CUBIST PHARMACEUTICALS INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21379

CUBIST PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 22-3192085
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)

65 HAYDEN AVENUE
LEXINGTON, MASSACHUSETTS 02421
(Address of principal executive offices)

(781) 860-8660
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /

As of May 14, 2003 there were 29,545,801 shares outstanding of
Cubist's common stock, $0.001 per value per share.

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CUBIST PHARMACEUTICALS, INC.

INDEX

CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS.

CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS.

CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS.

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

A. NATURE OF BUSINESS

Cubist Pharmaceuticals, Inc. ("Cubist") is a biopharmaceutical company
focused on the research, development and commercialization of antiinfective
drugs. Cubist is headquartered in Lexington, Massachusetts.

B. ACCOUNTING POLICIES

BASIS OF PRESENTATION

These unaudited consolidated financial statements should be read in
conjunction with Cubist's annual report on Form 10-K for the fiscal year ended
December 31, 2002 and the financial statements and footnotes included therein.
In the opinion of management, the consolidated financial statements include all
adjustments, consisting of only normal recurring accruals, necessary to present
fairly the financial position, results of operations and cash flows of Cubist
and its wholly owned subsidiary. Cubist's accounting policies are described in
the Notes to the Consolidated Financial Statements in Cubist's 2002 Annual
Report on Form 10-K and updated, as necessary, in this Form 10-Q. Interim
results are not necessarily indicative of the operating results for the full
year.

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 because 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. At March 31,
2003 and 2002, options to purchase 5,241,261 and 4,199,039 shares of common
stock, respectively, warrants to purchase 366,935 and 1,478,359 shares of common
stock, respectively, and convertible debt and notes payable convertible into
4,106,450 and 4,106,450 shares of common stock, respectively, were not included
in the computation of diluted net loss per share since their inclusion would be
antidilutive.

ACCOUNTING FOR STOCK-BASED COMPENSATION

Cubist has several stock-based compensation plans. Cubist applies APB
Opinion No. 25 "Accounting for Stock Issued to Employees" in accounting for
qualifying options granted to its employees under its plans and applies
Statement of Financial Accounting Standards No. 123 "Accounting for Stock Issued
to Employees" ("SFAS 123") for disclosure purposes only. The SFAS 123
disclosures include pro forma net loss and net loss per share as if the fair
value-based method of accounting had been used.

If compensation for employee options had been determined based on SFAS
123, Cubist's pro forma net loss, and pro forma net loss per share for the three
months ending March 31, would have been as follows:

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

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46, or FIN 46,"Consolidation of Variable Interest
Entities", to expand upon and strengthen existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities and activities of another entity. Until now, one company generally
has included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN 46 changes that by requiring
a variable interest entity, as defined, to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that the company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The provisions of FIN 46 have not had a
material effect on the company's results of operations and financial position.

In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", an interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements
of FASB Statement No. 5, Accounting for Contingencies relating to the
guarantor's accounting for, and disclosure of, the issuance of certain types of
guarantees. For guarantees that fall within the scope of FIN 45, the
Interpretation requires that guarantors recognize a liability equal to the fair
value of the guarantee upon its issuance. The disclosure provisions of the
Interpretation are effective for financial statements of interim or annual
periods that end after December 15, 2002. However, the provisions for initial
recognition and measurement are effective on a prospective basis for guarantees
that are issued or modified after December 31, 2002, irrespective of a
guarantor's year-end. The provisions of FIN 45 have not had a material effect on
the Company's results of operations and financial position. Pursuant to the
Amended and Restated By-Laws of Cubist Pharmaceutical, Inc., Article 8, Cubist
officers and directors are indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law while the
officer or director is serving or has served at the request of the Corporation.
These indemnifications were grandfathered under the provisions of FIN No. 45 as
they were in effect prior to December 31, 2002.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which nullifies EITF Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, whereas EITF No. 94-3 had
allowed the liability to be recorded at the commitment date of an exit plan. We
are required to adopt the provisions of SFAS 146 effective for exit or disposal
activities initiated after December 31, 2002. This pronouncement has not had a
material impact on the Company's financial statements.

C. GUARANTEES

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN
45 elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also requires that a guarantor recognize, at the inception of
a guarantee, a liability for the fair value of certain guarantees. The initial
recognition and measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002.

Under its charter, Cubist has agreed to indemnify any person who is made
a party to any action or threatened with any action as a result of such person's
serving or having served as an officer or director of Cubist or having served,
at Cubist's request, as an officer or director of another company. The
indemnification does not apply if the person is adjudicated not to have acted in
good faith in the reasonable belief that his or her actions were in the best
interests of Cubist. The indemnification obligation survives termination of the
indemnified party's involvement with Cubist but only as to those claims arising
from such person's role as an officer or director. Cubist has separate
indemnification agreements with certain of its officers and directors that do
not provide any greater coverage than that found in the charter provisions. The
maximum potential amount of future payments that Cubist could be required to
make under the charter provision and the corresponding indemnification
agreements is unlimited; however, Cubist has Director and Officer insurance
policies that, in most cases, would limit its exposure and enable it to recover
a portion of any future amounts paid. The estimated fair value of these
indemnification provisions is minimal. Any indemnification provisions entered
into prior to December 31, 2002 were grandfathered under the provisions of FIN
45.

Cubist enters into indemnification provisions under its agreements with
other companies in its ordinary course of business, typically with business
partners, contractors, and clinical sites. Under these provisions Cubist
generally indemnifies and holds harmless the indemnified party for losses
suffered or incurred by the indemnified party as a result of Cubist's
activities. These indemnification provisions generally survive termination of
the underlying agreement. The maximum potential amount of future payments Cubist
could be required to make under these indemnification provisions is unlimited.
Cubist has not incurred material costs to defend lawsuits or settle claims
related to these indemnification agreements. As a result, the estimated fair
value of these agreements is minimal. Accordingly, Cubist has no liabilities
recorded for these agreements as of March 31, 2003.

D. BUSINESS AGREEMENTS

MANUFACTURING AND DISTRIBUTION AGREEMENTS

During the three months ended March 31, 2003 and 2002, Cubist made
payments under its manufacturing and distribution agreements with ACS Dobfar
SpA, Abbott Laboratories, and DSM (as fully described in Form 10K) of
$958,000 and $104,000, respectively, which were recorded as research and
development expense and $103,000 and $0, respectively, which were recorded as
other assets.

LICENSING AGREEMENTS

On July 31, 2002, Cubist entered into a license agreement with
Biochemie GmbH for the exclusive worldwide rights to CAB-175, a proprietary
compound, for the purpose of developing and commercializing CAB-175. In
consideration for such license, Cubist made an upfront license fee payment
upon execution of the license agreement that was recorded as research and
development expense in 2002. In addition, Cubist will be required to pay
royalties to Biochemie on worldwide sales of any drug developed and
commercialized from any products derived from this license. During the three
months ended March 31, 2003, Cubist recorded an accrual for $2,600,000 to
Biochemie for milestones met and additional development work completed.

On June 27, 2001, Cubist and Syrrx, Inc. ("Syrrx") announced the
formation of an antiinfective drug discovery collaboration. The joint effort
used Syrrx and Cubist technologies for the high-throughput characterization
of novel antiinfective drug targets and rational drug design. As a result of
the collaboration, the companies expected to accelerate the discovery of
novel classes of antibiotics to treat infectious diseases, including those
resistant to current therapies. Financial incentives for the collaboration
included research and clinical milestones, royalties and an equity investment
(accounted for in other assets) in Syrrx by Cubist. The first milestone
payment under this agreement was made at December 31, 2001 and was accounted
for as research and development expense. As a result of Cubist's decision to
discontinue its target based drug discovery program, the parties have ceased
work under this collaboration and have commenced discussions to formally
terminate the relationship. Cubist recorded an impairment charge of $134,000
during the three months ended March 31, 2003 relating to the equity
investment in Syrrx based upon pricing derived from a recent round of
financing. The equity investment at March 31, 2003 after the impairment
charge was $166,000.

On February 3, 1999, Cubist entered into a research and license
agreement with Novartis 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 funded a research program for a period of four years.
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. In February 2003, the collaboration between Cubist and Novartis
was completed.

On November 7, 1997, Cubist entered into a license agreement with
Eli Lilly that was amended on October 6, 2000, and 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 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 recorded as research and
development expense. In December 2002, Cubist issued shares of common stock as a
milestone payment to Eli Lilly related to Cubist filing its New Drug Application
for Cidecin and recorded the value as research and development expense.

During the three months ended March 31, 2003 and 2002, Cubist made
payments as it related to its various license agreements (as fully described in
Cubist's Form 10K), in the aggregate of $459,000 and $469,000, respectively,
which were recorded as research and development expense.

COMMERCIALIZATION AGREEMENTS

In September 2002, Cubist and Gilead Sciences, Inc. mutually agreed to
terminate their licensing agreement for the European commercialization of
Cidecin. Revenues of $0 and $1,400,000 were recognized in the three months ended
March 31, 2003 and 2002 respectively. There are no future financial obligations
relating to this licensing agreement.

E. STOCKHOLDERS' EQUITY

In the first quarter of 2003, a charge was taken for the accelerated
vesting of options for Cubist's CEO related to his anticipated transition from
that position in June 2003. The one time related charge to general and
administrative expense in the quarter was $109,000.

On March 7, 2003, Cubist filed a shelf registration statement on Form
S-3 to register the offering on a delayed or continuous basis of $75.0 million
of common stock. As of May 14, 2003, the registration statement has not yet
become effective.

NOTES RECEIVABLE FROM RELATED PARTIES

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. This note had an annual interest rate of 4% and was to become due on
September 25, 2002. The terms of the note provided for the note to be forgiven
in three equal annual installments of $168,750, commencing September 2000
contingent upon the Senior Vice President's continued employment. As part of the
Senior Vice President's termination of employment on March 15, 2002, the third
installment was forgiven and the note was cancelled. In addition, the vesting of
unvested stock options was accelerated and an associated expense of $598,000 was
recognized in March 2002.

F. ACCRUED CLINICAL TRIAL EXPENSE

Accrued clinical trial expenses are comprised of amounts owed to third
party Clinical Research Organizations (CRO) for research and development work
performed on behalf of Cubist. At each period end, Cubist evaluates the accrued
clinical trial expense balance based upon information received from each CRO and
ensures that the balance is appropriately stated. The accrued clinical trial
expense balance of $532,000 at March 31, 2003 represents Cubist's best estimate
of amounts owed for clinical trial services performed through March 31, 2003
based on all information available. Such estimates are subject to change as
additional information becomes available.

G. INTANGIBLE ASSETS

At March 31, intangible assets consisted of:

Amortization expense was $378,944 and $391,057 for the three months ended
March 31, 2003 and 2002, respectively.

H. RESTRUCTURING EXPENSES

Cubist incurred $1,033,000 in restructuring expenses during the three
months ended March 31, 2003 related to the reduction of 23 employees in the
research organization. This expense is comprised of severance and
outplacements benefits of $866,000 and $167,000 of salary expense in Q1 2003
related to the eliminated positions. This restructuring was related to
ongoing efforts to focus Cubist on the activities related to the
commercialization of daptomycin.

I. CAPITAL LEASE ARRANGEMENTS

During the first quarter of 2003, Cubist entered into a sale/leaseback
arrangement with General Electric Capital Corporation ("GE Capital") to finance
lab equipment up to the value of $2,000,000. The transaction will be accounted
for as a capital lease. $407,000 of lab assets were sold to GE Capital in the
first quarter of 2003 and were leased back to Cubist. The equipment is leased
for a period of 42 months.

J. TERM LOAN

In April 2003, Cubist's term loan with Fleet National Bank was repaid
in full and was replaced by a term loan with Citizens Bank of Massachusetts. As
a result, restricted cash of $3,250,000, which was held by Fleet National Bank

as cash collateral, has been released to Cubist. The term loan with Citizens
Bank allows Cubist to borrow up to $5,000,000. Advances under this facility are
to be repaid over a 24-month period, commencing on June 30, 2003. Interest on
the borrowings accrue at the bank's LIBOR rate plus 2.75%. Borrowings under the
facility are collateralized by all of Cubist's assets other than intellectual
property. This agreement contains certain covenants, the most restrictive of
which requires Cubist to maintain an unencumbered cash balance, which by
definition includes all investments, of at least $50 million.

FORWARD-LOOKING STATEMENTS

This quarterly 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. In some cases, these statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"could," "should," "would," "expect," "anticipate," "continue" or other similar
words. These statements discuss future expectations, contain projections of
results of operations or of financial condition, or state trends and known
uncertainties or other forward-looking information. You are cautioned that
forward-looking statements are based on current expectations and are inherently
uncertain. Actual performance and results of operations may differ materially
from those projected or suggested in the forward-looking statements due to
certain risks and uncertainties, including, but not limited to, the risks and
uncertainties described or discussed in the Section "Risk Factors" in Cubist's
Annual Report on Form 10-K for the fiscal year ended December 31, 2002. The
forward-looking statements contained herein represent our judgment as of the
date of this quarterly report, and Cubist cautions readers not to place undue
reliance on such statements. Except as required under the federal securities
laws and the rules and regulations of the SEC, we do not have any intention or
obligation to update publicly any forward looking statements after the
distribution of this quarterly report, whether as a result of new information,
future events, changes in assumptions, or otherwise.

Forward-looking statements include information concerning possible or
assumed future results of our operations, including, but not limited to,
statements regarding:

- our ability to use our research and development and
technology platforms to identify potential product
candidates;
- our expectations regarding selection of clinical development
candidates;
- our expectations regarding clinical trials and development
time lines;
- whether we will receive, and the potential timing of,
regulatory approvals or clearances to market potential
products;
- the continuation of our collaborations with our partners;
- our ability to manufacture products on a commercial scale;
- our expectation regarding our ability to commercialize
products in the coming years;
- our future capital requirements and our ability to finance
our operations;
- the timing of new product launches; or
- our expectations regarding business conditions generally and
growth in the biopharmaceutical industry and overall
economy.

Many factors could affect our actual financial results, or could cause
these actual results to differ materially from those in these forward-looking
statements. These factors include, but are not limited to, the following:

- unanticipated increases in financing and operating costs;
- general economic or business conditions being less favorable
than expected;
- our history of operating losses and uncertainty of future
financial results;

- legislative or regulatory changes adversely affecting Cubist
or the biopharmaceutical industry generally;
- our inability to further identify, develop and achieve
commercial success for new products and technologies;
- the possibility of delays in the research and development
necessary to select drug development candidates and delays
in clinical trials;
- the risk that research and development may not result in
marketable products;
- the risk that we may be unable to successfully finance and
secure regulatory approval of and market our drug
candidates;
- our dependence upon pharmaceutical and biotechnology
collaborations;
- competition and risk of technological obsolescence;
- our ability to obtain and defend patents and protect trade
secrets;
- the levels and timing of payments under our collaborative
agreements;
- uncertainties about our ability to obtain new corporate
collaborations and acquire new technologies on satisfactory
terms, if at all;
- our ability to manufacture products on a commercial scale;
or
- our ability to protect our proprietary technologies.

Cubist(R), Cidecin(R), NatChem(TM), NatGen(TM) and VITA(TM) are our
trademarks. This quarterly report contains trademarks and trade names of other
companies.

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

OVERVIEW

Cubist Pharmaceutical, Inc. ("Cubist") is a biopharmaceutical company
focused on the research, development and commercialization of antiinfective
drugs.

In December 2002, Cubist filed a New Drug Application, or NDA, with the
United States Food & Drug Administration, or FDA, for its lead investigational
antibiotic Cidecin for the treatment of complicated skin and skin structure
infections, or cSSSI, caused by Gram-positive organisms. Cidecin is the first
antibiotic in a new class of drug candidates called lipopeptides and attacks
bacteria through a novel mechanism of action. Cidecin has demonstrated the
ability IN VITRO to rapidly kill virtually all clinically significant
Gram-positive bacteria, including those resistant to current therapies. In
February 2003, the FDA accepted the Cidecin NDA and granted the filing priority
review status, indicating that Cidecin, if approved, would represent a
therapeutic advance over existing medicines, and established a target date to
act on the NDA filing by June 20, 2003.

In July 2002, Cubist acquired exclusive worldwide rights to develop and
commercialize a novel cephalosporin, referred to as CAB-175. CAB-175 is a unique
investigational antibiotic in late-stage pre-clinical development that has
demonstrated IN VITRO activity against most clinically relevant Gram-positive
and Gram-negative bacteria, including important resistant species such as
methicillin-resistant STAPHYLOCOCCUS AUREUS, or MRSA.

Cubist is also developing an oral formulation of the antibiotic
ceftriaxone, or OCTX, which is currently available only in an intravenous
formulation and marketed by Hoffmann-La Roche under the brand name Rocephin(R).
We have developed a capsule version of this formulation and are continuing
pre-clinical studies to determine the suitability of this formulation for human
clinical development.

Additionally, Cubist uses its natural products and other technologies to
identify novel pharmaceutical compounds.

Since Cubist's incorporation, it has experienced significant net losses.
Cubist has an accumulated deficit of $285.4 million through March 31, 2003.
Cubist expects to incur significant additional operating losses over the next
several years due to the implementation of manufacturing, distribution,
marketing and sales capabilities as well as continued research and development
efforts, and pre-clinical testing and clinical trials.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003 AND 2002

RESEARCH AND DEVELOPMENT REVENUES

Total research and development revenues for the three months ended March 31,
2003 were $357,000 compared to $2,320,000 in the three months ended March 31,
2002.

The decrease in revenue for the three months ended March 31, 2003 as
compared to the three months ended March 31, 2002 was mainly attributable to the
mutual termination, in September 2002, of a European commercialization agreement
with Gilead Sciences as well as the completion of a research collaboration with
Novartis in February 2003.

OPERATING EXPENSES

The $2,394,000 increase in research and development expense is mainly
due to a $1,500,000 milestone expense to BioChemie for completion of a
successful CAB-175 dosing study in humans and additional expenses of
approximately $1,100,000 for additional development work, as well as a
restructuring of the research group, which in total eliminated 23 positions in
the US and the UK subsidiary. The total research restructuring costs were
approximately $1,000,000 in the three months ended March 31, 2003. In addition,
expenses related to clinical studies significantly decreased quarter over
quarter.

The increase in sales and marketing expense of $830,000 relates to
$560,000 of salesforce development expenses incurred in the three months ended
March 31, 2003 and $270,000 of expenses incurred in marketing in the first
quarter of 2003 related to medical meetings held by external consultants.

The $1,155,000 reduction in general and administrative expense mainly
relates to a charge of $767,000 for the expenses related to the termination of
employment of one of Cubist's former Executive Officers.

INTEREST AND OTHER INCOME AND EXPENSE

Interest income decreased year over year by $810,000 due to the decrease
in ending cash, cash equivalents and investments as well as the decrease in
interest rates from the same period prior year.

Other Expense in the three months ended March 31, 2003 consisted of an
other than temporary impairment of Cubist's investment in Syrrx from $300,000 to
$166,000, based on the pricing derived from a round of financing that

Syrrx completed in the first quarter of 2003, as well as $54,000 of foreign
exchange loss.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, Cubist has financed its 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 equivalents and investments, excluding restricted cash, at
March 31, 2003 was $125,927,000 compared to $221,797,000 at March 31, 2002.

In March 1999, the Company entered into a term loan agreement with Fleet
National Bank under which we could borrow up to $1,500,000 to finance fixed
asset purchases. In March 2000, we increased our term loan by $2,000,000 to
finance leasehold improvements and fixed asset purchases. Advances under this
facility were to be repaid over a 36-month period, commencing on March 31, 2000.
Interest on the borrowings accrued at the bank's LIBOR rate (4.25% at March 31,
2003). In September 2001, we increased our term loan by $6,500,000 to finance
leasehold improvements and fixed asset purchases for the new corporate
headquarters building. The facility was collateralized by all capital equipment
purchased with the funds under the term loan and a minimum cash collateral
amount of $3,250,000. This cash collateral amount is reflected as restricted
cash in the financial statements contained herein. In April 2002, the term loans
were consolidated and were to be paid over a 48-month period. In April 2003, the
loan was repaid in full and replaced by a term loan with Citizens Bank of
Massachusetts (see Footnote J).

In April 2003, Cubist entered into a term loan with Citizens Bank under
which the company may borrow up to $5,000,000. Advances under this facility are
to be repaid over a 24-month period, commencing on June 30, 2003. Interest on
the borrowings accrue at the bank's LIBOR rate plus 2.75%. Borrowings under the
facility are collateralized by all Cubist's assets other than intellectual
property. The equipment is leased for a period of 42 months.

During the first quarter of 2003, Cubist entered into a leasing
arrangement with GE Capital to finance lab equipment up to the value of
$2,000,000. The transaction will be accounted for as a capital lease. $407,000
of lab assets were sold to GE Capital in the first quarter of 2003 and were
leased back to Cubist.

On March 7, 2003, Cubist filed a shelf registration statement on Form
S-3 to register the offering on a delayed or continuous basis of $75.0 million
of common stock. As of May 14, 2003, the registration statement has not yet
become effective.

COMMITMENTS AND CONTINGENCIES

Our major outstanding contractual obligations relate to our convertible
notes, our term loans and our facilities leases.

The aggregate outstanding principal of our convertible notes is
$204,000,000. These notes consist of $165,000,000 of 5 1/2% convertible
subordinated notes due 2008, and $39,000,000 of 8 1/2% senior convertible notes
due 2005. Both the convertible subordinated notes and the senior convertible
notes require semi-annual interest payments through maturity.

The aggregate outstanding amount of our commercial commitments is
$118,800,000. These commitments represent maximum payments based on current
operating forecasts. Certain of these commitments could be lessened if changes
to our operating forecast occur in the future.

The following summarizes Cubist's contractual obligations and commercial
commitments as of March 31, 2003 and the effect such obligations and commitments
are expected to have on our liquidity and cash flow in the future periods:

Term loan 1.7 2.2 2.1 -- -- --
Operating leases 0.1 2.1 1.9 1.8 1.9 17.2
------------- --------- ---------- --------- --------- ------------
Total contractual obligations $ 12.6 $ 16.7 $ 55.4 $ 10.9 $ 11.0 $ 191.3
COMMERCIAL COMMITMENTS:

Clinical CRO costs $ 4.2 $ 2.7 $ -- $ -- $ -- $ --
Manufacturing and Distribution 13.4 6.6 8.8 8.2 10.7 29.7
Licenses and collaborations 3.6 2.6 4.0 0.2 6.3 17.8
------------- --------- ---------- --------- --------- ------------
Total commercial commitments $ 21.2 $ 11.9 $ 12.8 $ 8.4 $ 17.0 $ 47.5

Cubist believes that its 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 the next 15 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.

CRITICAL ACCOUNTING POLICIES

In Cubist's Form 10-K for the year ended December 31, 2002, the company
disclosed its critical accounting policies and estimates upon which Cubist's
financial statements are derived. There have been no changes to these policies
since December 31, 2002. Readers are encouraged to review these disclosures in
conjunction with the review of this Form 10-Q.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46, or FIN 46,"Consolidation of Variable Interest
Entities", to expand upon and strengthen existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities and activities of another entity. Until now, one company generally
has included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN 46 changes that by requiring
a variable interest entity, as defined, to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that the company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The provisions of FIN 46 have not had a
material effect on the company's results of operations and financial position.

In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", an interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements
of FASB Statement No. 5, Accounting for Contingencies relating to the
guarantor's accounting for, and disclosure of, the issuance of certain types of
guarantees. For guarantees that fall within the scope of FIN 45, the
Interpretation requires that guarantors recognize a liability equal to the fair
value of the guarantee upon its issuance. The disclosure provisions of the
Interpretation are effective for financial statements of interim or annual
periods that end after December 15, 2002. However, the provisions for initial
recognition and measurement are effective on a prospective basis for guarantees
that are issued or modified after December 31, 2002, irrespective of a
guarantor's year-end. The provisions of FIN 45 have not had a material effect on
the Company's results of operations and financial position. Pursuant to the
Amended and Restated By-Laws of Cubist Pharmaceutical, Inc., Article 8, Cubist
officers and directors are indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law while the
officer or director is serving or has served at the request of the Corporation.
These indemnifications were grandfathered under the provisions of FIN No. 45 as
they were in effect prior to December 31, 2002.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which nullifies EITF Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, whereas EITF No. 94-3 had
allowed the liability to be recorded at the commitment date of an exit plan. We
are required to adopt the provisions of SFAS 146 effective for exit or disposal
activities initiated after December 31, 2002. This pronouncement has not had a
material impact on the Company's financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in information affecting Cubist's
market risk since the end of the fiscal year ended December 31, 2002 as
described in Item 7A of Cubist's Form 10-K for the year ended December 31, 2002.

ITEM 4. CONTROLS AND PROCEDURES

Cubist maintains disclosure controls and procedures designed to ensure
that it is able to collect the information it is required to disclose in the
reports it files with the Securities and Exchange Commission, or the SEC, and to
process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Based on their evaluation of Cubist's
disclosure controls and procedures which took place as of a date within 90 days
of the filing date of this report, the Chief Executive and Chief Financial
Officers believe that these controls and procedures are effective to ensure that
Cubist is able to collect, process and disclose the information it is required
to disclose in the reports it files with the SEC within the required time
periods.

Cubist also maintains a system of internal controls designed to provide
reasonable assurance that transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets; access to assets is permitted only in accordance with management's
general or specific authorization; and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.

Since the date of the most recent evaluation of our internal controls by
the Chief Executive and Chief Financial Officers, there have been no significant
changes in such controls or in other factors that could have significantly
affected those controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.

PART II -- OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits have been filed with this report:

99.1 Certification pursuant to 18 U.S.C Section 1305, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2 Certification pursuant to 18 U.S.C Section 1305, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

A current report on Form 8-K was filed by Cubist with the Securities and
Exchange Commission on February 20, 2003 pursuant to Item 9 with respect
to Cubist's press release and transcript of the conference call relating
to its fourth quarter and full year results for 2002.

SIGNATURE

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

CUBIST PHARMACEUTICALS, INC.

May 14, 2003 By:

/s/ David W.J. McGirr
------------------------------------
David W.J. McGirr,
Senior Vice President and
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)

CERTIFICATION

I, Scott M. Rocklage, Ph.D., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cubist Pharmaceuticals,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

/s/ Scott M. Rocklage, Ph.D.
- ------------------------------------
Scott M. Rocklage, Ph.D.
Chairman and Chief Executive Officer

CERTIFICATION

I, David W.J. McGirr, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cubist Pharmaceuticals,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

/s/ David W.J. McGirr
- --------------------------
David W.J. McGirr
Senior Vice President and
Chief Financial Officer