co., Inc. until January 1995, when it was sold to Bristol-Myers Squibb.
Since June 1995, Mr. Maupay has also served as Group Executive of Calgon Vestal
Laboratories after the sale to Bristol-Myers Squibb. From 1984 to 1988 Mr.
Maupay served as Vice-President, Healthcare at Calgon Vestal Laboratories. Mr.
Maupay is a director of Life Medical Sciences, Inc., a medical device company,
Kensey Nash Corporation, a medical device company, Neshaminy Golf Club, Inc. and
Warwick Golf Farm. Mr. Maupay received his Bachelor of Science in Pharmacy from
Temple University and his M.B.A. from Lehigh University.

DR. SCHIMMEL is one of our scientific founders and has served as one of our
directors since our incorporation. From 1967 to 1998, Dr. Schimmel served as a
Professor of Biochemistry and Biophysics at the Massachusetts Institute of
Technology and as the John D. and Catherine T. MacArthur Professor of
Biochemistry and Biophysics at the Massachusetts Institute of Technology from
1992 to 1997. He has been a Professor and member of the Skaggs Institute for
Chemical Biology of the Scripps Research Institute since 1997. Dr. Schimmel is
an expert in molecular biology, protein translation and aminoacyl-tRNA
synthetases. He is a member of the National Academy of Sciences and the American
Academy of Arts and Sciences. Dr. Schimmel was a founder and is a director of
Repligen Corporation and Alkermes, Inc., each a biotechnology company. Dr.
Schimmel received his A.B. in Pre-Medicine from Ohio Wesleyan University and his
Ph.D. in Biochemistry from the Massachusetts Institute of Technology.

DR. ZABRISKIE has served as one of our directors since June 1999. From July
1997 to July 2000, Dr. Zabriskie has served as Chairman of the Board of NEN Life
Science Products, Inc., a laboratory supply company. From July 1997 to December
1999, Dr. Zabriskie also served as President and Chief Executive Officer of NEN
Life Science Products, Inc. From November 1995 to January 1997, he was President
and Chief Executive Officer of Pharmacia & Upjohn. From 1994 to November 1995,
he served as President, Chief Executive Officer and Chairman of Upjohn Co.

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RISK FACTORS

INVESTING IN OUR STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER
CAREFULLY THE RISKS DESCRIBED BELOW, TOGETHER WITH THE OTHER INFORMATION IN THIS
ANNUAL REPORT, BEFORE YOU MAKE A DECISION TO INVEST IN OUR COMMON STOCK. IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, OPERATING RESULTS OR
FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED. THIS COULD CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DECLINE, AND COULD CAUSE YOU TO LOSE ALL OR
PART OF YOUR INVESTMENT.

RISKS RELATING TO OUR BUSINESS

OUR OPERATING RESULTS FOR THE FORESEEABLE FUTURE WILL DEPEND SIGNIFICANTLY ON
OUR ABILITY TO OBTAIN REGULATORY APPROVAL OF, AND TO SUCCESSFULLY COMMERCIALIZE,
CIDECIN, DAPTOMYCIN FOR INJECTION.

Cidecin is currently our only drug candidate in clinical trials. We may not
receive revenues or royalties from commercial sales of Cidecin or any other drug
in the foreseeable future, if at all.

Our development of Cidecin involves a high degree of risk. Many important
factors affect our ability to successfully develop and commercialize Cidecin,
including our ability to:

o demonstrate safety and efficacy of Cidecin at each stage of the
clinical trial process;
o meet applicable regulatory standards and receive required regulatory
approvals;
o obtain and maintain necessary patents and licenses;
o produce Cidecin in commercial quantities at reasonable costs;
o obtain reimbursement coverage for Cidecin;
o compete successfully against other products; and
o market Cidecin successfully.

We cannot be sure that we will successfully develop and commercialize
Cidecin or that we will obtain required regulatory approvals for its
commercialization. As a result, we may never generate revenues from Cidecin
sales.

WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST AND EXPECT TO INCUR ADDITIONAL
LOSSES OVER THE NEXT SEVERAL YEARS.

Since we began operations, we have incurred substantial net losses in
every fiscal period. We had net losses of $14.4 million in 1998, $24.1
million in 1999 and $44.3 million in 2000. We had an accumulated deficit of
$108.2 million through December 31, 2000. These losses have resulted
principally from costs in conducting research and development activities,
commencing clinical trials and associated administrative costs.

We expect to incur significant additional operating losses over the next
several years as we expand our research and development efforts, pre-clinical
testing and clinical trials and we implement manufacturing, marketing and sales
programs. As a result, we cannot predict when we will become profitable, if at
all, and if we do, we may not remain profitable for any substantial period of
time. If we fail to achieve profitability within the time frame expected by
investors, the market price of the common stock may decline.

WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE TERRAGEN DISCOVERY INC. AND ACHIEVE
THE BENEFITS EXPECTED TO RESULT FROM THE ACQUISITION.

On October 23, 2000, we concluded the acquisition of TerraGen Discovery
Inc. We consummated the transaction with the expectation that it will result in
mutual benefits including, among other things, benefits relating to expanded and
complementary product offerings, increased market opportunity, new technology
and the addition of research and development personnel. Achieving the benefits
of the acquisition will depend in part on the integration of our technology,
operations and personnel in a timely and

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efficient manner so as to minimize the risk that the merger will result in the
loss of market opportunity or key employees or the diversion of the attention of
management.

In addition, TerraGen's principal offices are located in Vancouver, British
Columbia, Canada, with a facility in Slough, England, and our principal offices
are located in Cambridge, Massachusetts. We intend to maintain the operations of
the Canadian and English facilities. We must successfully integrate operations
and personnel in these offices with our operations and personnel in Cambridge
for the acquisition to be successful. We cannot assure you that we will
successfully integrate or manage this process. In addition, we cannot assure you
that, following the transaction, our businesses will achieve revenues, specific
net income or loss levels, efficiencies or synergies that justify the
acquisition or that the acquisition will result in increased earnings, or
reduced losses, for the combined company in any future period.

IF WE DO NOT INTEGRATE TERRAGEN'S OPERATIONS QUICKLY AND EFFECTIVELY, SOME OR
ALL OF THE POTENTIAL BENEFITS OF THE ACQUISITION MAY NOT OCCUR.

We must make TerraGen's technology, products and services operate together
with our technologies, products and services. If we do not integrate their
operations and technologies quickly and smoothly, serious harm to the combined
company's business, financial condition and prospects may result. Integrating
the two businesses will entail significant diversion of management's time and
attention. We may be required to spend additional time or money on integration
that would otherwise be spent on developing their business and services or other
matters.

THE LOSS OF KEY TERRAGEN PERSONNEL COULD MAKE IT DIFFICULT TO COMPLETE EXISTING
PROJECTS AND UNDERTAKE NEW PROJECTS.

The success of the combined company will depend on its ability to identify,
hire and retain employees, and a significant component of the value of the
merger is in the know-how and experience of TerraGen employees that we employ.
If key TerraGen employees were to leave, we may be unable to complete existing
TerraGen projects or to undertake new projects, each of which could materially
impair our future earnings and results of operations. We do not have employment
agreements with any of the key employees of TerraGen that provide for a fixed
term of employment.

A VARIETY OF RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS.

Because we have operations in Canada and the United Kingdom, we are subject
to additional risks related to operating in foreign countries. Our Canadian and
English operations are organized as separate legal entities. Associated risks
include:

o unexpected changes in tariffs, trade barriers and regulatory
requirements;
o economic weakness, including inflation, or political instability in
particular foreign economies and markets;
o compliance with tax, employment immigration and labor laws for
employees living and traveling abroad;
o foreign taxes including withholding of payroll taxes; and
o foreign currency fluctuations, which could result in increased
operating expenses and reduced revenues; and other obligations
incident to doing business or operating a subsidiary in another
country

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

WE DEPEND ON THIRD PARTIES FOR MANUFACTURING OF DAPTOMYCIN, AND OUR
COMMERCIALIZATION OF DAPTOMYCIN COULD BE STOPPED, DELAYED OR MADE LESS
PROFITABLE IF THOSE THIRD PARTIES FAIL TO PROVIDE US WITH SUFFICIENT QUANTITIES
AT ACCEPTABLE PRICES.

We have no experience in manufacturing. We lack the facilities and
personnel to manufacture products in accordance with the Good Manufacturing
Practices prescribed by the FDA or to produce an adequate supply of compounds to
meet future requirements for clinical trials and commercialization of
daptomycin. Drug manufacturing facilities are subject to an inspection

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before the FDA will issue an approval to market a new drug product, and all of
the manufacturers that we intend to use must adhere to the current Good
Manufacturing Practice regulations prescribed by the FDA.

We currently depend entirely on one company, ACS Dobfar, to manufacture
bulk daptomycin drug substance for our clinical trials, and on two companies,
Abbott Laboratories (Hospital Products Division) and Cook Sterile Solutions,
Inc., to manufacture clinical grade vialed formulation of daptomycin. We have
entered into a manufacturing and supply agreement with DSM Capua to manufacture
and supply to us bulk daptomycin drug substance for commercial purposes. We have
also entered into a development and supply agreement with Abbott Laboratories to
manufacture and supply final vialed daptomycin commercial drug product.

We may not be able to enter into definitive agreements on acceptable terms
for the expanded commercial scale manufacturing of daptomycin. If we are unable
to do so, or if we are required to transfer manufacturing processes to other
third-party manufacturers, we would be required to satisfy various regulatory
requirements and we could experience significant delays in supply. If we are
unable to maintain, develop or contract for manufacturing capabilities on
acceptable terms at any time, our ability to conduct clinical trials and to make
any commercial sales would be adversely affected.

IF WE ARE UNABLE TO DEVELOP SATISFACTORY SALES AND MARKETING CAPABILITIES, WE
MAY NOT SUCCEED IN COMMERCIALIZING CIDECIN OR ANY OTHER PRODUCT CANDIDATE.

We have no experience in marketing and selling drug products. We have
entered into a marketing, distribution and development agreement with Gilead
Sciences, Inc. for the development and commercialization of Cidecin and oral
daptomycin in the European Community. We have not entered into other
arrangements for the sale and marketing of Cidecin or any other product in North
America. We may seek to collaborate with a third party to market our drugs or
may seek to market and sell our drugs by ourselves. If we seek to collaborate
with a third party in North America, we cannot be sure that a collaborative
agreement can be reached on terms acceptable to us. If we seek to market and
sell our drugs directly in North America, we will need to hire additional
personnel skilled in marketing and sales. We cannot be sure that we will be able
to acquire, or establish third-party relationships to provide, any or all of
these marketing and sales capabilities in North America.

EVEN IF WE OBTAIN REGULATORY APPROVALS TO COMMERCIALIZE CIDECIN OR ANY OTHER
DRUG, OUR DRUG PRODUCTS MAY NOT BE ACCEPTED BY PHYSICIANS, PATIENTS, THIRD-PARTY
PAYORS OR THE MEDICAL COMMUNITY IN GENERAL.

We cannot be sure that Cidecin or any other drug successfully developed by
us, independently or with our collaborative partners, will be accepted by the
pharmaceutical market. Cidecin and any future products we develop will compete
with a number of antimicrobial drugs manufactured and marketed by major
pharmaceutical companies. The degree of market acceptance of any drugs we
develop depends on a number of factors, including:

- our demonstration of the clinical efficacy and safety of our drugs;

- the advantages and disadvantages of our drugs compared to existing
therapies; and

- the reimbursement policies of government and third-party payors.

We cannot be sure that physicians, patients, third-party payors or the
medical community in general will accept and utilize any drugs we develop.

OUR APPROACH TO DRUG DISCOVERY IS UNPROVEN, AND WE MAY NOT SUCCEED IN
IDENTIFYING ANY DRUG CANDIDATES WITH CLINICAL BENEFITS.

Our approach requires the development of multiple novel technologies to
create a successful drug candidate. While we have demonstrated that some
compounds have the ability to inhibit the activity of some molecular targets, we
have not proven that this activity can be utilized clinically as a therapeutic
drug. We cannot be certain that any preliminary potential demonstrated in
primary screening will continue to be encouraging in further screening or drug
discovery studies. We have not tested any drug candidates developed from our
drug discovery program in humans, and we cannot assure you that there will be
clinical benefits associated with any drug candidates we do develop. Our failure
to develop new drug candidates would have a material adverse effect on our
business, operating results and financial condition.

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OUR RESEARCH AND DEVELOPMENT PROGRAM FOR DRUG PRODUCTS OTHER THAN CIDECIN IS AT
AN EARLY STAGE, AND WE CANNOT BE CERTAIN OUR PROGRAM WILL RESULT IN THE
COMMERCIALIZATION OF ANY DRUG.

Except for our development program for Cidecin, our research and
development program is at an early stage. To date, we have not, independently or
with our collaborative partners, optimized any lead drug candidates generated in
our research program. Any drug candidates we develop will require significant
additional research and development efforts prior to commercial sale, including
extensive pre-clinical and clinical testing and regulatory approval. This may
require increases in spending on internal projects, the acquisition of third
party technologies or products and other types of investments. We cannot be sure
our approach to drug discovery, acting independently or with our collaborative
partners, will be effective or will result in the development of any drug. We
cannot expect that any drug products that do result from our research and
development efforts will be commercially available for many years.

We have limited experience in conducting pre-clinical testing and clinical
trials. Even if we receive initially positive pre-clinical or clinical results,
those results will not mean that similar results will be obtained in the later
stages of drug development. All of our potential drug candidates are prone to
the risks of failure inherent in pharmaceutical product development, including
the possibility that none of our drug candidates will be:

o safe, non-toxic and effective;
o approved by regulatory authorities;
o developed into a commercially viable drug;
o manufactured or produced economically;
o successfully marketed; or
o accepted widely by customers.

WE FACE SIGNIFICANT COMPETITION FROM OTHER BIOTECHNOLOGY AND PHARMACEUTICAL
COMPANIES, AND OUR OPERATING RESULTS WILL SUFFER IF WE FAIL TO COMPETE
EFFECTIVELY.

The biotechnology and pharmaceutical industries are intensely competitive.
We have many competitors both in the United States and internationally,
including major multinational pharmaceutical and chemical companies,
biotechnology companies and universities and other research institutions.
Competition for Cidecin, in particular, includes commercially available drugs
such as vancomycin, Zyvox and drug candidates in clinical development.

Many of our competitors have greater financial and other resources, such as
larger research and development staffs and more effective marketing and
manufacturing organizations. Our competitors may succeed in developing or
licensing on an exclusive basis technologies and drugs that are more effective
or less costly than any which we are currently developing, which could render
our technology and future drug products obsolete and noncompetitive. It is
possible for our competitors to obtain FDA or other regulatory approvals for
drug candidates before we can. In general, companies that begin commercial sale
of their drugs before their competitors have a significant competitive advantage
in the marketplace, including the ability to obtain patent and FDA marketing
exclusivity rights that would delay our ability to market specific products.
Even if our drug candidates are approved for sale, we may not be able to compete
successfully with competitors' existing products or products under development.

DECISIONS BY OUR COLLABORATIVE PARTNERS COULD IMPAIR OR PROHIBIT OUR DEVELOPMENT
OF NEW PRODUCTS AND OTHERWISE ADVERSELY AFFECT OUR REVENUES.

A key element of our strategy is to enhance our drug discovery and
development programs, and to fund a portion of our capital requirements, by
entering into collaborative agreements with pharmaceutical and biotechnology
companies. Our receipt of revenues, whether in the form of continued research
funding, drug development milestone payments or royalty payments on sales of
drugs, from these collaborative agreements is dependent upon the decisions made
by our collaborative partners. The amount and timing of resources dedicated by
our collaborative partners to their respective collaborations with us is not
under our control.

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Some drug candidates discovered by us may be viewed by our collaborative
partners as competitive with their drugs or drug candidates. Accordingly, our
collaborative partners may not elect to proceed with the development of drug
candidates that we believe to be promising. In addition, our collaborative
partners may pursue their existing or alternative technologies in preference to
our drug candidates. As a result:

- the interests and goals of our collaborative partners might not always
coincide with ours;

- some of our collaborative partners might develop independently, or with
others, drugs that could compete with ours; or

- disagreements over proprietary rights might lead to delays in research or
in the development and commercialization of product candidates and
might result in litigation or arbitration, either of which would be
time consuming and expensive.

If any of our collaborative partners breaches or terminates its agreement
with us or otherwise fails to conduct its collaborative activities in a timely
manner:

o the development or commercialization of any drug candidate or research
program under these collaborative agreements may be delayed;
o we may be required to undertake unforeseen additional responsibilities
or to devote unforeseen additional resources to such development or
commercialization; or
o the development or commercialization could be terminated.

We cannot be sure that we will be able to establish additional
collaborative relationships on terms acceptable to us or to continue our
existing collaborative arrangements.

OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.

Our success depends to a significant degree upon our ability to obtain
United States and foreign patent protection for our drug candidates and
processes, preserve our trade secrets, and operate without infringing the
proprietary rights of third parties. Legal standards relating to the validity of
patents covering pharmaceutical and biotechnological inventions, and the scope
of claims made under such patents, are still developing. Our patent position is
highly uncertain and involves complex legal and factual questions. We cannot be
certain that the named applicants or inventors of the subject matter covered by
our patent applications or patents, whether directly owned by us or licensed to
us, were the first to invent or the first to file patent applications for such
inventions. Third parties may challenge, infringe upon, circumvent or seek to
invalidate existing or future patents owned by or licensed to us. A court or
other agency with jurisdiction may find our patents unenforceable. Even if we
have valid patents, these patents still may not provide sufficient protection
against competing products or processes.

If our drug candidates or processes are found to infringe upon the patents
of others or are found to impermissibly utilize the intellectual property of
others, our development, manufacture and sale of our infringing drug candidates
could be severely restricted or prohibited. In this case, we may have to obtain
licenses from third parties to continue utilizing the patents or proprietary
rights of others. Obtaining these licenses may be expensive, if we are able to
obtain them at all. If we become involved in litigation involving our
intellectual property rights or the intellectual property rights of others, the
potential costs of such litigation and the potential damages that we could be
required to pay could be substantial.

In addition to patent protection, we rely on trade secrets, proprietary
know-how, and confidentiality provisions in agreements with our collaborative
partners, employees and consultants to protect our intellectual property. We
also rely on invention assignment provisions in agreements with employees and
some consultants. It is possible that these agreements could be breached or that
we might not have adequate remedies for any such breaches. Third parties may
learn of or independently discover our trade secrets, proprietary know-how and
intellectual property, which could have a material adverse effect on our
business, financial condition and results of operations. Moreover, the laws of
foreign countries in which we market our drug products may afford little or no
effective protection of our intellectual property.

-26-

IF WE LOSE THE SERVICES OF SCOTT M. ROCKLAGE, PH.D., DINENDRA SEN, FRANCIS P.
TALLY, M.D., OR OTHER KEY PERSONNEL, OUR BUSINESS WILL SUFFER.

We believe that our ability to successfully implement our business strategy
is highly dependent on our senior management and scientific team, including
Scott M. Rocklage, Ph.D., our Chairman of the Board of Directors and Chief
Executive Officer, Dinendra Sen, our President and Chief Operating Officer and
Francis P. Tally, M.D., our Executive Vice President, Scientific Affairs.
Although Dr. Rocklage has entered into an employment agreement with us, he may
terminate his employment at any time upon thirty days' written notice. No other
senior executive officer or key employee has entered into an employment
agreement with us. Losing the services of one or more of these individuals might
hinder our ability to achieve our business objectives.

WE MUST HIRE AND RETAIN QUALIFIED PERSONNEL IN A COMPETITIVE LABOR MARKET.

Our success in large part depends upon our ability to attract, train,
motivate and retain qualified scientific personnel. Qualified personnel are in
great demand throughout the biotechnology and pharmaceutical industries, and the
competition for these employees therefore is intense. If we fail to attract and
retain qualified personnel for our scientific and technical teams, the rate at
which we can discover, develop and commercialize drugs will be limited. This
could have a material adverse effect on our business, operating results and
financial condition.

WE MAY REQUIRE ADDITIONAL FUNDS.

We may require substantial additional funds in order to:

o finance our drug discovery and development programs;
o fund our operating expenses;
o pursue regulatory approvals;
o license or acquire additional drug candidates or technologies;
o develop manufacturing, marketing and sales capabilities; and
o prosecute and defend our intellectual property rights.

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

If adequate additional funds are not available, we may be required to
delay, reduce the scope of, or eliminate one or more of our research and
development programs. In order to obtain additional funding, we may be required
to relinquish rights to technologies or drug candidates that we would not
otherwise relinquish in order to continue independent operations.

WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
RELATING TO OUR DRUG PRODUCTS.

The nature of our business exposes us to potential liability risks inherent
in the testing, manufacturing and marketing of pharmaceutical products. Using
our drug candidates in clinical trials may expose us to product liability claims
and possible adverse publicity. These risks will expand with respect to drugs,
if any, that receive regulatory approval for commercial sale. Product liability
insurance is expensive and may not be available in the future. We cannot be sure
that we will be able to maintain or obtain insurance coverage at acceptable
costs or in a sufficient amount, that our insurer will not disclaim coverage as
to a future claim or that a product liability claim would not otherwise
adversely affect our business, operating results or financial condition.

-27-

OUR ABILITY TO GENERATE FUTURE REVENUES FROM DRUG PRODUCTS WILL DEPEND ON
REIMBURSEMENT AND DRUG PRICING.

Acceptable levels of reimbursement of costs of developing and manufacturing
of drugs and treatments related to those drugs by government authorities,
private health insurers and other organizations, such as HMOs, will have an
effect on the successful commercialization of, and attracting collaborative
partners to invest in the development of, our drug candidates. We cannot be sure
that reimbursement in the United States or elsewhere will be available for any
drugs we may develop or, if already available, will not be decreased in the
future. Also, we cannot be sure that reimbursement amounts will not reduce the
demand for, or the price of, our drugs. Any reduction in demand would adversely
affect our business. If reimbursement is not available or is available only to
limited levels, we may not be able to obtain collaborative partners to
manufacture and commercialize drugs, and may not be able to obtain a
satisfactory financial return on our own manufacture and commercialization of
any future drugs.

Third-party payors increasingly are challenging prices charged for medical
products and services. Also, the trend toward managed health care in the United
States and the concurrent growth of organizations such as HMOs, as well as
legislative proposals to reform health care or reduce government insurance
programs, may result in lower prices for pharmaceutical products, including any
products that may be offered by us in the future. Cost-cutting measures that
health care providers are instituting, and the effect of any health care reform,
could materially adversely affect our ability to sell any drugs that are
successfully developed by us and approved by regulators. Moreover, we are unable
to predict what additional legislation or regulation, if any, relating to the
health care industry or third-party coverage and reimbursement may be enacted in
the future or what effect such legislation or regulation would have on our
business.

WE MAY UNDERTAKE ADDITIONAL STRATEGIC ACQUISITIONS IN THE FUTURE AND ANY
DIFFICULTIES FROM INTEGRATING SUCH ACQUISITIONS COULD DAMAGE OUR ABILITY TO
ATTAIN OR MAINTAIN PROFITABILITY.

We may acquire additional businesses and technologies that complement or
augment our existing business and technologies. Integrating any newly acquired
businesses or technologies could be expensive and time-consuming. We may not be
able to integrate any acquired business successfully. Moreover, we may need to
raise additional funds through public or private debt or equity financing to
acquire any businesses, which may result in dilution for stockholders and the
incurrence of indebtedness. We may not be able to operate acquired businesses
profitably or otherwise implement our growth strategy successfully.

RISKS RELATED TO GOVERNMENTAL APPROVALS

IF WE DO NOT OBTAIN REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET CIDECIN
OR ANY FUTURE DRUG CANDIDATES.

The FDA and comparable regulatory agencies in foreign countries impose
substantial requirements upon the commercial introduction of drug products to
establish their safety and efficacy. These include lengthy and detailed
pre-clinical, laboratory and clinical testing procedures, sampling activities
and other costly and time-consuming procedures. All of our drug candidates will
require governmental approvals for commercialization, none of which have been
obtained. Pre-clinical testing and clinical trials and manufacturing of our drug
candidates will be subject to rigorous and extensive regulation by the FDA and
corresponding foreign regulatory authorities. Satisfaction of these requirements
typically takes a significant number of years and can vary substantially based
upon the type, complexity and novelty of the product.

We are currently testing Cidecin in human clinical trials to determine
whether Cidecin is safe and effective and, if so, to what degree. Many drugs in
human clinical trials fail to demonstrate the desired safety and efficacy
characteristics. Drugs in later stages of clinical development may fail to show
the desired safety and efficacy traits despite having progressed through initial
human testing. Our failure to demonstrate the safety and efficacy of Cidecin
could delay or prevent required approvals from regulatory authorities. This
would prevent us from commercializing Cidecin and would substantially impair our
business, operating results and financial condition. We cannot be sure when we,
independently or with our collaborative partners, might submit additional drug
candidates for FDA or other regulatory review. Government regulation also
affects the manufacturing and marketing of pharmaceutical products like ours.

The effects of governmental regulations may be to:

o delay the marketing of our potential drugs for a considerable or
indefinite period of time;

-28-

o impose costly procedural requirements upon our activities; and
o furnish a competitive advantage to larger companies or companies more
experienced in regulatory affairs.

Delays in obtaining governmental regulatory approval could adversely affect
our marketing as well as our ability to generate significant revenues from
commercial sales. We cannot be sure that FDA or other regulatory approvals for
any drug candidates developed by us will be granted on a timely basis or at all.
Moreover, if regulatory approval to market a drug candidate is granted, the
approval may impose limitations on the indicated use for which the drug may be
marketed.

WE HAVE LIMITED EXPERIENCE IN CONDUCTING THE PRE-CLINICAL AND CLINICAL TESTING
NECESSARY FOR US TO OBTAIN REGULATORY APPROVALS OF OUR DRUG CANDIDATES.

Before we receive regulatory approvals for the commercial sale of any of
our potential drugs, our drug candidates will be subject to extensive
pre-clinical testing and clinical trials to demonstrate their safety and
efficacy in humans. We depend on our collaborative partners to conduct clinical
trials for the drug candidates resulting from the collaborative agreements, and
we may become dependent on third parties to conduct future clinical trials of
our internally developed drug candidates. We have limited experience in
conducting pre-clinical testing or clinical trials. Clinical trials have been
commenced only with respect to Cidecin and not with respect to any of our other
drug candidates or any drug candidates being developed jointly by us and our
collaborative partners. Furthermore, we cannot be sure that pre-clinical testing
or clinical trials of any drug candidates will demonstrate the safety and
efficacy of our drug candidates at all or to the extent necessary to obtain
regulatory approvals. Companies in the biotechnology industry have suffered
significant setbacks in advanced clinical trials, even after demonstrating
promising results in earlier trials. The failure to demonstrate the safety and
efficacy of a drug candidate under development would delay or prevent regulatory
approval of the drug candidate and could have a material adverse effect on our
business, operating results and financial condition.

IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS AFTER ANY REGULATORY APPROVAL OF
A DRUG PRODUCT OR IF A REGULATORY AUTHORITY WITHDRAWS ITS APPROVAL OF A DRUG
PRODUCT, WE MAY BE FORCED TO SUSPEND THE SALE OF THE PRODUCT.

Even if initial regulatory approvals for our drug candidates are obtained,
our company, our drugs and the manufacturing facilities for our drugs would be
subject to continual review and periodic inspection. Later discovery of
previously unknown problems with a drug, manufacturer or facility may result in
restrictions on the drug, the manufacturer or us, including withdrawal of the
drug from the market. The FDA stringently applies regulatory standards. Failure
to comply can, among other things, result in fines, denial or withdrawal of
regulatory approvals, product recalls or seizures, operating restrictions and
criminal prosecution. In addition, our manufacturing facilities will be subject
to FDA inspections for adherence to Good Manufacturing Practices prior to
marketing clearance and periodically during the manufacturing process. The FDA
may also require post-marketing testing and surveillance to monitor the effects
of an approved product. In addition, if there are any modifications to a drug,
further regulatory approval will be required.

ITEM 2. DESCRIPTION OF PROPERTY

We are headquartered at 24 Emily Street in Cambridge, Massachusetts, where
we lease approximately 24,000 square feet of commercial space pursuant to a term
lease that expires in September 2003, subject to a 5-year renewal option. We
have leased an additional 11,000 square feet of commercial space at 125 Sidney
Street in Cambridge, Massachusetts, pursuant to a term lease that expires in
December 2003. We have also leased an additional 15,000 square feet of
commercial space at 148 Sidney Street in Cambridge Massachusetts, pursuant to a
term lease that expires in October 2010.

In September 2000, we acquired a new corporate headquarters containing
88,000 square feet of commercial office and laboratory space in Lexington,
Massachusetts pursuant to a purchase and sale agreement. We plan to relocate to
the facility during the third quarter of 2001. The facilities in Lexington are
adequate for our current business requirements.

In connection with the acquisition of TerraGen Discovery in October 2000,
we acquired the office space of former TerraGen subsidiaries in Canada and the
United Kingdom. We currently lease 9,265 square feet of commercial office and
laboratory space in Vancouver, Canada pursuant to a term lease that expires in
May 2001. In addition, we also lease 18,000 square feet of commercial office and
laboratory space in Slough, England pursuant to a term lease that expires in
April 2002.

-29-

ITEM 3. LEGAL PROCEEDINGS

We are not party to any material legal proceedings.

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

No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 2000.

PART II

ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Cubist's common stock is traded on the Nasdaq National Market under the
symbol "CBST". The following table sets forth, for the period indicated, the
high and low sale prices per share of Cubist's common stock as reported by the
Nasdaq National Market.

PRICE RANGE OF
COMMON STOCK
-------------------
HIGH LOW
---- ---

Year Ended December 31, 1999:
First Quarter....................................... $ 4.87 $ 2.68
Second Quarter...................................... $ 4.87 $ 2.87
Third Quarter....................................... $ 11.12 $ 2.93
Fourth Quarter...................................... $ 21.50 $ 7.37

Year Ended December 31, 2000:
First Quarter....................................... $ 71.50 $16.25
Second Quarter...................................... $ 52.50 $16.87
Third Quarter....................................... $ 64.12 $41.00
Fourth Quarter...................................... $ 52.12 $22.68

Year Ended December 31, 2001:
First Quarter (through March 23, 2001) ............. $ 35.93 $12.00

HOLDERS

As of March 23, 2001, Cubist had 277 stockholders of record. This does not
reflect persons or entities who hold their stock in nominee or "street" name
through various brokerage firms.

DIVIDENDS

We have never declared or paid cash dividends on our capital stock and do
not anticipate paying any dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to operate and expand our business.
Our payment of any future dividends will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, cash needs and growth plans. Our bank term loan
contains a restrictive covenant that prohibits us from paying cash dividends or
making stock redemptions or repurchases without the prior written consent of the
lender bank.

-30-

RECENT SALES OF UNREGISTERED SECURITIES

Described below is information regarding all securities we sold during the
fiscal year ended December 31, 2000, which, unless otherwise noted below, were
not registered under the Securities Act.

In January 2000, we issued and sold an aggregate of 2,200,000 shares of
common stock at a purchase price of $25.00 per share. The issuance and sale of
such shares of common stock were made in reliance on Rule 506 of Regulation D
promulgated under Section 4(2) of the Securities Act. The resale of these shares
was subsequently registered with the SEC.

In September 2000, in connection with the purchase of our new headquarters
in Lexington, Massachusetts, we issued senior convertible promissory notes in
favor of entities affiliated with John Hancock Life Insurance Company in the
aggregate principal amount of $39 million. The notes are convertible into shares
of Cubist common stock.

In October 2000, in connection with the acquisition of TerraGen Discovery
Inc., we issued an aggregate of 495,584 shares of common stock to acquire the
fully diluted capitalization of TerraGen. The issuance and sale of such shares
of common stock were made in reliance on Section 3(a)(10) of the Securities Act
and Rule 506 of Regulation D promulgated under Section 4(2) of the Securities
Act. The resale of these shares was subsequently registered with the SEC.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data are presented below for the years ended
December 31 1998, 1999 and 2000 and Statement of Operations for 1997 are
derived from our audited consolidated financial statements. The selected data
for the year ended December 31, 1996 and the balance sheet information as of
December 31, 1996 and 1997 has been prepared by us to reflect the combination
of Cubist with TerraGen using the pooling-of-interests method of accounting
and is unaudited. The following selected financial information should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements and the notes thereto, included elsewhere in this report.

YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Sponsored research revenues........... $5,022 $2,767 $1,674 $6,846 $5,223

Operating expenses:
Research and development expenses.. 7,459 10,799 12,357 25,539 44,638
General and administrative
expenses........................ 2,116 3,618 4,451 6,397 12,113

Total operating expenses...... 9,575 14,417 16,808 31,936 56,751
Interest income....................... 315 1,098 931 905 8,464
Interest expense...................... (229) (244) (361) (1,059) (2,314)
Other income.......................... -- 1,833 (1) 197 578

Income tax benefit related to
Canadian operations................ -- -- 175 925 499
Net loss........................... $(4,467) $(8,963) $(14,390) $(24,122) $(44,301)
Basic and diluted net loss per
common share....................... $ (1.72) $ (0.89) $ (1.16) $ (1.31) $ (1.68)
Weighted average number of common
shares outstanding for basic and
diluted net loss per common share.. 2,595 10,115 12,395 18,456 26,415

YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash, cash equivalents and
investments....................... 19,506 20,197 21,327 26,829 139,783
Working capital................... 18,033 10,238 16,046 21,938 110,146
Total assets...................... 23,898 24,384 26,178 42,595 193,370
Long-term liabilities............. 1,062 1,366 1,523 6,392 46,075
Stockholders' equity.............. 20,516 21,345 22,658 29,441 133,020
Dividends......................... -- -- -- -- --

-31-

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS ANNUAL REPORT. THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE FUTURE RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS ANNUAL REPORT. ALSO, SEE
"SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA."

OVERVIEW

Since our incorporation on May 1, 1992 and commencement of operations in
February 1993, we have been engaged in the research, development and
commercialization of novel antimicrobial drugs to combat serious and
life-threatening bacterial and fungal infections, including those caused by
bacteria and fungi resistant to commercially available drugs. We have a limited
history of operations and have experienced significant net losses since
inception. We had an accumulated deficit of $108.2 million through December 31,
2000. We expect to incur significant additional operating losses over the next
several years and expect cumulative losses to increase due to expanded research
and development efforts, pre-clinical testing and clinical trials and the
development of manufacturing, marketing and sales capabilities.

On October 23, 2000, C&T Acquisition Corporation, a subsidiary of Cubist,
acquired TerraGen Discovery Inc., ("TerraGen") a natural products discovery
company with operations in Vancouver, Canada and Slough, England. Following the
acquisition, the name of TerraGen was changed to Cubist Pharmaceuticals Inc.
TerraGen conducts its Slough, England operations through a wholly owned
subsidiary. With the acquisition, we acquired proprietary technologies and
expertise in the area of small molecule drug discovery from natural products.
Pursuant to the acquisition, we indirectly through C&T Acquisition Corporation
acquired all of the issued and outstanding common and preferred shares of
TerraGen, and assumed all of the outstanding options, warrants and convertible
debentures of TerraGen, by issuing 334,933 shares of our common stock and
causing C&T Acquisition Corporation to issue 178,491 exchangeable shares. The
exchangeable shares are exchangeable at any time at the option of the holder, on
a one-for-one basis, subject to certain adjustments, for shares of our common
stock. All exchangeable shares that remain outstanding will be automatically
exchanged for shares of our common stock on October 23, 2002. The options,
warrants and convertible debentures of TerraGen assumed by us pursuant to the
acquisition are exercisable or convertible for 94,605 shares of our common
stock. This acquisition had been accounted for using the pooling-of-interests
method of accounting. This Management's Discussion and Analysis of Financial
Condition and Results of Operations and the accompanying Consolidated Financial
Statements of Cubist have been restated to include the results and balances of
C&T Acquisition Corporation and TerraGen and its subsidiaries for all periods
presented.

In recent years we have enhanced our drug discovery and development
programs and funded a portion of our capital requirements by entering into
collaborative agreements with pharmaceutical and biotechnology companies. We
have entered into collaborative agreements based specifically on our
aminoacyl-tRNA synthetase program with Merck and Bristol-Myers Squibb, and a
collaborative agreement with Novartis based on our VITA functional genomics
technology. Under these collaborative agreements, we have received sponsored
research payments and, if drug development milestones are achieved, we are
entitled to milestone payments. In addition, we will be entitled to receive
royalties on worldwide sales of any drug developed and commercialized from these
collaborations. We have received all of the sponsored research payments that we
were entitled to under our collaborative agreements with Merck and
Bristol-Meyers Squibb, although Merck and Bristol-Myers Squibb are still
required to make milestone payments and pay royalties to us for any drug
developed and commercialized from these collaborations.

On November 7, 1997, we entered into a license agreement with Eli Lilly and
Company, pursuant to which we acquired exclusive worldwide rights to develop,
manufacture and market daptomycin. In exchange for such license, we paid to Eli
Lilly an upfront license fee in cash, and if drug development milestones are
achieved, have agreed to pay milestone payments in cash or by issuing shares of
our common stock to Eli Lilly. In addition, we will be required to pay royalties
to Eli Lilly on worldwide sales of Cidecin. On February 19, 1999, we issued to
Eli Lilly 56,948 shares of our common stock as a milestone payment which was due
upon commencement of Phase III clinical trials of Cidecin. The value of the
common stock issued was $250,000 and was recorded as research and development
expense. On October 6, 2000, we entered into a restated assignment and license
agreement whereby we will obtain expanded rights under the Eli Lilly patents
including an exclusive license to make, use and sell daptomycin for use in the
field of infectious disease no longer excluding induced colitis and complete
ownership, control and all rights to other Eli Lilly Assigned Patents relating
to daptomycin subject matter claimed therein for all compounds and all uses.

-32-

In September 1998, our Canadian subsidiary entered into a research
collaboration agreement with Schering-Plough Research Institute to access our
recombinant library to discover novel leads with potential activity in the
anti-infective area. As part of the agreement, we would provide library
screening services to Schering-Plough for those strains provided. In exchange
for these services, Schering-Plough is making rsearch payments to us.
Schering-Plough was granted an exclusive, worldwide license to use any
recombinant microorganism that produces a lead and an exclusive, worldwide
license to all of its rights and ownership in any resulting patents.

In May 1999, our Canadian subsidiary entered into a second collaboration
agreement with Schering-Plough under which Schering-Plough was granted an
exclusive, worldwide license to manufacture and sell compounds resulting from
screening Cubist's natural product library. In exchange for the license,
Schering-Plough is making research payments and, if scientific and
development milestones are achieved, Schering-Plough will make milestone
payments to us. In addition, Schering-Plough will be required to pay
royalties to us on worldwide sales of any drug developed and commercialized
from any products derived from this collaboration.

On February 3, 1999, we entered into a collaborative research and license
agreement with Novartis Pharma AG to use our VITA functional genomics technology
to validate and develop assays for antimicrobial targets and to identify new
compounds for development as antimicrobial agents. In exchange for the license,
Novartis is making research payments and, if scientific and development
milestones are achieved, Novartis will make milestone payments to us. In
addition, Novartis will be required to pay royalties to us on worldwide sales of
any drug developed and commercialized from any products derived from this
collaboration. Upon the signing of the research and license agreement, Novartis
purchased, and we issued to Novartis, 797,448 shares of our common stock for a
total purchase price of $4.0 million in cash.

On March 17, 1999, our Canadian subsidiary purchased the assets of
ChromaXome Corporation for $5.7 million, excluding acquisition costs, by
paying $2 million in cash, issuing notes payable of approximately $3 million
and issuing 18,231 shares of our common stock. The acquisition was accounted
for using the purchase method of accounting with the results of operations
included in our financial statements from the date of acquisition.

On April 8, 1999, our Canadian subsidiary purchased the assets of Xenova
Discovery Ltd. for $5.2 million, excluding acquisition costs, by paying
$400,000 in cash, issuing notes payable of approximately $3.6 million and
issuing 30,386 shares of our common stock. The acquisition was accounted for
using the purchase method of accounting with the results of operations
included in our financial statements from the date of acquisition.

On November 18, 1999, our Canadian subsidiary entered into a
cross-license agreement with Diversa Corporation. Under the terms of the
agreement, we granted a co-exclusive world-wide non-royalty bearing license
to certain patented technology, subject to certain restrictions. The license
may not be sublicensed and Diversa cannot use the macrodroplet screening
technology for the term of the agreement. Under the agreement, Diversa paid
an upfront license fee of $2,500,000 and will pay annual license maintenance
fees of $100,000 beginning in 2000, until the patents expire. We are required
to repay the license fee if we merge or are acquired prior to November 18,
2004 by a company whose primary business is DNA shuffling.

On December 1, 1999, we entered into a Clinical Services Master
Agreement with Omnicare Clinical Research, Inc. f/k/a IBAH, Inc. pursuant to
which Omnicare has agreed to provide various clinical research services for
our Cidecin clinical trials, including bacteremia; resistant, refractory or
contraindicated; complicated skin and soft tissue; complicated urinary tract;
and community acquired pneumonia. The related costs are being accrued over
the life of the clinical trials.

On January 10, 2000, we entered into a Monitoring Services Agreement with
Clindev (Proprietary) Limited, pursuant to which Clindev has agreed to provide
monitoring services for our Cidecin international complicated skin and soft
tissue trial. Under the terms of this agreement, the specific responsibilities
and obligations to be performed by Clindev include study management, clinical
trial initiation and management and clinical data management. The related costs
are being accrued over the life of the clinical trial.

On August 1, 2000, we entered into a Contract Research Agreement with
Target Research Associates, Inc. pursuant to which Target has agreed to provide
various clinical research services for our Cidecin Community Acquired Pneumonia
trial. Under the terms of this agreement, the specific responsibilities and
obligations to be performed by Target include study management, clinical trial
initiation and management and clinical data management. The related costs are
being accrued over the life of the clinical trial.

In April 2000, we entered into a development and supply agreement with
Abbott Laboratories pursuant to which Abbott has agreed to assist us in the
development of daptomycin as a parenteral formulation and to manufacture and
sell exclusively to us, daptomycin as a parenteral formulation. Under the
terms of this agreement, we agreed to make certain milestone payments to
Abbott for their development efforts and assistance in obtaining an approved
New Drug Application, or NDA, for daptomycin. We made payments totalling
$325,000 during the year ended December 31, 2000 which were expensed as
research and development. If the FDA approves the daptomycin NDA, we will
purchase minimum annual quantities of drug product from Abbott over a five
year period beginning in 2002.

-33-

In June 2000, Cubist entered into a services agreement with
Gist-brocades Holding A.G. (DSM), an affiliated company of DSM Capua pursuant
to which DSM has agreed to provide supervisory and advisory services to
Cubist relating to the equipping of the manufacturing facility at DSM Capua.
Cubist has also entered into a manufacturing and supply agreement with DSM
Capua pursuant to which DSM Capua has agreed to manufacture and supply to
Cubist bulk daptomycin drug substance for commercial purposes. Under the
terms of the manufacturing and supply agreement, DSM Capua is required to
prepare its manufacturing facility in Italy to manufacture bulk daptomycin
drug substance in accordance with Good Manufacturing Practices standards.
Under the terms of the service agreements, Cubist will make a series of
scheduled payments to DSM over a five year period beginning in 2000 in order
to reimburse DSM for certain costs to be incurred by DSM Capua of
approximately $7.5 million in connection with the preparation, testing and
validation of its manufacturing facility. During 2000, Cubist reimbursed
$750,000 of these costs to DSM Capua and accrued an additional $846,000.
These costs are being recorded as other assets and will begin to be amortized
upon completion of the facility and commencement of manufacturing daptomycin
for commercial purposes. In addition, in consideration for the implementation
of the Cubist technology in the facility by DSM Capua, Cubist has agreed to
make milestone payments of $1,400,000 to DSM if specific phases of the
preparation of its manufacturing facility are completed within specified
periods of time. Cubist is accruing these estimated milestone payments over
the expected duration of the preparation work and recorded research and
development expense of $627,000 in 2000. Upon completion of the preparation
of DSM Capua's manufacturing facility and a determination by the FDA that the
manufacturing facility complies with Good Manufacturing Practices standards,
Cubist will purchase minimum annual quantities of bulk daptomycin drug
substance from DSM over a five-year period beginning in 2002.

On September 8, 2000, we announced the purchase of a new corporate
headquarters building in Lexington, Massachusetts. The new facility is 88,000
square feet, approximately 35,000 of which is constructed as laboratory
space. We believe this should increase our operating efficiencies to better
meet our corporate goals and objectives and plans to relocate to the
facilities in the third quarter of 2001. To finance the purchase, we issued
$39 million of convertible notes to John Hancock Life Insurance Company. This
financing covers the building purchase price of approximately $34 million and
includes $5 million for facility improvements. The five-year notes carry a
coupon rate of 8.5% and can be converted at any time at the option of the
holder into our common stock at $63.8625 per share. We retain the right to
redeem these notes after three years at 103% of its principal amount
outstanding.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2000 AND 1999

REVENUES. Total revenues in the year ended December 31, 2000 were
$5,223,000 compared to $6,846,000 in the year ended December 31, 1999, a
decrease of $1,623,000 or 23.7%. The revenues earned in the year ended
December 31, 2000, consisted of $4,775,000 in research support funding from
the Novartis, Schering-Plough and other strategic collaborations and $448,000
in Small Business Innovation Research funding. The revenues earned in the
year ended December 31, 1999 consisted of $6,535,000 in research support
funding from the Bristol-Myers Squibb, Merck, Schering-Plough, Novartis and
other strategic collaborations and $311,000 in Small Business Innovation
Research funding. The decrease in revenues in the year ended December 31,
2000 as compared to the year ended December 31, 1999 was primarily due to the
completion of research support funding phases of the Merck and Bristol-Myers
Squibb collaborations, partially offset by increased funding from SBIR grants
and revenues associated with the Schering-Plough collaboration.

RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses
in the year ended December 31, 2000, were $44,638,000 compared to $24,786,000 in
the year ended December 31, 1999, an increase of $19,852,000 or 80.1%. The
increase was largely due to increased clinical and manufacturing costs related
to Cidecin development, including the additional personnel costs and purchases
that were required by such development.

WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES. We
incurred a write-off of acquired in-process research and development costs in
the year ended December 31, 1999 of $752,000 relating to the acquisitions of
ChromaXome and Xenova in 1999.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
the year ended December 31, 2000, were $12,113,000 compared to $6,397,000 in the
year ended December 31, 1999, an increase of $5,716,000 or 89.4%. The increase
was largely due to increased personnel costs and recruiting expenses, increased
costs associated with our marketing program, as well as increased legal and
other professional services costs that were expensed under pooling of interests
accounting treatment related to the acquisition of TerraGen.

INTEREST INCOME AND EXPENSE. Interest income in the year ended December 31,
2000, was $8,464,000 compared to $905,000 in the year ended December 31, 1999,
an increase of $7,559,000 or 835.2%. The increase in interest income was due
primarily to higher average cash, cash equivalent and investment balances during
the year ended December 31, 2000 as a result of the private

-34-

placement financings and secondary public offering completed during 2000.
Interest expense in the year ended December 31, 2000 was $2,314,000 as compared
to $1,059,000 during the year ended December 31, 1999, an increase of $1,255,000
or 118.5%. The increase in interest expense was primarily due to the convertible
debt financing of the new corporate headquarters building in Lexington,
Massachusetts.

OTHER INCOME. Other income in the year ended December 31, 2000 was $579,000
compared to $197,000 in the year ended December 31, 1999, an increase of
$382,000 or 193.9%. The increase in other income was due to foreign currency
gains and losses related to our subsidiaries in Canada and the United Kingdom.

INCOME TAX BENEFIT. Income tax benefit in the year ended December 31,
2000, was $499,000 compared to $926,000 in the year ended December 31, 1999,
a decrease of $427,000 or 46.1%. The decrease in income tax benefit was due
to the decreased availability of investment tax credits related to our
Canadian operations during the year ended December 31, 2000.

NET LOSS. Our net loss for the year ended December 31, 2000 was $44,301,000
compared to $24,122,000 during the year ended December 31, 1999, an increase of
$20,179,000 or 83.7%. The increase was primarily due to an increase in expenses
incurred associated with the development of Cidecin, increased costs associated
with our marketing program, increased costs related to personnel and recruiting
expenses and increased legal and other professional services costs that were
expensed under pooling of interests accounting treatment related to the
acquisition of TerraGen.

YEARS ENDED DECEMBER 31, 1999 AND 1998

REVENUES. Total revenues in the year ended December 31, 1999 were
$6,846,000 compared to $1,674,000 in the year ended December 31, 1998, an
increase of $5,172,000 or 309.0%. The revenues earned in the year ended
December 31, 1999, consisted of $6,535,000 in research support funding from
the Bristol-Myers Squibb, Merck, Novartis and other strategic collaborations
and $311,000 in Small Business Innovation Research funding. The revenues
earned in the year ended December 31, 1998 consisted of $1,146,000 in
research support funding from the Bristol-Myers Squibb, Merck and other
strategic collaborations and $528,000 in Small Business Innovation Research
funding. The increase in revenues in the year ended December 31, 1999 as
compared to the year ended December 31, 1998 was primarily due to the
increase of milestone payments and research support funding from the Merck,
Novartis and other strategic collaborations during 1999.

RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses
in the year ended December 31, 1999, were $24,786,000 compared to $12,357,000 in
the year ended December 31, 1998, an increase of $12,429,000 or 100.6%. The
increase was largely due to increased clinical and manufacturing costs related
to Cidecin development, the additional personnel and purchases that were
required by such development and the expanded research and development
activities after the acquisitions of ChromaXome and Xenova which were accounted
for under the purchase method of accounting.

WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES. The
write-off of acquired in-process research and development costs in the year
ended December 31, 1999 of $752,000 related to the acquisitions of ChromaXome
and Xenova in 1999.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
the year ended December 31, 1999, were $6,397,000 compared to $4,452,000 in the
year ended December 31, 1998, an increase of $1,945,000 or 43.7%. The increase
was largely due to increased investor and public relations expenses, increased
legal and other professional services expenses and expanded activities after the
acquisitions of ChromaXome and Xenova which were accounted for under the
purchase method of accounting.

INTEREST INCOME AND EXPENSE. Interest income in the year ended December 31,
1999, was $905,000 compared to $931,000 in the year ended December 31, 1998, a
decrease of $26,000 or 2.8%. The decrease in interest income was due primarily
to lower average cash, cash equivalent and investment balances during the year
ended December 31, 1999 as compared to the year ended December 31, 1998.
Interest expense in the year ended December 31, 1999 was $1,059,000 as compared
to $361,000 during the year ended December 31, 1998, an increase of $698,000 or
193.4%. The increase in interest expense was primarily due to the debt financing
of the ChromaXome and Xenova acquisitions and deemed discounts related to
convertible debentures.

OTHER INCOME. Other income in the year ended December 31, 1999 was
$197,000 compared to ($1,000) in the year ended December 31, 1998, an
increase of $198,000. The increase in other income was due to foreign
currency gains and losses related to our subsidiaries in Canada and the
United Kingdom.

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INCOME TAX BENEFIT. Income tax benefit in the year ended December 31, 1999,
was $926,000 compared to $175,000 in year ended December 31, 1998, an increase
of $751,000 or 429.1%. The increase in income tax benefit was due to investment
tax credits for increased research and development expenditures related to our
Canadian operations during the year ended December 31, 1999 as compared to the
year ended December 31, 1998.

NET LOSS. Our net loss for the year ended December 31, 1999 was $24,122,000
compared to $14,390,000 during the year ended December 31, 1998, an increase of
$9,732,000 or 67.6%. The increase was primarily due to an increase in expenses
incurred associated with the development of Cidecin, increased costs associated
with our marketing and investor relations program and the expanded operations
after the acquisitions of ChromaXome and Xenova, which were accounted for under
the purchase method of accounting.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations through the sale of equity
securities, convertible debt securities, equipment financing, sponsored research
revenues, license revenues and interest earned on invested capital. Our total
cash, cash equivalent and investments balance at December 31, 2000 was
$139,783,000 compared to $26,829,000 at December 31, 1999.

From inception through December 31, 2000, we had invested an aggregate of
$47,106,000 (of which $37,032,000 was invested during 2000) in property and
equipment, primarily in building, leasehold improvements and laboratory
equipment under capital leases. The obligations under capital leases at December
31, 2000 were $934,000. Minimum annual principal payments due under capital
leases total $696,000 in 2001. Principal payments are scheduled to decline each
year thereafter until expiration in 2003. We made principal payments under our
capital lease obligations of $685,000 in the year ended December 31, 2000. We
expect our capital expenditures in 2001 to be approximately $13,000,000,
consisting of leasehold improvements, laboratory equipment and information
technology purchases.

On September 23, 1998, we completed a private placement financing with
investors and raised net proceeds of $12.7 million by issuing 6,065,560
shares of our common stock at $2.25 per share, along with 3,032,783 warrants
exercisable for our common stock at $2.25 per share. During the twelve months
ended December 31, 1999, we issued 285,644 shares of our common stock upon
the exercise of 326,668 warrants issued in connection with the private
placement financing completed on September 23, 1998. Such warrants are
exercisable at $2.25 per share or pursuant to a standard cashless net issue
provision. Of the 285,644 shares issued, 160,000 shares were issued for an
aggregate purchase price of $360,000 and 125,644 shares were issued upon
cashless net issue exercise pursuant to which the holders of such warrants
surrendered the right to acquire 41,024 additional shares of our common
stock. During the twelve months ended December 31, 2000, we issued 1,219,540
shares of our common stock upon the exercise of 1,261,669 warrants issued in
connection with the private placement financing completed on September 23,
1998. Such warrants were exercisable at $2.25 per share or pursuant to a
standard cashless net issue provision. Of the 1,219,540 shares issued,
650,558 shares were issued for an aggregate purchase price of $1,463,756 and
568,982 shares were issued upon cashless net issue exercise pursuant to which
the holders of such warrants surrendered the right to acquire 42,129
additional shares of our stock.

On October 8, 1998, our Canadian subsidiary completed a private placement
financing with investors and raised net proceeds of $3.2 million by issuing
88,848 shares of our common stock, along with warrants exercisable for 44,424
shares of our common stock.

On March 15, 1999, our Canadian subsidiary completed a private placement
financing with investors and raised net proceeds of $5.2 million by issuing
142,157 shares of our common stock.

Upon the signing of the research and license agreement with Novartis in
February 1999, we issued to Novartis, 797,448 shares of our common stock for a
total purchase price of $4.0 million in cash.

On March 17, 1999, our Canadian subsidiary purchased the assets of
ChromaXome Corporation for $5.7 million, excluding acquisition costs, by paying
approximately $2 million in cash, issuing notes payable of approximately $3
million and issuing 18,231 shares of our common stock.

On April 8, 1999, our Canadian subsidiary purchased the assets of Xenova
Discovery Ltd. for $5.2 million, excluding acquisition costs, by paying
approximately $400,000 in cash, issuing notes payable of approximately $3.6
million and issuing 30,386 shares of our common stock.

During March 1999, we entered into a term loan agreement with a bank under
which we are able to borrow up to $1,500,000 to finance fixed asset purchases.
In March 2000, we increased the term loan by an additional $2,000,000 to finance

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leasehold improvements and fixed asset purchases. Advances under this facility
are to be repaid over a 36-month period, commencing on March 31, 2000. Interest
on the borrowings is at the bank's LIBOR rate (9.03% at December 31, 2000).
Borrowings under the facility are collateralized by all capital equipment
purchased with the funds under this term loan. At December 31, 2000, borrowings
outstanding totaled $1,139,578.

On October 21, 1999, we completed a private placement financing with
investors and raised net proceeds of $17.5 million by issuing 2,503,333 shares
of our common stock at $7.50 per share.

On November 16, 1999, our Canadian subsidiary issued $1.6 million Cdn of
convertible debentures and warrants to purchase 16,458 shares of common stock.
The convertible debentures bear interest at a rate of 12% and are payable on
March 31, 2000. On March 31, 2000, the convertible debentures and related
interest were converted to 30,176 shares of common stock.

On January 17, 2000, our Canadian subsidiary issued a note payable totaling
$2,006,667 and warrants to purchase 22,790 shares of common stock. The note
payable bears interest at 14.4% and is repayable over 36 months to January 17,
2003. The warrants were exercised in 2000 resulting in gross proceeds of
$599,000. At December 31, 2000, the note payable balance was $1,062,079.

On January 29, 2000, we completed a private placement financing with
investors and raised net proceeds of $52.0 million by issuing 2,200,000 shares
of our common stock at $25.00 per share.

On April 3, 2000, we completed a secondary public offering and raised
approximately $82.5 million (less financing costs of $4,957,275) by issuing
2,500,000 shares of common stock at $33.00 per share. In addition, on May 3,
2000, the underwriters exercised their option to purchase an additional 375,000
shares of common stock at $33.00 per share to cover over-allotments, raising an
additional $12.4 million (less financing costs of $680,625).

On September 8, 2000, we announced the purchase of a new corporate
headquarters building in Lexington, Massachusetts. The new facility is 88,000
square feet, approximately 35,000 of which is constructed as laboratory
space. To finance the purchase, we issued $39 million of convertible notes to
John Hancock Life Insurance Company. This financing covers the building
purchase price of approximately $34 million and includes $5 million for
facility improvements. The notes carry a coupon rate of 8.5% and can be
converted at any time at the option of the holder into our common stock at
$63.8625 per share. We retain the right to redeem these notes after three
years at 103% of the principal outstanding.

We believe that our existing cash resources, existing capital resources,
projected interest income and future revenues due under our collaborative
agreements, will be sufficient to fund our operating expenses and capital
requirements as currently planned through at least the next 12 months. Our
actual cash requirements may vary materially from those now planned and will
depend on numerous factors. We cannot be sure that our existing cash, cash
equivalents, other capital resources, interest income and future revenues due
under our collaborative agreements will be sufficient to fund our operating
expenses and capital requirements during that period.

RECENT PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which was amended by SFAS No. 137 and is
effective for fiscal years beginning after June 15, 2000. The statement
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 also requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Adoption of this standard is not
expected to have a material impact on our financial position or results of
operations.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We currently own financial instruments that are sensitive to market risks
as part of our investment portfolio. Our investment portfolio is used to
preserve our capital until it is required to fund operations, including our
research and development activities. None of these market-risk sensitive
instruments are held for trading purposes. Our investment portfolio includes
investment grade debt instruments. These bonds are subject to interest rate
risk, and could decline in value if interest rates fluctuate. Due to the
conservative nature of these instruments, we do not believe that we have a
material exposure to interest rate risk. We do not own derivative financial
instruments in our investment portfolio.

The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to the impact of
interest rate changes and foreign currency fluctuations.

INTEREST RATE RISK

We do not engage in trading market risk sensitive instruments or
purchasing hedging instruments or "other than trading" instruments that are
likely to expose us to market risk, whether interest rate, foreign currency
exchange, commodity price or equity price risk. We have not purchased options
or entered into swaps, forward or futures contracts. Our primary market risk
exposure is that of interest rate risk on borrowings under our credit
facility, which are subject to interest rates based on the bank's base rate.
We also have an outstanding promissory note issued in favor of Xenova
Discovery Limited at the LIBOR rate plus one percent and a change in the
applicable interest rate on these loans would affect the rate at which we
could borrow funds. The aggregate hypothetical loss in earnings for one year
of those borrowings held by us at December 31, 2000, which are subject to
interest rate risk resulting from a hypothetical 10 percent increase in
interest rates is approximately $38,177 after tax. The hypothetical loss was
determined by financial instruments held by us at December 31, 2000. Fixed
rate financial instruments were not evaluated.

FOREIGN CURRENCY RISK

We face exposure to adverse movements in foreign currency exchange
rates. Our international revenues and expenses are denominated in foreign
currencies. The functional currency of each of our foreign subsidiaries is
the local currency. Our international business is subject to risks typical of
an international business, including, but not limited to differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Based on our overall currency rate exposure at December 31, 2000,
A 10% change in foreign exchange rates would have had an immaterial effect on
our financial position, results of operations and cash flows. To date, we
have not hedged the risks associated with foreign exchange exposure. Although
we may do so in the future, we cannot be sure that any hedging techniques we
may implement will be successful or that our business, results of operations,
financial condition and cash flows will not be materially adversely affected
by exchange rate fluctuations.

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ITEM 8. FINANCIAL STATEMENTS

CUBIST PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS

Report of Independent Accountants.......................................................................... 39
Balance Sheets as of December 31, 1999 and 2000............................................................ 41
Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000................. 42
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000................. 43
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the
years ended December 31, 1998, 1999 and 2000............................................................. 44
Notes to Financial Statements.............................................................................. 46

-39-

REPORTS OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Cubist Pharmaceuticals, Inc.:

In our opinion, based upon our audits and the report of other auditors,
the accompanying consolidated balance sheets and the related consolidated
statements of operations, of changes in stockholders' equity and
comprehensive loss and of cash flows present fairly, in all material
respects, the financial position of Cubist Pharmaceuticals, Inc. and its
subsidiaries (the "Company") at December 31, 1999 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These consolidated
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
Cubist Pharmaceuticals Inc. (formerly TerraGen Discovery Inc.), a wholly
owned subsidiary, at December 31, 1999 and for each of the years ended
December 31, 1998 and 1999, which statements reflect total assets
constituting 29.1% of consolidated total assets as of December 31, 1999, and
total revenue constituting 2.4% and 21.8% of consolidated total revenue for
the years ended December 31, 1998 and 1999, respectively. Those statements
were audited by other auditors whose report thereon have been furnished to
us, and our opinion expressed herein, insofar as it relates to the amounts
included for Cubist Pharmaceuticals Inc. (formerly TerraGen Discovery Inc.),
is based solely on the report of the other auditors. We conducted our audits
of these statements in accordance with auditing standards generally accepted
in the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 15, 2001

-40-

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Cubist Pharmaceuticals Inc.
(formerly TerraGen Discovery Inc.)

We have audited the consolidated balance sheet of Cubist Pharmaceuticals
Inc.(formerly TerraGen Discovery Inc.) (the "Company") as at December 31,
1999 and the consolidated statements of operations, stockholders' equity and
comprehensive income and cash flows for the years ended December 31, 1999 and
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December
31, 1999 and the results of its operations and cash flows for the years ended
December 31, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States of America.

Chartered Accountants

/s/ KPMG LLP

Vancouver, Canada

April 3, 2000, except as to
the acquisition of the Company described in
note A which is as of October 23, 2000

-41-

CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
------------
1999 2000
---- ----

ASSETS
Current assets:
Cash and cash equivalents.................................... $12,248,607 $46,940,277
Short-term investments....................................... 14,580,515 74,607,683
Accounts receivable.......................................... 380,107 363,412
Investment tax credits receivable............................ 926,699 --
Prepaid expenses and other current assets.................... 564,324 2,509,766
----------- -----------

Total current assets......................................... 28,700,252 124,421,138

Property and equipment, net..................................... 4,520,051 40,142,080
Intangible assets, net.......................................... 9,195,153 7,280,062
Long-term investments........................................... -- 18,234,857
Other assets.................................................... 179,287 3,291,713
----------- ------------

Total assets................................................. $42,594,743 $193,369,850
=========== ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $1,771,995 $4,541,988
Accrued expenses............................................. 1,778,853 7,424,576
Current portion of long-term debt............................ 2,490,231 1,692,340
Current portion of capital lease obligations................. 720,807 615,880
---------- ----------

Total current liabilities.................................... 6,761,886 14,274,784
Deferred revenue................................................ 2,533,875 2,500,000
Long-term debt, net of current portion.......................... 2,951,864 43,257,329
Capital lease obligations, net of current portion............... 906,079 317,973
---------- ----------

Total liabilities............................................ 13,153,704 60,350,086
Commitments (Notes H, I, M, N and Q)
Stockholders' equity:
Preferred stock, non-cumulative; convertible,
$.001 par value; authorized 5,000,000
shares 1999 and 2000; issued and outstanding
1999 and 2000 no shares.................................... -- --
Common stock, $.001 par value; authorized
50,000,000 shares; issued and outstanding 1999
20,983,510 shares; issued and outstanding
2000 27,757,900 shares..................................... 20,984 27,758
Additional paid-in capital................................... 93,050,133 241,010,543
Accumulated deficit.......................................... (63,881,456) (108,182,032)
Accumulated other comprehensive income....................... 251,378 163,495
------------ -------------

Total stockholders' equity................................... 29,441,039 133,019,764
----------- -------------

Total liabilities and stockholders' equity................. $42,594,743 $193,369,850
============= ============

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

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CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
---- ---- ----

Revenue........................................................... $1,674,152 $6,846,384 $5,223,009
Operating expenses:
Research and development....................................... 12,356,766 24,786,363 44,638,151
Write-off of acquired in process research and development...... -- 752,304 --
General and administrative..................................... 4,451,620 6,397,268 12,112,736
------------- ------------ -------------
Total operating expenses.................................... 16,808,386 31,935,935 56,750,887
Interest income................................................... 931,345 904,647 8,464,211
Interest expense.................................................. (361,124) (1,059,134) (2,314,225)
Other income (expense)............................................ (1,080) 196,584 578,622
-------------- -------------- -------------
Net loss before income taxes................................... $(14,565,093) $(25,047,454) $(44,799,270)
Income tax benefit related to Canadian operations................. 175,497 925,593 498,694
-------------- -------------- -------------
Net loss ...................................................... ($14,389,596) ($24,121,861) ($44,300,576)
============== ============== =============
Basic and diluted net loss per common share....................... $(1.16) $(1.31) $(1.68)
-------------- -------------- -------------
Weighted average number of common shares outstanding
for basic and diluted net loss per common share................ 12,395,003 18,455,568 26,414,826
============== ============== =============

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

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CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1999 2000
---- ---- ----

Cash flows for operating activities:
Net loss....................................................... $(14,389,596) $(24,121,861) $(44,300,576)
Adjustments to reconcile net loss to net cash used in
operating activities:
Write-off of acquired in-process research and development...... -- 752,304 --
Depreciation and amortization.................................. 1,370,939 3,112,976 4,367,510
(Gain) loss on the sale of equipment........................... -- 7,776 (8,600)
Common stock issued for technology milestone................... -- 250,000 --
Cashless exercise of warrants related to lease agreements...... -- 38,330 --
Fair value of options granted to non-employees................. 44,844 58,202 48,054
Forgiveness of note receivable related to common stock......... -- -- 168,750
Deemed discount amortization on convertible debentures......... -- 372,300 353,400
Unrealized foreign exchange gain, net.......................... -- (209,456) (571,208)
Changes in assets and liabilities:
Accounts receivable......................................... (40,540) (201,724) 11,945
Investment tax credits receivable........................... (169,348) (757,351) 925,600
Prepaid expenses and other current assets................... (94,674) (296,594) (1,686,028)
Other assets................................................ 106,056 (105,049) (2,129,298)
Accounts payable and accrued expenses....................... 344,282 2,141,412 8,424,131
Deferred revenue............................................ -- 2,477,626 --
------------- ------------- -------------

Total adjustments......................................... 1,561,559 7,640,752 9,904,256
------------- ------------- -------------

Net cash used for operating activities....................... (12,828,037) (16,481,109) (34,396,320)

Cash flows for (from) investing activities:
Acquisitions, net of cash on hand.............................. -- (3,062,788) --
Purchases of property and equipment............................ (2,161,938) (899,688) (36,886,604)
Proceeds from the sale of equipment............................ -- 15,150 8,600
Purchase of intangible assets.................................. (59,822) (131,679) (185,332)
Purchases of investments....................................... (12,547,850) (15,192,711) (110,706,986)
Maturities of investments...................................... 15,278,730 13,160,046 32,444,961
------------- ------------- -------------

Net cash provided by (used for) investing activities......... 509,120 (6,111,670) (115,325,361)
------------- ------------- -------------
Cash flows from financing activities:
Issuance of common stock and warrants, net..................... 16,017,627 27,575,740 145,256,184
Proceeds from notes receivable................................. 30,000 101,686 --
Repayments of long-term debt................................... (189,736) (3,293,587) (1,761,207)
Proceeds from long term debt, net.............................. 941,255 2,232,261 41,526,157
Principal payments of capital lease obligations................ (582,710) (712,464) (684,832)
------------- ------------- -------------

Net cash provided by financing activities.................... 16,216,436 25,903,636 184,336,302
------------- ------------- -------------

Net increase in cash and cash equivalents......................... 3,897,519 3,310,857 34,614,621
Effect of changes in foreign exchange rates on cash balances...... (36,663) 158,644 77,049
Cash and cash equivalents at beginning of year.................... 4,918,250 8,779,106 12,248,607
------------- ------------- -------------

Cash and cash equivalents at end of year.......................... $8,779,106 $12,248,607 $46,940,277
============= ============= =============
Disclosures of cash flow information:
Cash paid during the year for interest......................... $361,124 $816,897 $2,314,225

Non-cash investing and financing activities:
Cancellation of promissory note in connection
with resignation of officer.................................. $37,776 -- --
Issuance of restricted common stock in exchange for a
promissory note................................................ -- $506,250 --
Issuance of notes payable related to acquisitions.............. -- $6,632,757 --
Issuance of common stock related to acquisitions............... -- $1,814,166 --
Beneficial conversion feature on convertible debenture......... -- $264,300 --
Warrants issued with long-term debt............................ -- $323,000 $658,606
Issuance of common stock on conversion of long-term debt....... -- -- 1,112,097

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

-44-

CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000

$ ADDITIONAL PAID-IN CAPITAL
# OF ISSUANCE $
SHARES $ OF NOTES DEFERRED ACCUMULATED
COMMON COMMON SHARES RECEIVABLE COMPENSATION DEFICIT
------ ------ -------- ---------- ------------ -----------

BALANCE AT DECEMBER 31, 1997 10,730,707 $10,731 $46,576,910 ($191,685) ($35,827) ($25,369,999)

Exercise of stock options 3,642 4 4,465 - - -
Shares issued in connection
with employee stock purchase plan 6,341 6 20,553 - - -
Repurchase of common stock (2,064) (2) (786) - - -
Issuance of common stock, net of
offering costs 6,183,720 6,183 16,021,767 - - -
Amortization of deferred compensation - - 2,255 22,223 (11,158) -
Repayment of promissory notes - - - 30,000 - -
Cancellation of promissory note in
connection with resignation of
officer (10,000) (10) (37,766) 37,776 - -
Options granted to non-employees - - 44,844 - - -
Net loss - - - - - (14,389,596)
Foreign currency translation - - - - - -
adjustments
---------- ------ ---------- --------- ---------- -----------

BALANCE AT DECEMBER 31, 1998 16,912,346 16,912 62,632,242 (101,686) (46,985) (39,759,595)

Exercise of stock options and warrants 432,626 433 810,983 - - -
Shares issued in connection with employee
stock purchase plan and 401(k) plan 40,035 40 144,644 - - -
Issuance of common stock, net of
offering costs 3,549,886 3,550 27,410,670 (506,250) - -
Issuance of common stock in connection
with acquisitions, net of offering costs 48,617 49 1,814,117 - - -
Issuance of warrants for services - - 77,107 - (77,107) -
Deferred compensation related to grant
of stock options - - 707,797 - (703,125) -
Amortization of deferred compensation - - - - 140,538 -
Repayment of promissory notes - - - 101,686 - -
Options granted to non-employees - - 58,202 - - -
Warrants issued in connection with long-
term debt - - 323,000 - - -
Beneficial conversion feature on - - 264,300 - - -
convertible debentures
Net loss - - - - - (24,121,861)
Foreign currency translation adjustments - - - - - -
---------- ------ ---------- --------- ---------- -----------

BALANCE AT DECEMBER 31, 1999 20,983,510 20,984 94,243,062 (506,250) (686,679) (63,881,456)

Exercise of stock options and warrants 1,641,448 1,641 3,610,538 - - -
Shares issued in connection with employee
stock purchase plan and 401(k) plan 27,766 28 624,033 - - -
Issuance of common stock, net of
offering costs 5,075,000 5,075 141,014,869 - - -

$
ACC.OTHER $ $
COMPREHENSIVE STOCKHOLDERS COMPREHENSIVE
INCOME EQUITY LOSS
-------------- ------------ -------------

BALANCE AT DECEMBER 31, 1997 ($44,350) $20,945,780 ($9,006,717)

Exercise of stock options - 4,469 -
Shares issued in connection
with employee stock purchase plan - 20,559 -
Repurchase of common stock - (788) -
Issuance of common stock, net of
offering costs - 16,027,950 -
Amortization of deferred compensation - 13,320 -
Repayment of promissory notes - 30,000 -
Cancellation of promissory note in
connection with resignation of
officer - - -
Options granted to non-employees - 44,844 -
Net loss - (14,389,596) (14,389,596)
Foreign currency translation
adjustments (38,949) (38,949) (38,949)
-------- ----------- -----------

BALANCE AT DECEMBER 31, 1998 (83,299) 22,657,589 (14,428,545)
======== =========== ===========
Exercise of stock options and warrants - 811,416 -
Shares issued in connection with employee
stock purchase plan and 401(k) plan - 144,684 -
Issuance of common stock, net of
offering costs - 26,907,970 -
Issuance of common stock in connection
with acquisitions, net of offering costs - 1,814,166 -
Issuance of warrants for services - - -
Deferred compensation related to grant
of stock options - 4,672 -
Amortization of deferred compensation - 140,538 -
Repayment of promissory notes - 101,686 -
Options granted to non-employees - 58,202 -
Warrants issued in connection with long-
term debt - 323,000 -
Beneficial conversion feature on - 264,300 -
convertible debentures
Net loss - (24,121,861) (24,121,861)
Foreign currency translation adjustments 334,677 334,677 334,677
-------- ----------- -----------

BALANCE AT DECEMBER 31, 1999 251,378 29,441,039 (23,787,184)
======== =========== ===========
Exercise of stock options and warrants - 3,612,179 -
Shares issued in connection with employee
stock purchase plan and 401(k) plan - 624,061 -
Issuance of common stock, net of -
offering costs - 141,019,944

-45-

$ ADDITIONAL PAID-IN CAPITAL
# OF ISSUANCE $
SHARES $ OF NOTES DEFERRED ACCUMULATED
COMMON COMMON SHARES RECEIVABLE COMPENSATION DEFICIT
------ ------ -------- ---------- ------------ -----------

Issuance of common stock upon
conversion of convertible debentures 30,176 30 1,112,067 - - -
Deferred compensation related to grant - - - -
of stock options 2,115,437 (2,115,437)
Amortization of deferred compensation - - - - 723,493 -
Stock options cancelled (43,838) 43,838
Forgiveness of promissory notes - - - 168,750 - -
Options granted to non-employees - - 48,054 - - -
Warrants issued in connection with
long-term debt - - 658,606 - - -
Net loss - - - - - (44,300,576)
Foreign currency translation adjustments - - - - - -
---------- ------- ------------ ----------- ------------ -------------
BALANCE AT DECEMBER 31, 2000 27,757,900 $27,758 $243,382,828 ($337,500) ($2,034,785) ($108,182,032)
========== ======= ============ ========= =========== =============

$
ACC. OTHER $ $
COMPREHENSIVE STOCKHOLDERS COMPREHENSIVE
INCOME EQUITY LOSS
------------- ------------ -------------

Issuance of common stock upon
conversion of convertible debentures - 1,112,097 -
Deferred compensation related to grant -
of stock options - -
Amortization of deferred compensation - 723,493 -
Stock options cancelled -
Forgiveness of promissory notes - 168,750 -
Options granted to non-employees - 48,054 -
Warrants issued in connection with
long-term debt - 658,606 -
Net loss (44,300,576) (44,300,576)
Foreign currency translation adjustments (87,883) (87,883) (87,883)
--------- ------------ ------------

BALANCE AT DECEMBER 31, 2000 $163,495 $133,019,764 ($44,388,459)
======== ============ ============

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

-46-

CUBIST PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. NATURE OF BUSINESS

Cubist Pharmaceuticals, Inc. ("Cubist") is a specialty pharmaceutical
company founded in May 1992 and is focused on the research, development and
commercialization of novel antimicrobial drugs to combat serious and
life-threatening bacterial and fungal infections. Cubist has established
multiple technology licenses and collaborations and has established a network of
advisors and collaborators. Cubist is headquartered in Cambridge, Massachusetts.

On October 23, 2000, C&T Acquisition Corporation, a subsidiary of Cubist,
acquired TerraGen Discovery Inc., ("TerraGen") a natural products discovery
company with operations in Vancouver, Canada and Slough, England. Following the
acquisition, the name of TerraGen was changed to Cubist Pharmaceuticals Inc.
TerraGen conducts its Slough, England operations through a wholly owned
subsidiary. With the acquisition, Cubist acquired proprietary technologies and
expertise in the area of small molecule drug discovery from natural products.
This transaction was accounted for using the pooling-of-interests method of
accounting. The accompanying consolidated financial statements of Cubist have
been restated to include the results and balances of C&T Acquisition Corporation
and TerraGen and its subsidiaries for all periods presented.

Cubist is subject to risks common to companies in the industry including,
but not limited to, uncertainty of product development and commercialization,
lack of marketing and sales history, dependence on key personnel, market
acceptance of products, product liability, protection of proprietary technology,
ability to raise additional financing, and compliance with FDA and other
governmental regulations.

Cubist has a limited history of operations and has experienced significant
net losses since inception. At December 31, 2000, Cubist has an accumulated
deficit of $108.2 million. Cubist expects to incur significant additional net
losses over the next several years and expects cumulative losses to increase due
to expanded research and development efforts, preclinical testing and clinical
trials and the development of manufacturing, marketing and sales capabilities.
As a result, Cubist's business plan indicates that additional financing may be
required to support its planned expenditures. Cubist believes that the funds
currently available and future revenues due under its collaborative agreements
(Note H) will be sufficient to fund operations through at least the next twelve
months.

B. ACCOUNTING POLICIES

BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Cubist and its wholly-owned subsidiaries. All significant intercompany amounts
and transactions have been eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of short-term interest-bearing instruments with
original maturities of three months or less. These investments are carried at
cost which approximates market value.

Cubist invests its cash and cash equivalents primarily in deposits, U.S.
Government treasuries and money market funds with financial institutions. Cubist
has not recorded any losses to date on its invested cash and cash equivalents.

-47-

INVESTMENTS

Investments, with an original maturity of more than three months when
purchased, consisted of certificates of deposit and investment-grade commercial
paper at December 31, 1999 and 2000. Investments, all of which are held to
maturity, are stated at amortized cost plus accrued interest, which approximates
market value.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets,
generally three years for computer equipment and five years for laboratory
equipment and furniture and fixtures. Leasehold improvements are stated at cost
and are amortized over the lesser of the life of the lease or their estimated
useful lives. Maintenance and repairs are charged to expense as incurred, while
major betterments are capitalized. When assets are retired or otherwise disposed
of, the assets and related allowances for depreciation and amortization are
eliminated from the accounts and any resulting gain or loss is reflected in
income.

INTANGIBLE ASSETS

Intellectual property and processes represents information databases, and
technological process information acquired through Cubist's business
acquisitions. These assets are amortized on a straight-line basis over their
estimated useful life of four years. Workforce represents the estimated cost
savings or value of experienced employees obtained through acquisitions and are
amortized on a straight-line basis over two years. Patent costs include costs of
obtaining patents directly or through an acquisition transaction. Patent costs
are amortized over the lesser of the patent's remaining legal life and its
useful life. Amortization of intangible assets are included in research and
development expense.

IMPAIRMENT OF LONG-LIVED ASSETS

Cubist reviews long-lived assets for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may
not be fully recoverable or that the useful lives of these assets are no longer
appropriate. Each impairment test is based on a comparison of the undiscounted
cash flows to the recorded value of the asset. If impairment is indicated, the
asset is written down by the amount in which the carrying value of the asset
exceeds the related fair value of the asset. No provisions for impairment have
been recorded to date.

REVENUE RECOGNITION

Cubist has entered into various collaborative agreements with
pharmaceutical and biotechnology companies. The terms of the collaborative
arrangements can include nonrefundable licensing fees, funding of research and
development, payments based on the achievement of certain milestones, and
royalties on product sales. Nonrefundable licensing fees are recorded as
deferred revenue upon receipt and recognized as revenue ratably over the period
that the related products or services are delivered or obligations as defined in
the agreement are performed. Revenues from research funding are recognized when
the related research activities are performed. Revenues from milestone payments
which are substantive and whose achievability was not reasonably assured at the
inception of the agreement are recognized when the milestone is achieved.
However, milestone payments that require future performance are deferred and
recognized as revenue ratably over the term of the agreement as the related
activities are performed. Any revenue related to royalties is recognized as
earned.

Cubist's revenue recognition policies are consistent with the principles
provided in the Securities and Exchange Commission's Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements."

Revenue from Small Business Innovation Research ("SBIR") government grants
to conduct research and development is recognized as eligible costs are incurred
up to the funding limit.

RESEARCH AND DEVELOPMENT

All research and development costs are expensed as incurred. The portion of
purchase price, if any, on any acquisition allocated to in-process research and
development is charged to expense upon acquisition (Note C).

-48-

INCOME TAXES

Cubist accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settled. A deferred tax asset is established for
the expected future benefit of net operating loss and credit carryforwards. A
valuation reserve against net deferred tax assets is required if, based upon
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.

INVESTMENT TAX CREDITS

Investment tax credits for research and development expenditures
incurred by Cubist's Canadian operations are recorded as a reduction of tax
expense when collection is reasonably assured. Investment tax credits
receivable at December 31, 1999 were received in January 2000.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of Cubist's financial instruments, which include cash
and cash equivalents, investments, accounts receivable, accounts payable, and
accrued expenses approximates their fair value due to the short-term nature of
the items. The estimated fair value of long-term debt and capital lease
obligations approximates their carrying value. The estimated fair value of
long-term debt and capital lease obligation has been determined using current
interest rates for similar instruments.

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.

FOREIGN CURRENCY AND INTEREST RATE RISK

Cubist operates internationally, which gives rise to a risk that earnings
and cash flows may be negatively impacted by fluctuations in interest and
foreign exchange rates. To the date of these financial statements, Cubist has
not entered into foreign currency hedging arrangements.

NET LOSS PER COMMON SHARE

Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Diluted net loss per share does not differ
from basic net loss per share since potential common shares from stock options,
warrants, convertible debt and notes payable are antidilutive for all periods
presented and are therefore excluded from the calculation. During the years
ended December 31, 1998, 1999 and 2000, options to purchase 1,535,810,
2,006,829, and 2,920,895 shares of common stock, respectively, warrants for
3,120,314, 2,793,239, and 1,578,652 shares of common stock, respectively, and
convertible debt and notes payable convertible into 0, 87,158, and 668,969
shares of common stock, respectively, were not included in the computation of
diluted net loss per share since their inclusion would be antidilutive.

OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive loss consists of net loss and foreign currency translation
adjustments which is presented in the Statement of Stockholders' Equity.

ACCOUNTING FOR STOCK BASED COMPENSATION

Cubist accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts and with fixed exercise prices at least equal to the fair
market value of common stock at the date of grant. Cubist applies the provisions
of Statement of Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," through disclosure only (Note L). All stock-based
awards to non-employees are accounted for at their fair value in accordance with
SFAS No. 123.

-49-

FOREIGN CURRENCY

Prior to October 1, 2000 the functional currency of Cubist's subsidiaries,
which are located in Canada and United Kingdom, was the Canadian dollar. The
remeasurement of the foreign currency balances into the Canadian dollar
functional currency was performed as follows, according to the remeasurement
method:

- Monetary items are remeasured at the rate of exchange in effect at the
balance sheet date;

- Non-monetary items are remeasured at historical exchange rates; and

- Revenue and expense items are remeasured at the average exchange rate
prevailing in the period.

The translation of the Canadian functional currency financial statements
into the United States dollar was performed as follows:

- Assets and liabilities were translated at period end exchange rates; and

- Revenues and expenses were translated using the average rates prevailing
in the period.

The resulting effects of foreign currency translation adjustments have
been accumulated and are included as other comprehensive income in the statement
of stockholders' equity.

Effective October 1, 2000 the functional currency for all of Cubist's
subsidiaries was changed to the United States dollar. Accordingly, the
remeasurement method is used to convert the foreign currency balances from the
local currency into the United States dollar.

Foreign exchange gains (losses) of ($1,080), $196,584 and $570,022 in the
years ended December 31, 1998, 1999 and 2000 are included in the other income
(expense) for the period.

DEEMED DEBT DISCOUNTS

As applicable, the consideration received on debt instruments issued is
allocated between the debt, the fair value of detachable warrants issued with
the debt and the intrinsic value of beneficial (in-the-money) conversion
options. Debt is disclosed net of deemed discounts. Discounts attributable to
detachable warrants are amortized to interest expense over the term of the debt.
Discounts attributable to a beneficial conversion option are amortized over the
period to the initial conversion date. Amortization is calculated by the
effective interest method.

RECENT ACCOUNTING PRONOUNCEMENT

In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS") "Accounting for Derivative
Instruments and Hedging Activities", which was amended by SFAS No. 137 and is
effective for fiscal years beginning after June 15, 2000. The statement
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 also requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Adoption of this standard is not
expected to have a material impact on the financial position or results of
operations of Cubist.

C. BUSINESS COMBINATIONS

TERRAGEN DISCOVERY INC.

On October 23, 2000, Cubist indirectly through its subsidiary C&T
Acquisition Corporation acquired all of the issued and outstanding common and
preferred shares of TerraGen, and assumed all of the outstanding options,
warrants and convertible debentures of TerraGen, by issuing 334,933 shares of
Cubist common stock and causing C&T Acquisition Corporation to issue 178,491
exchangeable shares. Each common share of TerraGen was exchanged, at the
election of the holder, for either 0.021323 exchangeable shares or 0.021323
shares of Cubist common stock and each preferred share was exchanged, at the
election of the

-50-

holder, for either 0.030386 exchangeable shares or 0.030386 shares of Cubist
common stock. The exchangeable shares are exchangeable at any time at the option
of the holder, on a one-for-one basis, for shares of Cubist common stock. All
exchangeable shares that remain outstanding will be automatically exchanged for
Cubist common stock on October 23, 2002. The options, warrants and convertible
debentures of TerraGen assumed by Cubist pursuant to the acquisition are
exercisable for 94,605 shares of Cubist common stock. This acquisition had been
accounted for using the pooling-of-interests method of accounting. The balances
as at December 31, 1999 and the results for the years ended December 31, 1998
and 1999 have been restated to include the balances and results of C&T
Acquisition Corporation and TerraGen and its subsidiaries. The financial results
for the year ended December 31, 2000 include the results of the previously
separate businesses for the nine months ended September 30, 2000 prior to the
consummation of the transaction. Revenue and net loss from the previously
separate operations of Cubist and TerraGen were revenues of $2,496,247 and
$1,760,573 and net loss of $23,171,029 and $3,737,752, respectively in the nine
months ended September 30, 2000, which are included in these consolidated
financial statements. Results on a stand-alone basis were as follows:

YEAR ENDED COMBINED
DECEMBER 31, 1998 CUBIST TERRAGEN RESTATED
- ------------------------- ----------------- ------------------- --------------------

Revenue $1,634,199 $39,953 $1,674,152
Operating loss (12,350,323) (2,783,911) (15,134,234)
Net loss (11,825,006) (2,564,590) (14,389,596)
Net loss per share (0.97) (15.03) (1.16)

YEAR ENDED COMBINED
DECEMBER 31, 1999 CUBIST TERRAGEN RESTATED
- ------------------------- ----------------- ------------------- --------------------

Revenue $5,353,379 $1,493,005 $6,846,384
Operating loss (18,295,676) (6,793,875) (25,089,551)
Net loss (17,813,510) (6,308,351) (24,121,861)
Net loss per share (0.99) (15.21) (1.31)

There were no intercompany transactions between the two companies prior to
consummation of the transaction.

CHROMAXOME CORPORATION

On March 17, 1999 Cubist's Canadian subsidiary purchased substantially
all of the assets of ChromaXome Corporation under an asset purchase agreement
dated March 12, 1999, among Cubist, Trega Biosciences and ChromaXome
Corporation ("ChromaXome"). The consideration paid, excluding acquisition
costs, for the assets acquired consisted of approximately $2 million in cash,
notes payable of approximately $3 million and 18,231 shares of common stock
having an estimated fair value of $673,405. The notes payable bore interest
at a rate of 9.5% and were repaid prior to December 31, 2000.

XENOVA DISCOVERY

On April 8, 1999 Cubist's Canadian subsidiary purchased substantially
all of the assets of Xenova Discovery Ltd. under an asset purchase agreement
dated April 8, 1999, among Cubist, Xenova Group PLC ("Xenova Group") and
Xenova Discovery Ltd. ("Xenova"). The consideration paid, excluding
acquisition costs, for the assets acquired consisted of $402,250 in cash,
notes payable of $3,619,663 and 30,386 shares of common stock having an
estimated fair value of $1,140,761. One note payable of $1,375,715 was due
and repaid as of December 31,1999. The second note payable bears interest at
a rate of LIBOR plus 1% (6.375% at December 31, 2000). The note payable is
due April 8, 2002 and is repayable at any time by Cubist and may be converted
into 58,282 shares of common stock at any time after 24 months from the date
of closing, at the option of either Xenova Group or Cubist. The interest on
the second note payable is being repaid quarterly, and at December 31, 2000
the balance outstanding was $2,243,948.

The acquisitions of ChromaXome and Xenova have been accounted for by the
purchase method with results of operations of the acquired entities included in
the financial statements of Cubist from the dates of acquisition.

-51-

CHROMAXOME XENOVA TOTAL
--------------- --------------- ---------------

Capital assets $22,806 $1,060,414 $1,083,220
Intangible assets 5,574,326 4,380,939 9,955,265
In-process research and development 407,310 344,994 752,304
Liabilities assumed (2,511) (278,567) (281,078)
----------- ------------ ------------
Net assets acquired 6,001,931 5,507,780 11,509,711

Consideration:
Notes payable (3,013,094) (3,619,663) (6,632,757)
Shares issued (673,405) (1,140,761) (1,814,166)
------------ ------------ ------------
Cash (including acquisition costs) $2,315,432 $747,356 $3,062,788
============ ============ ===========

Acquired in-process research and development materially represents acquired
tangible assets having no alternative future use outside of specified research
and development activities.

The following table reflects, on an unaudited pro forma basis, the combined
results of Cubist's operations acquired for the years ended December 31, 1998
and 1999 as if all such acquisitions had taken place immediately prior to the
beginning of the respective years presented. Appropriate adjustments have been
made to reflect the accounting basis used in recording these acquisitions. No
adjustments have been recorded for nonrecurring charges arising on the
acquisitions. This pro forma information does not purport to be indicative of
the results of operations that would have resulted had the acquisitions been in
effect for the entire years presented, and is not intended to be a projection of
future results or trends.

1998 1999
TOTAL TOTAL
----- -----

Revenues $ 1,674,152 $ 6,846,384
Net loss $21,153,557 $25,851,246
Net loss per share $ (1.70) $ (1.40)

D. INVESTMENTS

At December 31, 1999 and 2000, all investments were classified as
held-to-maturity and carried at amortized cost. Investments consisted of the
following:

1999 2000
---- ----

Short-term:
Commercial Paper $ 7,855,515 $ 5,444,093
Corporate Bonds 6,725,000 69,163,590
----------- -----------
$14,580,515 $74,607,683
=========== ===========
Long-Term:
Corporate Bonds -- $18,234,857
----------- -----------
$ -- $18,234,857
=========== ===========

At December 31, 2000, maturities of all investments classified as
long-term were due after one year through two years.

The carrying amounts and estimated fair values of our investments at
December 31, 1999 and 2000 were as follows:

1999 2000
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE

Cash and cash equivalents $12,248,607 $12,248,607 $46,940,277 $46,995,641
Short-term investments 14,580,515 14,586,000 74,607,683 75,031,075
Long-term investments -- -- 18,234,857 18,324,806

Fair values of all marketable securities are based upon quoted market
prices.

-52-

E. PROPERTY AND EQUIPMENT

At December 31, property and equipment consisted of:

1999 2000
---- ----

Building................................. $ -- $34,000,000
Leasehold improvements................... 2,816,007 3,951,361
Laboratory equipment..................... 5,740,898 7,143,333
Furniture and fixtures................... 575,520 692,104
Computer equipment....................... 941,325 1,319,088
----------- -----------
10,073,750 47,105,886
Less accumulated depreciation
and amortization....................... (5,553,699) (6,963,806)
----------- -----------
Property and equipment, net.............. $4,520,051 $40,142,080
=========== ===========

Depreciation and amortization expense was $1,292,050, $1,518,511, and
$1,634,512 in 1998, 1999 and 2000, respectively.

On September 8, 2000, Cubist purchased for $34 million, a new corporate
headquarters building in Lexington, Massachusetts. In connection with this
purchase, Cubist issued $39 million of senior convertible notes (see Note N).
Cubist expects to occupy the new facility during the third quarter of 2001.
Accordingly, no depreciation expense has been recorded in 2000.

F. INTANGIBLE ASSETS

At December 31, intangible assets consisted of:

1999 2000
---- ----

Patents...................................... $4,917,196 $5,192,577
Intellectual property and processes.......... 5,038,240 4,748,769
Workforce.................................... 637,559 630,628
----------- -----------
$10,592,995 $10,571,974
Less accumulated amortization................ (1,397,842) (3,291,912)
----------- -----------
Intangible assets, net....................... $9,195,153 $7,280,062
=========== ===========

Amortization expense was $3,340, $1,393,193, and $1,928,476 in 1998, 1999
and 2000, respectively.

G. ACCRUED EXPENSES

At December 31, accrued expenses consisted of:

1999 2000
---- ----

Payroll and benefits..................... $559,181 $908,585
Drug development......................... 525,128 4,394,082
Interest................................. 240,997 1,031,333
Other.................................... 453,547 1,090,576
---------- -----------
Total accrued expenses................... $1,778,853 $7,424,576
========== ==========

-53-

H. COLLABORATIVE RESEARCH AGREEMENTS

In June 1996, Cubist entered into a collaborative research agreement with
Bristol-Myers Squibb Company ("Bristol-Myers Squibb"). Under the terms of the
agreement, Bristol-Myers Squibb purchased from Cubist $4,000,000 of Cubist's
preferred stock upon execution of the agreement, which was subsequently
converted to common stock and agreed to make payments to Cubist upon the
achievement of certain milestones. In addition, Bristol-Myers Squibb reimbursed
Cubist a fixed amount for research and development expenses relating to the
production of certain targets and also for expenses relating to the screening of
Bristol-Myers Squibb compounds against Cubist's targets over three years. Cubist
recorded revenue of $1,500,000 and $500,000 in 1998 and 1999, respectively, for
certain research and development revenues and milestone payments in accordance
with the agreement. Bristol-Myers Squibb's exclusive research period ended in
January 2000 and reimbursements of Cubist's research and development costs
ceased.

In June 1996, Cubist entered into a collaborative research agreement
with Merck & Co., Inc. ("Merck"). Under the terms of the agreement, Merck
paid Cubist a technology licensing fee upon execution and will pay certain
milestone payments if earned. In addition, Merck reimbursed Cubist for
research and development expenses relating to the production of certain
targets, for expenses relating to the screening of Merck compounds against
Cubist's targets, and for expenses relating to compound optimization through
August 1999. Cubist recorded revenue of $106,667 and $2,500,000 in 1998 and
1999, respectively, for certain research and development revenues and
milestone payments, in accordance with the agreement.

In September 1998, Cubist's Canadian subsidiary entered into a research
and collaboration agreement with Schering-Plough Research Institute to access
Cubist's recombinant library to discover novel leads with potential activity
in the anti-infective area. As part of the agreement, Cubist would provide
library screening services to Schering-Plough for those strains provided. In
exchange for these services, Schering-Plough is making research payments to
Cubist. Schering-Plough was granted an exclusive, worldwide license to use
any recombinant microorganism that produces a lead and an exclusive,
worldwide license to all of its rights and ownership in any resulting
patents. Cubist recorded revenue of $394,000 and $397,000 in 1999 and 2000,
respectively, for certain research and development revenues in accordance
with the agreement.

In May 1999, Cubist's Canadian subsidiary entered into a second
collaboration agreement with Schering-Plough under which Schering-Plough was
granted an exclusive, worldwide license to manufacture and sell compounds
resulting from screening Cubist's natural product library. In exchange for
the license, Schering-Plough is making research payments and, if scientific
and development milestones are achieved, Schering-Plough will make milestone
payments to us. In addition, Schering-Plough will be required to pay
royalties to Cubist on worldwide sales of any drug developed and
commercialized from any products derived from this collaboration. Cubist
recorded revenue of $217,000 and $731,000 in 1999 and 2000, respectively, for
certain research and development revenues, in accordance with the agreement.

On February 3, 1999, Cubist entered into a research and license agreement
with Novartis Pharma AG to use Cubist's proprietary VITA functional genomics
technology to validate and develop assays for antiinfective targets and to
identify new compounds for development as antiinfective agents. In exchange for
the license, Novartis will fund a research program for a period of three years.
Further, if certain scientific and development milestones are achieved, Novartis
will make milestone payments. In addition, Novartis will be required to pay
royalties to Cubist on worldwide sales of any drug developed and commercialized
from any products derived from this collaboration. Cubist recorded revenue of
$2,041,875 and $2,750,000 in 1999 and 2000, respectively, for certain research
and development revenues and milestone payments in accordance with the
agreement. Upon the signing of the research and license agreement, Novartis
purchased, and Cubist issued to Novartis, 797,448 shares of Common Stock for a
total purchase price of $4.0 million in cash.

On November 6, 2000, Cubist and Emisphere Technologies, entered into a
research agreement to develop an oral formulation of daptomycin. Under the terms
of the agreement, Cubist will pay a license fee of $500,000 upon execution of a
license agreement and could pay milestone payments totaling $30 million should a
product be successfully commercialized. In addition, Cubist will fund
Emisphere's research and development efforts at a rate of $250,000 per full-time
equivalent per year. Cubist would also pay a royalty on sales of any product
resulting from the collaboration and would be responsible for drug development
and would receive exclusive worldwide commercialization rights to any oral
products.

Cubist was a party to various other collaborative research agreements that
resulted in revenues of $40,000, $882,000 and $897,000 for the years ended
December 31, 1998, 1999 and 2000, respectively. At December 31, 2000,
accounts receivable of $363,412 is due under one of Cubist's collaborative
research agreements. This amount is due from an entity that owns common stock
and holds a note payable issued by Cubist.

-54-

I. LICENSE AGREEMENT

On November 7, 1997, Cubist entered into a license agreement with Eli Lilly
and Company ("Eli Lilly") which was amended on October 6, 2000, pursuant to
which Cubist acquired exclusive worldwide rights to develop, manufacture and
market daptomycin. In exchange for such license, Cubist paid an upfront license
fee in cash and, if certain drug development milestones are achieved, has agreed
to pay milestone payments by issuing shares of common stock to Eli Lilly. In
addition, Cubist will be required to pay royalties to Eli Lilly on worldwide
sales of daptomycin. On February 19, 1999 Cubist issued 56,948 shares of common
stock as a milestone payment pursuant to, and in accordance with, the terms of
the agreement. The value of the common stock was $250,000 and was recorded as
research and development expense.

Cubist's Canadian subsidiary and Diversa Corporation entered into a
cross-license ("Cross-license Agreement") dated November 18, 1999, pursuant
to which Cubist granted a co-exclusive world-wide non-royalty bearing license
to certain patented technology of Cubist, subject to certain restrictions.
Under the Cross-license Agreement, Diversa paid an upfront license fee of
$2,500,000 and will pay annual license maintenance fees, until the patents
expire. Cubist is required to repay the upfront license fee if it were to
merge or be acquired prior to November 18, 2004 by a company whose primary
business is DNA shuffling. No upfront license issue fee revenue was
recognized in 1999 and 2000. Revenue of $100,000 was recognized in 2000
related to the annual license maintenance fee.

On November 22, 2000, Cubist and International Health Management
Associates, Inc. ("IHMA") signed a license agreement to utilize IHMA's
expertise and experience in "bridge" oral drug delivery technologies to
research, develop and commercialize oral forms of ceftriaxone. In exchange
for such license, Cubist paid an undisclosed upfront license fee which was
recorded as research and development expense in 2000, and if certain drug
development milestones are achieved, Cubist will pay milestone payments.
Cubist will also be required to pay royalties to IHMA on worldwide sales of
any oral formulation of ceftriaxone.

J. FINANCINGS

On May 1, 1997, Cubist's Canadian subsidiary completed a private
placement financing with investors and raised net proceeds of $3.5 million
(less financing costs of $41,664) by issuing 88,848 shares of common stock,
along with 44,424 warrants exercisable for common stock at $56.28 Cdn per
share. On October 8, 1998 there was a second closing of this private
placement financing resulting in Cubist raising an additional $3.2 million by
issuing 88,848 shares of Cubist common stock, along with 44,424 warrants
exercisable for Cubist common stock at $56.28 Cdn per share. These warrants
were exercisable immediately and expire on May 1, 2001. In connection with
the pooling-of-interests transaction consummated on October 23, 2000 between
Cubist and TerraGen, the exercise price for all warrants outstanding as of
that date was set at a United States dollar equivalent of $37.25 per share.

In December 1998, the stockholders of Cubist's Canadian subsidiary
authorized the exchange of all the then outstanding warrants to purchase
common stock issued in connection with the May 1997 and October 1998 private
placement financing for common stock on a 3 for 1 basis, for no additional
consideration. Under these terms, 87,936 warrants were exchanged for 29,312
shares of common stock on December 31, 1998.

On September 23, 1998, Cubist completed a private placement financing with
investors and raised approximately $13.6 million (less financing costs of
approximately $901,000) by issuing 6,065,560 shares of common stock at $2.25 per
share, along with 3,032,783 warrants exercisable for common stock at $2.25 per
share. The warrants are exercisable at any time until September 23, 2003. The
values of the warrants and common stock in excess of par value have been
reflected in additional paid-in-capital.

On March 15, 1999, Cubist's Canadian subsidiary completed a private
placement financing with investors and raised net proceeds of $5.2 million,
(less financing costs of $9,200,) by issuing 142,157 shares of common stock.

On October 21, 1999, Cubist completed a private placement financing with
investors and raised approximately $18.8 million (less financing costs of
$1,328,892) by issuing 2,503,333 shares of common stock at $7.50 per share.

On January 29, 2000, Cubist completed a private placement financing with
investors and raised approximately $55.0 million (less estimated financing costs
of $3,039,000) by issuing 2,200,000 shares of common stock at $25.00 per share.

-55-

On April 3, 2000, Cubist completed a secondary public offering and raised
approximately $82.5 million (less financing costs of $4,957,275) by issuing
2,500,000 shares of common stock at $33.00 per share. In addition, on May 3,
2000, the underwriters exercised their option to purchase an additional 375,000
shares of common stock at $33.00 per share to cover over-allotments, raising an
additional $12.4 million (less financing costs of $680,625).

K. STOCKHOLDERS' EQUITY

WARRANTS

In February 1999, Cubist issued to Bridge Technology Group a warrant
exercisable for 25,000 shares common stock at $4.31 per share. The value of
the warrant was determined using the Black-Scholes option-pricing model.
Cubist recorded general and administrative expense of $70,680 and $6,427 in
1999 and 2000, respectively. The warrant was exercised during the year ended
December 31, 2000.

NOTES RECEIVABLE FROM RELATED PARTIES

Cubist accepted a promissory note from the Chief Executive Officer in
consideration for the preferred stock issued to him in 1997. The note fell
due in equal quarterly installments of $10,000 commencing on March 31, 1998.
On October 14, 1999 the principal amount of this note was paid in full.

In September 1999, Cubist accepted a promissory note from a Senior Vice
President in consideration for 50,000 shares of restricted common stock issued
to him. The aggregate principal amount of this note at December 31, 2000 is
$337,500 and is reflected in stockholders' equity as a reduction to
paid-in-capital. This note has an annual interest rate of 4% and is due on
September 25, 2002. The note is being forgiven in three equal annual
installments of $168,750, contingent upon the Senior Vice President's continued
employment, until September 2002.

On September 18, 2000, Cubist accepted a promissory note of $250,000 from
the Chief Executive Officer. This note has an annual interest rate of 6.15% and
is due on March 31, 2002. In the event the note is repaid prior to December 31,
2001, no interest will be charged.

L. STOCK OPTIONS

Under the Cubist 1993 Amended and Restated Stock Option Plan, options to
purchase 5,085,181 shares of common stock may be granted to employees,
directors, officers or consultants. The options are generally granted at fair
market value on the date of the grant, vest ratably over a four-year period and
expire ten years from the date of grant. At December 31, 2000, there were
1,156,641 shares available for future grant.

Under the Cubist 2000 Nonstatutory Stock Option Plan, options to purchase
1,000,000 shares of common stock may be granted to employees, directors,
officers or consultants. The options are generally granted at fair market value
on the date of the grant, vest ratably over a four-year period and expire ten
years from the date of grant. At December 31, 2000, there were 1,000,000 shares
available for future grant.

Under the TerraGen Discovery Inc. Employee Stock Option Plan, incentive and
non-qualified stock options may be granted to United Kingdom and Canadian
employees, directors and consultants. Options typically vest ratably over a
maximum four-year period and expire ten years from the date of grant. In
connection with the acquisition by Cubist, Cubist assumed the TerraGen plan and
all of the TerraGen options were converted at the acquisition exchange ratio of
0.021323 per share of common stock into options to acquire common stock of
Cubist. The assumed options are exercisable upon the same terms and conditions
as provided in the TerraGen plan except that the assumed options are exercisable
for shares of Cubist common stock upon payment of the revised exercise price in
United States dollars.

Had compensation costs for Cubist's stock-based compensation plan been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, Cubist's net loss and loss per share for the years
ended December 31, 1998, 1999 and 2000 would have been increased to the pro
forma amounts indicated below:

-56-

1998 1999 2000
---- ---- ----
NET LOSS BASIC AND NET LOSS BASIC AND NET LOSS BASIC AND
-------- ---------- -------- ---------- -------- ---------
DILUTED LOSS DILUTED LOSS DILUTED LOSS
------------ ------------ ------------
PER SHARE PER SHARE PER SHARE
--------- --------- ---------

As Reported....... $(14,389,596) $(1.16) $(24,121,861) $(1.31) $(44,300,576) $(1.68)
Pro forma......... $(15,656,293) $(1.26) $(26,713,559) $(1.45) $(59,918,426) $(2.27)

The fair value of each stock option was estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for fiscal 1998:

CUBIST TERRAGEN
------ --------

Expected stock price volatility 97% 113%
Risk free interest rate 4.7% 5.01%
Expected annual dividend yield per share 0% 0%
Expected life of options 4 years 3.65 years

The following weighted-average assumptions were used for fiscal 1999:

CUBIST TERRAGEN
------ --------

Expected stock price volatility 74% 102%
Risk free interest rate 5.3% 5.10%
Expected annual dividend yield per share 0% 0%
Expected life of options 7 years 3.82 years

The following weighted-average assumptions were used for fiscal 2000:

CUBIST AND TERRAGEN
-------------------

Expected stock price volatility 87%
Risk free interest rate 6.2%
Expected annual dividend yield per share 0%
Expected life of options 7 years

The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are anticipated.

A summary of the status of Cubist's stock option plan as of December 31,
1998, 1999 and 2000, and changes during each of the years then ended, is
presented below:

1998 1999 2000
---- ---- ----
WAEP* WAEP* WAEP*
NUMBER PER SHARE NUMBER PER SHARE NUMBER PER SHARE
------ --------- ------ --------- ------ ---------

Balance at January 1................ 809,910 $4.98 1,535,810 $4.01 2,006,829 $5.11
Granted............................. 1,010,484 4.10 887,866 6.57 1,316,403 36.09
Exercised........................... (3,642) (1.23) (140,420) (2.94) (347,731) (3.94)
Canceled............................ (280,942) (7.20) (276,427) (3.97) (54,606) (29.57)
---------- ------ --------- ------ ---------- -------
Balance at December 31.............. 1,535,810 $4.01 2,006,829 $5.11 2,920,895 $18.75
========= ========= ===== ========= ======
Weighted average grant-date fair
value of options granted during
the year:
Exercise price greater than
grant date stock fair value... $20.18 $22.66 --
Exercise price equals grant date
stock fair value.............. $2.42 $3.72 $26.70
Exercise price less than grant
date stock fair value......... -- $7.94 $30.64

* Weighted-average exercise price

-57-

The following table summarizes information about stock options outstanding
at December 31, 2000:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------

$.007--$1.96......... 157,736 5.2 years $1.80 157,736 $ 1.80
$2.25--$5.00......... 908,678 8.0 years 3.21 327,314 3.04
$5.25--$7.00......... 310,337 6.9 years 5.80 201,334 5.87
$8.00--$11.625....... 641,244 8.9 years 11.10 142,423 10.83
$30.00--$63.375...... 902,900 9.3 years 47.40 100,557 52.80
------- --------- ------ -------- ------
2,920,895 8.3 years $18.75 929,364 $10.02
========= ========= ====== ======== ======

Cubist records deferred compensation for stock options issued with
exercise prices below the fair value of common stock as of the measurement
date. Deferred compensation is amortized and recorded as compensation expense
ratably over the vesting period of the stock options. Compensation expense of
$0, $43,945, and $697,966 was recognized in 1998, 1999 and 2000, respectively.

M. COMMITMENTS AND CONTINGENCIES

Cubist leases its facilities under operating lease agreements, which
extend through 2010. Certain of these leases contain renewal options and
provisions that adjust the base payment based upon changes in the consumer
price index and require Cubist to pay operating costs, including property
taxes, insurance and maintenance. In 1993, Cubist provided a security deposit
of $100,000 upon execution of a lease. The security deposit bears interest in
a segregated account, and was partially refunded ($79,000 plus interest) on
the fifth anniversary, and is fully refundable plus interest within thirty
days after the expiration of the lease, provided no event of default has
occurred. In 1995, Cubist entered into an agreement with the landlord under
which the landlord provided financing of $345,500 to Cubist for expansion of
the facility, which was payable in equal monthly installments of $7,685 over
five years with an annual interest rate of 12% through February 2000. No
additional security deposit was required. At December 31, 2000, there was no
outstanding principal balance.

Cubist leases certain equipment under long-term capital leases. The
cost of this equipment included in fixed assets was approximately $2,395,481 and
$1,795,888, with associated accumulated depreciation of approximately $1,335,134
and $1,288,754, at December 31, 1999 and 2000, respectively. Cubist intends to
purchase all of the leased equipment at a price to be negotiated at lease end.
Future lease payments for non-cancelable leases for the respective years ended
December 31 are as follows:

OPERATING LEASES CAPITAL LEASES
---------------- --------------

2001................................................... 1,364,085 696,400
2002................................................... 1,144,774 340,157
2003................................................... 1,025,382 --
2004................................................... 562,500 --
2005 and thereafter.................................... 3,525,000 --
--------- ------
Total minimum lease payments.................... $7,621,741 $1,036,557
---------- ----------
Less amount representing interest payments...... (102,704)
----------
Present value of minimum lease payments......... 933,853
Less current portion............................ (615,880)
----------
Long-term obligation............................ $ 317,973
==========

Lease payments under operating leases were $459,481, $763,503 and $906,889
in 1998, 1999 and 2000, respectively are approximately $20 million.

-58-

Cubist is party to various agreements, including those related to clinical
trial management, for which noncancelable minimum future payments due during
the year ended December 31, 2001 are approximately $20 million.

N. LONG TERM DEBT

1999 2000
---- ----

Note payable issued in conjunction with the acquisition of ChromaXome (Note C)... $1,000,000 $ --
Note payable issued in conjunction with the acquisition of Xenova (Note C)....... 2,400,440 2,243,948
Convertible debentures, net of deemed discount................................... 886,884 --
Term loan agreement ............................................................. 1,139,578 2,643,642
Notes payable to MM Venture Finance Partnership.................................. -- 1,062,079
Senior convertible notes......................................................... -- 39,000,000
Other............................................................................ 15,193 --
----------- -----------
5,442,095 44,949,669
Less current portion...................................................... (2,490,231) (1,692,340)
----------- -----------
Long-term obligation...................................................... $2,951,864 $43,257,329
---------- -----------

During March 1999, Cubist entered into a term loan agreement with a bank
under which Cubist is able to borrow up to $1,500,000 to finance fixed asset
purchases. In March 2000, Cubist increased its term loan by an additional
$2,000,000 to finance leasehold improvements and fixed asset purchases.
Advances under this facility are to be repaid over a 36-month period,
commencing on March 31, 2000. Interest on the borrowings is at the bank's
LIBOR rate (9.03% at December 31, 2000). Borrowings under the facility are
collateralized by all capital equipment purchased with the funds under this
term loan. At December 31, 2000, there were no amounts available for
borrowing under the term loan agreement.

On November 16, 1999, Cubist's Canadian subsidiary issued convertible
debentures of $1,625,000 Cdn. The convertible debentures bear interest at a
rate of 12% collateralized by all present and after-acquired property of the
former TerraGen Discovery Inc. The convertible debentures were convertible
into common stock at the option of the holder at $37.25 per share. On March
31, 2000, Cubist issued 30,176 shares of common stock upon conversion of the
convertible debentures principal and related interest. In connection with the
issuance of the convertible debentures, Cubist issued warrants to purchase
49,377 shares of common stock at $37.25 per share. The warrants became
exercisable on December 31, 1999 and expire November 16, 2004.

The estimated value of the detachable warrants of $323,000 was recorded as
a discount on the convertible debentures and was amortized to interest expense
over the term of the debt using the effective interest method. Interest expense
of $108,000 and $215,000 was recorded in 1999 and 2000, respectively.

The convertible debenture has a beneficial conversion feature valued at
$264,300, equal to the aggregate excess market value of the underlying common
stock at the agreement date over the conversion rate. The beneficial conversion
feature was recorded as additional paid-in capital and recognized on issuance as
interest expense, as the debenture was immediately convertible to common stock.

On January 17, 2000, Cubist's Canadian subsidiary issued notes payable
to MM Venture Finance Partnership ("MM") totaling $2,000,667. The notes
payable bear interest at 14.4% and is being repaid over 36 months through
January 17, 2003. The assets of the former TerraGen Discovery Inc.,
including its patents, were pledged as collateral for the loan. In addition,
MM received and later exercised warrants to purchase 22,790 shares of common
stock for gross proceeds of $606,665. The estimated value of the detachable
warrants of $658,606 was recorded as a discount on the notes payable and is
being amortized to interest expense over the term of the note payable using
the effective interest method. Interest expense of $138,400 was recorded in
2000.

On September 8, 2000, Cubist issued $39,000,000 of senior convertible
notes to John Hancock Life Insurance company to finance the purchase of a new
corporate headquarters building in Lexington, Massachusetts, which serves as
the collateral for senior convertible notes. The senior convertible notes are
convertible, at the option of the holder, into common stock at a price equal
to $63.8625 per share. The senior convertible notes bear interest at a rate
of 8.5% per year and Cubist is required to make semi-annual interest payments
on the outstanding principal balance. The senior convertible notes are
redeemable by Cubist at any time on or after September 8, 2003 at 103% of the
principal amount outstanding as of the redemption date. In the event of a
change in control, as defined in senior convertible note agreements, the
holders could require Cubist to repurchase senior convertible notes at 100%
of the outstanding principal and interest. The deferred costs associated with
the sale of the senior convertible notes were $1,324,605 of which $81,029 was
amortized to interest expense in 2000.

-59-

At December 31, 2000, payments of principal and interest on existing debt
were due as follows:

Fiscal year ending December 31,
2001...................................... $ 5,100,848
2002...................................... 7,746,637
2003...................................... 4,158,938
2004...................................... 3,315,000
2005...................................... 41,486,250
----------
Total payments............................ 61,807,673
Less amounts representing interest........ (16,858,004)
------------
Total debt................................ $44,949,669
Less current portion...................... (1,692,340)
-----------
$43,257,329
===========

O. EMPLOYEE BENEFITS

Cubist maintains a 401(k) savings plan in which substantially all of its
permanent employees in the United States are eligible to participate.
Participants may contribute up to 15% of their annual compensation to the plan,
subject to certain limitations. Cubist contributes a matching amount in cash of
up to 1.5% of a participant's total compensation or $500 annually, whichever is
less, or a match in common stock up to 4.5% of a participant's total
compensation or 75% of a participant's total contribution annually, whichever is
less. Matches distributed in common stock have immediate vesting. Cubist
contributed $6,160, $5,853 and $5,227 during 1998, 1999 and 2000, respectively.
Cubist issued 28,420 and 14,939 shares of common stock in 1999 and 2000,
respectively, pursuant to this plan. No shares were issued prior to 1999.

Cubist maintains a Group Registered Retirement Savings Plan ("RRSP"),
independent to each employee, through a nationally recognized funds manager.
Substantially all of the permanent employees in Canada are eligible to
participate. Participants may contribute up to 18% of their previous years
earned income, subject to certain limitations. Cubist will make a matching
contribution of up to 3% of an employee's salary. Cubist's Canadian
subsidiary contributed $27,639, $33,704 and $23,657 during 1998, 1999 and
2000, respectively.

Cubist maintains a Contracted In Money Purchase Scheme for all employees
in the United Kingdom. Participants many contribute up to 10% of their annual
compensation to the scheme. Cubist matches contributions at a level up to 10%
of an employee's salary. Cubist's United Kingdom subsidiary contributed $0,
$42,083 and $50,229 during 1998, 1999 and 2000, respectively.

Cubist instituted an employee stock purchase plan in 1998, in which
substantially all of its permanent employees are eligible to participate.
Participants may contribute up to 15% of their annual compensation to the plan,
subject to certain limitations. The plan allows participants to purchase Cubist
common stock, after a pre-determined six-month period, through payroll
deductions at a price 15% less than the lower of the closing price for the
beginning or ending date of the purchase period. The plan allows for the
issuance of 250,000 shares of common stock to eligible employees. During 1998,
1999 and 2000, Cubist issued 6,341, 11,615 and 12,827 shares of common stock,
respectively, pursuant to this plan.

P. INCOME TAXES

Net income/(loss) before income taxes for domestic and foreign operations
is as follows:

YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
---- ---- ----

Domestic...................... $(11,825,006) $(17,813,510) $(38,938,164)
Foreign....................... (2,740,087) (7,233,944) (5,861,106)
-------------- -------------- --------------
$(14,565,093) $(25,047,454) $(44,799,270)
============== ============== ==============

Based on Cubist's current financial status, realization of Cubist's
deferred tax assets does not meet the "more likely than not" criteria under SFAS
No. 109 and, accordingly, a valuation allowance for the entire deferred tax
asset amount has been recorded. The components of the net deferred tax asset and
the related valuation allowance are as follows:

-60-

1999 2000
---- ----

Deferred income tax assets:
Net operating loss carryforwards........... $ 18,654,488 $ 39,231,437
Research and development costs............. 3,754,689 3,414,689
Tax credit carryforwards................... 2,786,000 3,657,017
Deferred revenues.......................... 997,630 997,630
Other, net................................. 1,041,085 963,905
----------- ----------
Total deferred tax assets.................. 27,233,892 48,264,678
Valuation allowance........................ (27,233,892) (48,264,678)
------------ ------------
Net deferred tax assets.................... $ --- $ ---
============ ============

The following is a reconciliation between the United States federal statutory
rate and the effective tax rate:

1998 1999 2000
---- ---- ----

Federal statutory rate (34.0%) (34.0%) (34.0%)
State taxes (5.1%) (4.5%) (5.4%)
Foreign rate differential 0.8% 1.2% 0.5%
Investment tax credit (1.2%) (3.7%) (1.1%)
Valuation allowance 38.3% 37.3% 38.9%
----- ----- -----
Effective tax rate (1.2%) (3.7%) (1.1%)
===== ===== =====

At December 31, 2000, Cubist has U.S. federal net operating loss
carryforwards of approximately $90.8 million, which begin to expire in 2007,
state net operating loss carryforwards of $82.0 million, which begins to
expire in 2001, and $7.5 million of foreign net operating loss carryforwards
which begin to expire in 2004. Of the total net operating loss carryforwards
$6.2 million relates to the exercise of stock options. The tax benefit of
this amount will result in an increase in additional paid-in capital upon
realization of these losses. Cubist also has federal, state and foreign
credit carryforwards of $1,765,000, $1,546,000, and $170,000, respectively,
which begin to expire in 2006.

Ownership changes resulting from the issuance of capital stock may limit
the amount of net operating loss and tax credit carryforwards that can be
utilized annually to offset future taxable income. The amount of the annual
limitation is determined based on Cubist's value immediately prior to the
ownership change. Subsequent significant changes in ownership could further
affect the limitation in future years.

Q. VENDOR AGREEMENTS

In April 2000, Cubist entered into a development and supply agreement with
Abbott Laboratories (Abbott) pursuant to which Abbott has agreed to assist
Cubist in the development of daptomycin as a parenteral formulation and to
manufacture and sell exclusively to Cubist, daptomycin as a parenteral
formulation. Under the terms of this agreement, Cubist has agreed to make
certain milestone payments to Abbott for their development efforts and
assistance in obtaining an approved New Drug Application (NDA) for daptomycin.
Cubist has made payments in 2000 totaling $325,000 which were expensed as
research and development. If the FDA approves the daptomycin NDA, Cubist will
purchase minimum annual quantities of drug product from Abbott over a five year
period beginning in 2002.

In June 2000, Cubist entered into a services agreement with Gist-brocades
Holding A.G. (DSM), an affiliated company of DSM Capua pursuant to which DSM has
agreed to provide supervisory and advisory services to Cubist relating to the

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equipping of the manufacturing facility at DSM Capua. Cubist has also entered
into a manufacturing and supply agreement with DSM Capua pursuant to which
DSM Capua has agreed to manufacture and supply to Cubist bulk daptomycin drug
substance for commercial purposes. Under the terms of the manufacturing and
supply agreement, DSM Capua is required to prepare its manufacturing facility
in Italy to manufacture bulk daptomycin drug substance in accordance with
Good Manufacturing Practices standards. Under the terms of the service
agreements, Cubist will make a series of scheduled payments to DSM over a
five year period beginning in 2000 in order to reimburse DSM for certain
costs to be incurred by DSM Capua of approximately $7.5 million in connection
with the preparation, testing and validation of its manufacturing facility.
During 2000, Cubist reimbursed $750,000 of these costs to DSM Capua and
accrued an additional $846,000. These costs are being recorded as other
assets and will begin to be amortized upon completion of the facility and
commencement of manufacturing daptomycin for commercial purposes. In
addition, in consideration for the implementation of the Cubist technology in
the facility by DSM Capua, Cubist has agreed to make milestone payments of
$1,400,000 to DSM if specific phases of technical development of the scaled
up manufacturing process to be used in this manufacturing facility are
completed within specified periods of time. Cubist is accruing these
estimated milestone payments over the expected duration of the preparation
work and recorded research and development expense of $627,000 in 2000. Upon
completion of the preparation of DSM Capua's manufacturing facility and a
determination by the FDA that the manufacturing facility complies with Good
Manufacturing Practices standards, Cubist will purchase minimum annual
quantities of bulk daptomycin drug substance from DSM over a five-year period
beginning in 2002.

R. SEGMENT INFORMATION

Cubist operates in one business segment, the research, development and
commercialization of novel antimicrobial drugs.

The following summary discloses total revenues and long-lived assets:

DOMESTIC INTERNATIONAL CONSOLIDATED
-------- ------------- ------------

YEAR ENDED DECEMBER 31, 1998
Total revenue....................... $1,634,199 $39,953 $1,674,152
Long-lived assets.................. 3,894,005 385,598 4,279,603

YEAR ENDED DECEMBER 31, 1999
Total revenue....................... $5,353,379 $1,993,005 $6,846,384
Long-lived assets.................. 3,626,174 10,268,317 13,894,491

YEAR ENDED DECEMBER 31, 2000
Total revenue....................... $3,197,766 $2,025,243 $5,223,009
Long-lived assets.................. 42,019,412 8,694,443 50,713,855

S. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table contains Statement of Operations information for each
quarter of 1999 and 2000. Cubist believes that the following information
reflects all normal recurring adjustments necessary for a fair presentation of
the information for the period presented. The operating results for any quarter
are not necessarily indicative of results for any future period. The quarterly
financial information has been restated to reflect the acquisition of TerraGen
Discovery Inc., which was accounted for using the pooling-of-interests method of
accounting:

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------

2000
Total revenues....... $ 1,281 $ 1,662 $ 1,314 $ 966
Net loss............. $(8,867) $(8,733) $(9,308) $(17,392)

1999
Total revenues....... $ 623 $ 1,347 $ 3,366 $ 1,510
Net loss............. $(5,319) $(6,703) $(4,654) $(7,446)

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U. SUBSEQUENT EVENTS

On January 7, 2001, Cubist and Gilead Sciences, Inc. signed a licensing
agreement for the exclusive rights to commercialize Cubist's investigational
antibacterial drug Cidecin (daptomycin for injection) and an oral formulation of
daptomycin in 16 European countries following regulatory approval. Gilead has
agreed to pay Cubist an up-front licensing fee of $13 million, and Cubist is
entitled to receive additional cash payments of up to $31 million upon
achievement of certain clinical and regulatory milestones. Gilead will also pay
Cubist a fixed royalty on net sales. Cubist will continue to be responsible for
worldwide clinical development of Cidecin, while Gilead will be responsible for
any regulatory filings in the covered territories. Gilead's sales force will
market the products in Europe.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to Directors and compliance with Section 16(a) of
the Securities Exchange Act may be found in the sections captioned "PROPOSAL NO.
1 - ELECTION OF DIRECTORS", "EXECUTIVE COMPENSATION" and "SECTION 16(A)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on June 7, 2001. Such information is incorporated
herein by reference. Information with respect to Executive Officers may be found
under the section captioned "Our Executive Officers and Directors" in Part I of
this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required with respect to this item may be found in the
sections captioned "EXECUTIVE COMPENSATION" appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on June 7, 2001. Such information is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required with respect to this item may be found in the
section captioned "PRINCIPAL STOCKHOLDERS" and "PROPOSAL NO. 1 - ELECTION OF
DIRECTORS" appearing in the definitive Proxy Statement to be delivered to
Stockholders in connection with the Annual Meeting of Stockholders to be held on
June 7, 2001. Such information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Information required with respect to this item may be found in the
section captioned "CERTAIN TRANSACTIONS" appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on June 7, 2001. Such information is incorporated
herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) Documents Filed As Part Of Form 10-K

1. FINANCIAL STATEMENTS.

The following financial statements and supplementary data are included in
Part II Item 8 filed as part of this report:

o Report of Independent Accountants

o Balance Sheets as of December 31, 2000 and 1999

o Statements of Operations for the years ended December 31, 2000, 1999
and 1998

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o Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998

o Statements of Stockholders' Equity for the years ended December 31,
2000, 1999 and 1998

o Notes to Financial Statements

2. FINANCIAL STATEMENT SCHEDULE

None.

Schedules not listed above have been omitted because they are not
applicable, not required or the information required is shown in the financial
statements or the notes thereto.

3. LIST OF EXHIBITS

3.1 Restated Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 3 to Cubist's Quarterly Report on Form 10-Q
filed on August 12, 1999) (File no. 000-21379)

3.2 Amended and Restated By-Laws of the Registrant, as amended to date.
(Exhibit 3.4, Registration No. 333-6795)

4.1 Specimen certificate for shares of Common Stock (incorporated by
reference to Exhibit 3.4 to Cubist's Registration Statement on Form
S-1) (Registration No. 333-6795)

4.2 Rights Agreement dated as of July 21, 1999 between Cubist and
BankBoston, N.A. as Rights Agent (incorporated by reference to Exhibit
99.1 to Cubist's Report on Form 8-K filed on July 30, 1999) (File No.
000-21379)

4.3 First Amendment dated as of March 7, 2000 to the Rights Agreement,
dated as of July 21, 1999 between Cubist and Fleet National Bank f/k/a
BankBoston, N.A. as Rights Agent (incorporated by reference to Exhibit
4.2 to Cubist's Registration Statement on Form 8-A/A filed on March 9,
2000) (File No. 000-21379)

+10.1 Patent License Agreement between the Registrant and the Massachusetts
Institute of Technology, dated March 10, 1994. (Exhibit 10.1,
Registration No. 333-6795)

+10.2 License Agreement between the Registrant and the Board of Trustees of
Leland Stanford Junior University, dated April 1, 1994. (Exhibit 10.2,
Registration No. 333-6795)

10.3 Employment Agreement between the Registrant and Scott M. Rocklage,
dated June 20, 1994. (Exhibit 10.3, Registration No. 333-6795)

10.4 Consulting Agreement between the Registrant and Paul R. Schimmel,
dated May 1, 1992. (Exhibit 10.4, Registration No. 333-6795)

10.5 Amended and Restated 1993 Stock Option Plan. (Exhibit 10.6,
Registration No.333-6795)

10.6 Collaborative Research and License Agreement between the Registrant
and Merck & Co., Inc., dated June 13, 1996. (Exhibit 10.8,
Registration No. 333-6795)

10.7 Collaborative Research and License Agreement between the Registrant
and Bristol-Myers Squibb Company and the Registrant, dated June 25,
1996. (Exhibit 10.9, Registration No. 333-6795)

10.8 Screening Agreement, dated November 28, 1995, between the Registrant
and Monsanto Company. (Exhibit 10.11, Registration No. 333-6795)

10.9 Letter Agreement, dated January 18, 1996, between Pharm-Eco
Laboratories, Inc. and the Registrant. (Exhibit 10.12, Registration
No. 333-6795)

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+10.10 Research Collaboration and License Agreement with ArQule, Inc.,
dated October 22, 1997. (Exhibit 10.12, Annual Report on Form 10-K,
File No. 000-21379)

10.11 Lease Agreement between Registrant and Stimpson Family Trust dated
April 30, 1993, regarding 24 Emily Street, Cambridge, MA., as amended
by the First Amendment to Lease, dated September 19, 1994. (Exhibit
10.13, Registration No.333-6795)

10.12 Form of Employee Confidentiality and Nondisclosure Agreement.
(Exhibit 10.15, Registration No. 333-6795)

10.13 Master Lease Agreement between the Registrant and Comdisco, Inc.,
dated as of August 30, 1993, as amended February 7, 1995, and as
further amended on February 26, 1996. (Exhibit 10.16, Registration No.
333-6795)

10.14 Series B Convertible Preferred Stock Purchase Warrant between the
Registrant and Comdisco, Inc., dated August 30, 1993. (Exhibit 10.17,
Registration No. 333-6795)

10.15 Series C Convertible Preferred Stock Purchase Warrants between the
Registrant and Comdisco, Inc., dated February 28, 1995 and February
26, 1996. (Exhibit 10.18, Registration No. 333-6795)

10.16 Series C Convertible Preferred Stock Purchase Options issued to
Dr. Paul Schimmel and Dr. Julius Rebek in May 1995, as amended by
certain Letter Agreements, dated October 23, 1995, between the
Registrant and each of Dr. Schimmel and Dr. Rebek. (Exhibit 10.19,
Registration No. 333-6795)

10.17 Amended and Restated Stockholders Rights Agreement by and among the
Registrant and the parties signatory thereto. (Exhibit 10.20,
Registration No. 333-6795)

10.18 Secured Promissory Note, dated as of July 21, 1994, by Scott M.
Rocklage to the Registrant. (Exhibit 10.21, Annual Report on Form
10-K, filed March 31, 1997, File No. 000-21379)

10.19 Amendment to Promissory Note, dated as of July 21, 1996, by and
between the Registrant and Scott M. Rocklage. (Exhibit 10.22, Annual
Report on Form 10-K, filed March 31, 1997, File No. 000-21379)

10.20 Amendment to Promissory Note, dated as of December 23, 1997, by and
between the Registrant and Scott M. Rocklage. (Exhibit 10.22, Annual
Report on Form 10-K, filed March 20, 1998, File No. 000-21379)

10.21 Promissory Note, dated as of October 18, 1995, by and between the
Registrant and Scott M. Rocklage. (Exhibit 10.23, Annual Report on
Form 10-K, filed March 20, 1998, File No. 000-21379)

+10.22 Compound Library Screening Agreement between the Registrant and
Genzyme Corporation, dated February 24, 1997. (Exhibit 10.24,
Amendment to Annual Report on Form 10-K/A, filed October 22, 1998,
File No. 000-21379)

+10.23 Library Sample Evaluation Agreement between the Registrant and
Pharmacopeia, Inc., dated as of September 11, 1996. (Exhibit 10.25,
Amendment to Annual Report on Form 10-K/A, filed October 22, 1998,
File No. 000-21379)

10.24 Stock Purchase Agreement, dated July 18, 1997, between International
Biotechnology Trust plc and Cubist. (Exhibit 10.27, Registration No.
333-33883)

10.25 Registration Rights Agreement, dated July 18, 1997, between
International Biotechnology Trust plc and Cubist. (Exhibit 10.28,
Registration No. 333-33883)

10.26 Registration Rights Agreement, dated July 18, 1997, between each of
H&Q Healthcare Investors and H&Q Life Sciences Investors and Cubist.
(Exhibit 10.29, Registration No. 333-33883)

10.27 Master Lease Agreement between the Registrant and Transamerica
Business Credit, dated as of February 14, 1997. (Exhibit 10.33, Annual
Report on Form 10-K, filed March 20, 1998, File No. 000-21379)

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+10.28 License Agreement, dated November 7, 1997, between Cubist and Eli
Lilly. (Exhibit 10.3, Amendment to Quarterly Report on Form 10-Q/A,
filed October 22, 1998, File No. 000-21379)

+10.29 Amendment No. 1 to Collaborative Research and License Agreement with
Merck, dated as of October 30, 1997 (Exhibit 10.1, Quarterly Report on
Form 10-Q, filed August 12, 1998, File No. 000-21379)

+10.30 Amendment No. 2 to Collaborative Research and License Agreement with
Merck, dated as of April 30, 1998 (Exhibit 10.2, Quarterly Report on
Form 10-Q, filed August 12, 1998, File No. 000-21379)

10.31 First Amendment to Amended and Restated 1993 Stock Option Plan
(Exhibit 10.3, Quarterly Report on Form 10-Q, filed August 12, 1998,
File No. 000-21379)

10.32 1997 Employee Stock Purchase Plan. (Exhibit 10.4, Quarterly Report on
Form 10-Q, filed August 12, 1998, File No. 000-21379)

10.33 Securities Purchase Agreement, dated as of September 10, 1998 between
Cubist and each of the Purchasers listed on Exhibit A thereto (Exhibit
10.1, Quarterly Report on Form 10-Q, filed November 4, 1998, File No.
000-21379)

10.34 Registration Rights Agreement, dated as of September 10, 1998 between
Cubist and each person listed on Exhibit A thereto (Exhibit 10.2,
Quarterly Report on Form 10-Q, filed November 4, 1998, File No.
000-21379)

10.35 Common Stock Purchase Warrants, dated September 23, 1998, executed by
Cubist (Exhibit 10.3, Quarterly Report on Form 10-Q, filed November 4,
1998, File No. 000-21379)

10.36 Collaborative Research and License Agreement between Cubist and
Novartis Pharma AG, dated as of February 3, 1999 (Exhibit 10.1,
Quarterly Report on Form 10-Q, filed May 13, 1999, File No. 000-21379)

10.37 Stock Purchase Agreement between Cubist and Novartis Pharma AG, dated
as of February 3, 1999 (Exhibit 10.2, Quarterly Report on Form 10-Q,
filed May 13, 1999, File No. 000-21379)

10.38 Restated Certificate of Incorporation as amended (Exhibit 3,
Quarterly Report on Form 10-Q, filed August 12, 1999,
File No. 000-21379)

10.39 Registration Rights Agreement, dated as of October 15, 1999 between
Cubist and each person listed on Exhibit A thereto (Exhibit 10.1,
Quarterly Report on Form 10-Q, filed November 12, 1999, File No.
000-21379)

10.40 Registration Rights Agreement dated as of January 27, 2000 among
Cubist and each of the Investors party thereto (Exhibit 10.1,
Registration No. 333-96365)

10.41 Second Amendment to Amended and Restated 1993 Stock Option Plan
(Exhibit 10.41, Annual Report on Form 10-K, filed March 10, 2000, File
No. 000-21379)

10.42 Third Amendment to Amended and Restated 1993 Stock Option Plan
(Exhibit 10.42, Annual Report on Form 10-K, filed March 10, 2000, File
No. 000-21379)

10.43 Stock Pledge Agreement dated as of September 25, 1999 by and between
Alan D. Watson and Cubist (Exhibit 10.43, Annual Report on Form 10-K,
filed March 10, 2000, File No. 000-21379)

10.44 Letter Agreement dated September 25, 1999 between Alan D. Watson and
Cubist (Exhibit 10.44, Annual Report on Form 10-K, filed March 10,
2000, File No. 000-21379)

10.45 Secured Promissory Note dated as of September 25, 1999 by and between
Alan D. Watson and Cubist (Exhibit 10.45, Annual Report on Form 10-K,
filed March 10, 2000, File No. 000-21379)

+10.46 Manufacturing and Supply Agreement, entered into as of June 22, 2000,
by and between Cubist and DSM Capua S.p.A (Exhibit 10.1, Quarterly
Report on Form 10-Q, filed August 14, 2000, File No. 000-21379)

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+10.47 Services Agreement, entered into as of June 22, 2000, by and between
Cubist and Gist- brocades Holding A.G. (Exhibit 10.2, Quarterly Report
on Form 10-Q, filed August 14, 2000, File No. 000-21379)

+10.48 Development and Supply Agreement dated April 3, 2000, by and between
Cubist and Abbott Laboratories (Exhibit 10.3, Quarterly Report on Form
10-Q, filed August 14, 2000, File No. 000-21379)

10.49 Clinical Services Master Agreement, dated December 1, 1999, by and
between Cubist and Omnicare Clinical Research, Inc. f/k/a IBAH, Inc.

10.50 Exhibit A to the Clinical Services Master Agreement, dated
December 21, 2000, by and between Cubist and Omnicare Clinical
Research, Inc. f/k/a IBAH, Inc.

10.51 Exhibit B to the Clinical Services Master Agreement, dated
April 12, 2000, by and between Cubist and Omnicare Clinical Research,
Inc. f/k/a IBAH, Inc.

10.52 Exhibit C to the Clinical Services Master Agreement, dated
April 18, 2000, by and between Cubist and Omnicare Clinical Research,
Inc. f/k/a IBAH, Inc.

10.53 Exhibit D to the Clinical Services Master Agreement, dated
May 10, 2000, by and between Cubist and Omnicare Clinical Research,
Inc. f/k/a IBAH, Inc.

10.54 Exhibit E to the Clinical Services Master Agreement, dated
October 17, 2000, by and between Cubist and Omnicare Clinical
Research, Inc. f/k/a IBAH, Inc.

10.55 Contract of Monitoring Services dated, January 10, 2000, between
Cubist and Clindev (Proprietary) Limited

10.56 First Amendment to Contract of Monitoring Services, dated
June 22, 2000, between Cubist and Clindev (Proprietary) Limited

10.57 Second Amendment to Contract of Monitoring Services, dated
December 20, 2000, between Cubist and Clindev (Proprietary) Limited

10.58 Contract Research Agreement, dated as of August 1, 2000, by and
between Target Research Associates, Inc. and Cubist

10.59 Assignment and License Agreement, dated October 6, 2000, by and
between Eli Lilly & Company and Cubist

10.60 Note Purchase Agreement, dated September 8, 2000, by and between
Cubist and the Purchasers listed on Schedule 1 thereto

10.61 Registration Rights Agreement, dated as of September 8, 2000, by and
between John Hancock Life Insurance Company, John Hancock Variable
Life Insurance Company, Signature 4 Limited, Investors Partner Life
Insurance Company and Cubist

10.62 Senior Convertible Promissory Note R-1, dated September 8, 2000, by
and between Cubist and John Hancock Life Insurance Company

10.63 Senior Convertible Promissory Note R-2, dated September 8, 2000, by
and between Cubist and John Hancock Life Insurance Company

10.64 Senior Convertible Promissory Note R-3, dated September 8, 2000, by
and between Cubist and John Hancock Life Insurance Company

10.65 Senior Convertible Promissory Note R-4, dated September 8, 2000, by
and between Cubist and John Hancock Variable Life Insurance Company

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10.66 Senior Convertible Promissory Note R-5, dated September 8, 2000, by
and between Cubist and Hare & Co.

10.67 Senior Convertible Promissory Note R-6, dated September 8, 2000, by
and between Cubist and Investors Partner Life Insurance Company

10.68 Research & Development Collaboration and Option Agreement, dated as
of October 4, 2000, by and between Cubist and Emisphere Technologies,
Inc.

10.69 License Agreement, dated as of November 22, 2000, by and between
Cubist and International Health Management Associates, Inc.

10.70 Patent Cross-License Agreement, dated as of November 18, 1999, by and
between TerraGen Discovery Inc. and Diversa Corporation

10.71 Convertible Promissory Note, dated as of April 8, 1999, by and
between TerraGen Diversity Inc. and Xenova Discovery Limited

10.72 Audit Committee Charter

10.73 Fourth Amendment to Amended and Restated 1993 Stock Option Plan

10.74 Fifth Amendment to Amended and Restated 1993 Stock Option Plan

10.75 Sixth Amendment to Amended and Restated 1993 Stock Option Plan

10.76 Cubist Pharmaceuticals, Inc. 2000 Nonstatutory Stock Option Plan

23.1 Consent of PricewaterhouseCoopers LLP

23.2 Consent of KPMG LLP
- -------------------------------
Unless otherwise indicated, all of the above-listed Exhibits are incorporated by
reference from the Company's filing indicated.

+ Confidential Treatment granted: Omitted portions filed separately with the
Commission.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.

CUBIST PHARMACEUTICALS, INC.

By: /s/ Scott M. Rocklage
--------------------------------------------
Scott M. Rocklage, Ph.D.
Chairman of the Board of Directors and Chief
Executive Officer

Pursuant to the requirements of the Exchange Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated.

SIGNATURE TITLE DATE

/s/ Scott M. Rocklage Chairman of the Board of Directors, Chief March 30, 2001
------------------------------------ Executive Officer and Director
Scott M. Rocklage (Principal Executive Officer)

/s/ Thomas A. Shea Vice President and Chief Financial Officer March 30, 2001
------------------------------------
Thomas A. Shea

Director March ___, 2001
------------------------------------
Susan Bayh

/s/ Barry M. Bloom Director March 29, 2001
------------------------------------
Barry M. Bloom

/s/ John K. Clarke Director March 30, 2001
------------------------------------
John K. Clarke

/s/ David Martin Director March 29, 2001
------------------------------------
David Martin

/s/ Walter Maupay Director March 30, 2001
------------------------------------
Walter Maupay

Director March ___, 2001
------------------------------------
Paul R. Schimmel

/s/ John Zabriskie Director March 30, 2001
------------------------------------
John Zabriskie