UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

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

COMMISSION FILE NUMBER 0-21379

CUBIST PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

65 Hayden Avenue, Lexington, MA 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, or the Securities Exchange Act, 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 ý No o

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

Number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on April 29, 2005: 53,231,755.

PART I. Financial Information

Item 1. Condensed Consolidated Financial Statements

Cubist Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

	March 31, 2005			December 31, 2004
	(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	21,594		$	20,572
Short-term investments	78,359			84,044
Accounts receivable, net	9,429			9,854
Inventory	6,748			4,891
Prepaid expenses and other current assets	5,583			3,626
Total current assets	121,713			122,987
Property and equipment, net	47,404			47,948
Intangible assets, net	36,723			17,465
Long-term investments	17,224			23,801
Other assets	3,379			3,707
Total assets	$	226,443		$	215,908

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	8,452		$	5,504
Accrued liabilities	18,445			19,413
Deferred revenue	3,801			4,250
Current portion of capital lease obligations	117			117
Total current liabilities	30,815			29,284
Deferred revenue, excluding current portion	700			700
Long-term debt	165,000			165,000
Capital lease obligations, net of current portion	49			78
Total liabilities	196,564			195,062
Commitments and contingencies	—			—
Stockholders’ equity:
Preferred stock, non-cumulative; convertible, $.001 par value; authorized 5,000,000 shares; no shares issued and outstanding	—			—
Common stock, $.001 par value; authorized 100,000,000 shares; 53,209,368 and 51,153,827 shares issued and outstanding as of March 31, 2005 and December 31, 2004, respectively	53			51
Additional paid-in capital	494,671			472,758
Accumulated deficit	(464,845		)	(451,963		)
Total stockholders’ equity	29,879			20,846
Total liabilities and stockholders’ equity	$	226,443		$	215,908

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

Cubist Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three months ended March 31,
	2005			2004
	(in thousands except share and per share amounts)

Revenues:
Product revenues, net	$	20,889		$	6,281
License fee revenues	1,492			1,417
Collaborative agreement and other revenues	1,301			773
Total revenues	23,682			8,471

Costs and expenses:
Cost of product revenues	6,925			2,425
Research and development	13,743			13,461
Sales and marketing	9,545			8,549
General and administrative	4,762			4,577
Total costs and expenses	34,975			29,012

Operating loss	(11,293		)	(20,541		)

Other expense, net:
Interest income	760			423
Interest expense	(2,459		)	(3,175		)
Other income	110			50
Total other expense, net	(1,589		)	(2,702		)

Net loss	$	(12,882	)	$	(23,243	)

Basic and diluted net loss per common share	$	(0.25	)	$	(0.58	)
Weighted average number of common shares outstanding for basic and diluted net loss per common share	51,506,878			40,142,207

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

Cubist Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three months ended March 31,
	2005			2004
	(in thousands)

Cash flows from operating activities:
Net loss	$	(12,882	)	$	(23,243	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,758			1,916
Amortization of debt issuance costs	190			256
Amortization of premium on investments	93			110
Other	379			399
Changes in assets and liabilities:
Accounts receivable	425			(2,125		)
Inventory	(1,857		)	(1,993		)
Prepaid expenses and other current assets	(1,957		)	(907		)
Other assets	138			(373		)
Accounts payable and accrued liabilities	2,699			(4,874		)
Deferred revenue	(449		)	(1,417		)
Total adjustments	1,419			(9,008		)
Net cash used in operating activities	(11,463		)	(32,251		)

Cash flows from investing activities:
Purchases of property and equipment	(472		)	(597		)
Purchases of investments	(228,242		)	(52,226		)
Maturities of investments	240,411			60,350
Net cash provided by investing activities	11,697			7,527

Cash flows from financing activities:
Issuance of common stock, net	822			694
Repayments of long-term debt and capital lease obligations	(29		)	(529		)
Net cash provided by financing activities	793			165

Net increase (decrease) in cash and cash equivalents	1,027			(24,559		)
Effect of changes in foreign exchange rates on cash balances	(5		)	423
Cash and cash equivalents, beginning of period	20,572			33,662
Cash and cash equivalents, end of period	$	21,594		$	9,526
Supplemental disclosures of cash flow information:
Non-cash investing activities:
Issuance of common stock to Eli Lilly	$	20,000		$	—

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

CUBIST PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Cubist Pharmaceuticals, Inc. (“Cubist” or the “Company”) in accordance with accounting principles generally accepted in the United States of America and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted. The condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the financial position and results of operations for the interim periods ended March 31, 2005 and 2004.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2004, which are contained in Cubist’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2005.

B. ACCOUNTING POLICIES

Revenue Recognition

Cubist recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101 (SAB 101), as amended by SAB 104, and Emerging Issues Task Force (EITF) Issue No. 00-21 for all revenue transactions entered into in fiscal periods beginning after June 30, 2003. Principal sources of revenue are sales of Cubicin® (daptomycin for injection), license fees and milestone payments that are derived from collaborative agreements with biotechnology companies. The Company has followed the following principles in recognizing revenue:

Multiple Element Arrangements

Cubist analyzes its multiple element arrangements entered into after June 30, 2003, to determine whether the elements can be separated and accounted for individually as separate units of accounting in accordance with EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.” An element of a contract can be accounted for separately if the delivered elements have stand-alone value and the fair value of any undelivered elements is determinable.

Product Revenues, net

Cubist recognizes revenue from product sales when persuasive evidence of an arrangement exists, title to product and associated risk of loss has passed to the customer, the price is fixed or determinable, collection from the customer is reasonably assured and the Company has no further performance obligations. All revenues from product sales are recorded net of applicable provisions for returns, chargebacks, rebates, and discounts in the same period the related sales are recorded.

Certain product sales qualify for rebates or discounts from standard list pricing due to government sponsored programs or other contractual agreements. Reserves for rebate programs are included in accrued liabilities and were $156,000 and $172,000 at March 31, 2005 and December 31, 2004, respectively. The Company allows customers to return product within a specified period prior to and subsequent to the expiration date. Reserves for product returns are based upon many factors, including industry data on product return rates, historical experience of actual returns, analysis of the level of inventory in the distribution channel, if any, and reorder rates of end-users. Reserves for returns, discounts and chargebacks are netted against accounts receivable and were $766,000 and $602,000 at March 31, 2005 and December 31, 2004, respectively. To date there have been no sales incentives offered to customers.

License Revenues

Non-refundable license fees are recognized in accordance with the provisions of each agreement. License fees with ongoing involvement or performance obligations are recorded as deferred revenue once received and are generally recognized ratably over the period of such obligation only after both the license period has commenced and the technology has been delivered.

Research services

Revenues from research funding are recognized when the services are performed in order to match revenues to expenses incurred. Revenues from SBIR grants to conduct research and development are recognized as the eligible costs are incurred up to the granted funding limit.

Milestones

Revenue from milestone payments related to arrangements under which the Company has continuing performance obligations are recognized as revenue upon achievement of the milestone only if all of the following conditions are met: the milestone payments are non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved in achieving the milestone; and the amount of the milestone is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, the milestone payments are deferred and recognized as revenue over the term of the arrangement as the Company completes its performance obligations.

Reclassifications

Certain reclassifications have been made to prior years’ financial statements to conform to the 2005 presentation.

Revision in the Classification of Certain Securities

In connection with the preparation of the 2004 annual report on Form 10-K, Cubist concluded that it was appropriate to classify its auction rate securities as short-term investments. Previously, such securities had been classified as cash and cash equivalents due to their liquidity and pricing reset feature. Accordingly, the Company has made adjustments to its Condensed Consolidated Statement of Cash Flows for the period ended March 31, 2004 to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents. There was no impact on net income or cash flows from operations as a result of the reclassification.

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 and notes payable are antidilutive for all periods presented and are therefore excluded from the calculation. Potential common shares excluded from the calculation of diluted net loss per share as their inclusion would have been antidilutive were:

	March 31,
	2005	2004
Options to purchase shares of common stock	6,529,330	6,049,724
Warrants to purchase shares of common stock	—	16,459
Notes payable convertible into shares of common stock	3,495,763	3,949,864

Comprehensive Loss

Comprehensive loss is comprised of only net loss, as there was no other comprehensive income (loss) for the quarters ended March 31, 2005 and 2004.

Accounting for Stock-Based Compensation

Cubist has several stock-based compensation plans. The Company 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 (SFAS) No. 123, “Accounting for Stock Issued to Employees” for disclosure purposes only. The disclosures of SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” 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 No. 123, Cubist’s pro forma net loss and pro forma net loss per share would have been as follows:

	Three months ended March 31,
	2005			2004
	(in thousands, except per share data)
Net loss, as reported	$	(12,882	)	$	(23,243	)
Add: Stock-based employee compensation recorded in net loss, as reported	—			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(3,636		)	(4,921		)
Pro forma net loss	$	(16,518	)	$	(28,164	)

Loss per share:
Basic and diluted - as reported	$	(0.25	)	$	(0.58	)
Basic and diluted - pro forma	$	(0.32	)	$	(0.70	)

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:

	Three months ended March 31,
	2005	2004
Expected stock price volatility	100%	62%
Risk free interest rate	3.9%	3.5%
Expected annual dividend yield per share	0%	0%
Expected life of options	5 years	5 years

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, or SFAS No. 123R, which would require all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value. SFAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123R requires the determination of the fair value of the share-based compensation at the grant date and the recognition of the related expense over the period in which the share-based compensation vests. SFAS No. 123R permits a prospective or two modified versions of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by the original SFAS No. 123. The Company is required to adopt the provisions of SFAS No. 123R effective January 1, 2006, at which time the Company will begin recognizing an expense for unvested share-based compensation that has been issued or will be issued after that date. Since we currently account for stock options granted to employees and shares issued under our employee stock purchase plans in accordance with the intrinsic value method permitted under APB Opinion No. 25, no compensation expense is recognized. The adoption of SFAS No. 123R is expected to have a significant impact on our results of operations. The impact of adopting SFAS No. 123R cannot be accurately estimated at this time, as it will depend on the market value and the amount of share based awards granted in future periods. However, had we adopted SFAS No. 123R in a prior period, the impact would approximate the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and loss per share included in this quarterly report.

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs”, or SFAS No. 151. SFAS No. 151 requires abnormal amounts of inventory costs related to idle facility, freight handling and wasted material expenses to be recognized as current period charges. Additionally, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The standard is effective for fiscal years beginning after June 15, 2005. We believe the adoption of SFAS No. 151 will not have a material impact on our consolidated financial statements.

C. GUARANTEES

In connection with the Company’s efforts to reduce the number of facilities that it occupies, the Company has vacated some of its leased facilities or sublet them to third parties. When the Company sublets a facility to a third party, it remains the primary obligor under the master lease agreement with the owner of the facility. As a result, if a third party vacates the sublet facility, the Company would be obligated to make lease or other payments under the master lease agreement. The Company believes that the financial risk of default by sublessors is individually and in the aggregate not material to the Company’s financial position or results of operations.

D. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at:

	March 31, 2005		December 31, 2004
	(in thousands)
Accrued payroll	$	358	$	646
Accrued commissions	539		1,621
Accrued bonus	995		3,049
Accrued benefit costs	1,221		1,884
Accrued clinical trials	1,798		1,404
Accrued interest	3,781		1,512
Accrued manufacturing costs	3,732		1,899
Deferred rent	839		709
Accrued royalty	1,878		3,511
Other accrued costs	3,304		3,178
	$	18,445	$	19,413

E. INVENTORY

Inventories are stated at the lower of cost or market with cost determined under the first-in / first-out, or FIFO, method. The Company analyzes its inventory levels quarterly, and writes-down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements to cost of product revenues. Expired inventory is disposed of and the related costs are written off to cost of product revenues.

Inventories consisted of the following at:

	March 31, 2005		December 31, 2004
	(in thousands)
Raw materials	$	2,103	$	616
Work in process	2,978		1,705
Finished goods	1,667		2,570
	$	6,748	$	4,891

F. INTANGIBLE ASSETS

Intangible assets consisted of:

	March 31, 2005			December 31, 2004
	(in thousands)

Patents	$	2,627		$	2,627
Manufacturing rights	11,590			11,590
Acquired technology rights	28,500			8,500
Intellectual property and processes and other intangibles	5,388			5,388
	48,105			28,105
Less: accumulated amortization - patents	(1,952		)	(1,937		)
accumulated amortization - manufacturing rights	(3,107		)	(2,549		)
accumulated amortization - acquired technology rights	(951		)	(783		)
accumulated amortization - intellectual property and processes and other intangibles	(5,372		)	(5,371		)
Intangible assets, net	$	36,723		$	17,465

Additions to intangible assets during 2005 relate to $20.0 million of payments to Eli Lilly in the form of common stock related to the Company’s license agreement with Eli Lilly. Cubist will amortize the additional Eli Lilly intangible asset over the remaining life of the licensing agreement with Eli Lilly commencing when the shares are registered by Cubist or sold by Eli Lilly (see note G). The amortization of the Eli Lilly intangible assets and the manufacturing rights are included in cost of product revenues.

Amortization expense was $0.7 million and $0.7 million for the quarters ended March 31, 2005 and 2004, respectively. The estimated aggregate amortization expenses for intangible assets at March 31, 2005 for each of the five succeeding years and thereafter is as follows:

	(in thousands)
Remainder of 2005	$	3,560
2006	4,747
2007	4,747
2008	4,016
2009	2,928
2010	2,928
2011 and thereafter	13,797
	$	36,723

G. STOCKHOLDER’S EQUITY

In March 2005, Cubist announced that it entered into an agreement to purchase from Eli Lilly a 2% reduction in the royalties payable to Eli Lilly on net sales of CUBICIN. Cubist issued to Eli Lilly $20.0 million in Cubist common stock with associated registration rights. A total of 1,876,173 shares were issued at a price of $10.66 per share, determined based on the average closing price of the stock over ten consecutive trading days ending March 2, 2005. Cubist’s global royalty obligation to Eli Lilly on CUBICIN sales was reduced by two percentage points upon registration of the common stock on April 22, 2005.

H. SEGMENT INFORMATION

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, or SFAS No. 131, establishes standards for reporting information on operating segments in interim and annual financial statements. Cubist operates in one business segment, the research, development and commercialization of novel antiinfective drugs. The Company’s entire business is managed by a single management team, which reports to the Chief Executive Officer. Substantially all of the Company’s revenues are currently generated within the U.S.

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

FORWARD-LOOKING STATEMENTS

This document contains and incorporates by reference ‘‘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 the risks and uncertainties described or discussed in the section entitled “Risk Factors” in this Quarterly Report. The forward-looking statements contained and incorporated herein represent our judgment as of the date of this Quarterly Report, and we caution readers not to place undue reliance on such statements.

Forward-looking statements include information concerning possible or assumed future results of our operations, including statements regarding:

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

• our expectations regarding the future market demand and medical need for CUBICIN;

• our expectations regarding clinical trials and development time lines for CUBICIN or other product candidates;

• our expectations regarding our ability to continue to manufacture sufficient quantities of CUBICIN in accordance with current Good Manufacturing Practices;

• our ability to use our research and development and technology platforms and methods to identify potential products and candidates;

• our expectations regarding selection of clinical development candidates;

• our expectations regarding our ability to further identify, develop and commercialize products in the coming years;

• the continuation of our collaborations with our partners and our ability to establish and maintain successful manufacturing, sales and marketing, distribution and development collaborations;

• our future capital requirements and our ability to finance our operations; and

• our expectations regarding general business conditions and growth in the biopharmaceutical industry and overall economy.

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

• whether we will receive, and the potential timing of, regulatory approvals or clearances to market CUBICIN in other countries and for additional indications in the United States and other countries;

• whether the U.S. Food and Drug Administration, or FDA, accepts proposed clinical trial protocols that may be achieved in a timely manner;

• our ability to conduct successful clinical trials in a timely manner;

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

• any changes in the current or anticipated market demand or medical need for CUBICIN;

• competition, particularly with respect to CUBICIN;

• our ability to continue to manufacture sufficient quantities of CUBICIN in accordance with Good Manufacturing Practices and at acceptable cost;

• our dependence upon pharmaceutical and biotechnology collaborations;

• our ability to finance our operations;

• potential costs resulting from product liability claims;

• our ability to protect our proprietary technologies;

• our ability to discover or in-license drug candidates and develop and achieve commercial success for drug candidates; and

• a variety of risks common to our industry, including ongoing regulatory review, litigation relating to intellectual property, and legislative or regulatory changes.

Overview

Cubist is a biopharmaceutical company headquartered in Lexington, Massachusetts, focused on the research, development and commercialization of antiinfective products that address unmet medical needs. We have one marketed product, CUBICIN, that was approved in the United States for the treatment of complicated skin and skin structure infections, or cSSSI, in September 2003. Net product sales of CUBICIN were $20.9 million and $6.3 million for the first quarter of 2005 and 2004, respectively. In the first quarter of 2005, we expanded our target market and hired 24 additional sales people. We continue to sell CUBICIN in accordance with our drop-ship program under which orders are processed through wholesalers but shipments are sent directly to our end-users. We also maintain agreements with third parties to perform various supply chain activities, including: manufacturing and supplying CUBICIN bulk drug substance; converting CUBICIN bulk drug substance into its finished, vialed and packaged formulation; managing warehousing and distribution of CUBICIN to our customers; and performing the order processing, order fulfillment, shipping, collection and invoicing services related to our CUBICIN product sales.

Net loss for the first quarter of 2005 was $12.9 million or $0.25 per share, compared to $23.2 million or $0.58 per share in the first quarter of 2004. In the first quarter of 2005, we made investments in our research programs and in expanding our sales force and realized the benefit of our reduced debt balance, which resulted in lower interest expense for the three months ended March 31, 2005 compared to March 31, 2004. Our sNDA for additional API manufacturing at the ACS Dobfar SpA, or ACS, facility in Italy was approved by the FDA in February 2005 and, in mid-March we filed an sNDA CBE-30 for an additional fill/finish plant in Albuquerque, New Mexico, operated by Cardinal Health PTS, LLC. These facilities will allow for increased capacity and an improved supply chain.

We have incurred net losses since our inception, principally as a result of research and development efforts, preclinical testing and clinical trials. As of March 31, 2005, we had an accumulated deficit of $464.8 million. We expect to incur losses for the foreseeable future as we continue our investments in sales and marketing activities related to CUBICIN as well as research and development for other drug products with potential commercial viability.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

Revenues

The following table sets forth March 31, 2005 and 2004 revenues together with the percentage change in revenues:

	Three months ended March 31,
	2005		2004		% Change
	(in millions)
Product revenues, net	$	20.9	$	6.3	232	%
License fee revenues	1.5		1.4		7	%
Collaborative agreement and other revenues	1.3		0.8		63	%
Total revenues	$	23.7	$	8.5	179	%

Product Revenues, net

Net sales of CUBICIN were $20.9 million and $6.3 million for the quarters ended March 31, 2005 and 2004, respectively. Gross sales of CUBICIN totaled $21.7 million and $6.8 million for the quarters ended March 31, 2005 and 2004, respectively, and offset by $0.8 million and $0.5 million of allowances for sales returns, Medicaid rebates, chargebacks and prompt-pay discounts. The increase in revenue is primarily due to increased customer volume as well as the benefit of a 6% price increase in November 2004.

We currently do not allow wholesalers to stock CUBICIN. We have a drop-ship program in place through which orders are processed through wholesalers, but shipments are sent directly to our end-users. This results in sales trends closely tracking actual hospital and out-patient administration location purchases of our product. We plan to shift from the drop-ship program in the future, however, we have not determined when the change will occur. When we discontinue the drop-ship program and allow wholesalers to stock CUBICIN, our net product sales may be impacted by the timing of wholesaler inventory stocking purchases and provisions for returns based on estimated product in the distribution channel. In addition, we have been approached by certain of our wholesale customers regarding new fees related to various data supply and administrative services. If we are required to pay substantial additional fees to our wholesalers, our net product revenue will be impacted.

License Fee Revenues

Total license fee revenues for the quarter ended March 31, 2005 were $1.5 million as compared to $1.4 million for the quarter ended March 31, 2004, an increase of $0.1 million or 7%. Included in license fee revenue for the quarter ended March 31, 2005 and 2004 is $1.4 million of revenue related to our 2003 license agreement with Chiron, which included up-front payments totaling $11.3 million, including a $3.3 million premium paid upon purchasing our common stock. This $11.3 million was recorded as deferred revenue and is being amortized to license fee revenues over the estimated development period of the agreement of two years. The Company currently expects to recognize $2.8 million of the up-front fee as revenue in the remainder of 2005 assuming no change in our estimated development period.

Collaborative Agreement and Other Revenues

Collaborative agreement and other revenues in the quarter ended March 31, 2005 were $1.3 million as compared to $0.8 million in the quarter ended March 31, 2004, an increase of $0.5 million or 63%. Included in collaborative agreement and other revenues is $1.2 million of development revenue from our commercialization agreement with Chiron recognized in the quarter ended March 31, 2005 compared to no development revenue in the quarter ended March 31, 2004, and $0.1 million of SBIR revenue in the quarter ended March 31, 2005 compared to $0.7 million of SBIR revenue in the quarter ended March 31, 2004.

Costs and Expenses

The following table sets forth March 31, 2005 and 2004 costs and expenses together with the percentage change in costs and expenses:

	Three months ended March 31,
	2005		2004		% Change
	(in millions)
Cost of product revenues	$	6.9	$	2.4	188	%
Research and development	13.7		13.5		1	%
Sales and marketing	9.5		8.5		12	%
General and administrative	4.8		4.6		4	%
Total costs and expenses	$	34.9	$	29.0	20	%

Cost of Product Revenues

Cost of product revenues were $6.9 million and $2.4 million in the quarters ended March 31, 2005 and 2004, respectively. Our gross margin for the quarter ended March 31, 2005 was 67% as compared to 61% for the quarter ended March 31, 2004, primarily due to higher volume resulting in lower cost per unit. Included in our cost of product revenues are royalties owed to Eli Lilly on net sales of CUBICIN under our license agreement with Eli Lilly. As our production volumes increase there is the potential for our gross margin to increase as we work to develop manufacturing process improvements.

Research and Development Expenses

Total research and development expense in the quarter ended March 31, 2005 was $13.7 million as compared to $13.5 million in the quarter ended March 31, 2004, an increase of $0.2 million or 1%. The increase from 2004 to 2005 is primarily due to $1.6 million of costs associated with our HepeX-B program which was in-licensed in June 2004, $0.5 million of higher payroll and employee related expenses, $0.4 million in costs associated with the preparation of our second fill finish site, a $0.4 million increase in costs associated with lab services and a $0.2 million increase in consulting charges. These increases were partially offset by $3.4 million in costs incurred in 2004 for our CAB-175 and OCTX programs that were discontinued in 2004.

We expect to continue incurring substantial research and development expenses related to: i) Phase 3b and Phase 4 clinical trials for CUBICIN; ii) pre-clinical and clinical testing of other products under development, such as HepeX-B and potential compounds under our discovery research program; iii) manufacturing and formulation development costs related to HepeX-B; iv) regulatory matters; and v) medical affairs activities.

Sales and Marketing Expenses

Sales and marketing expense in the quarter ended March 31, 2005 was $9.5 million as compared to $8.5 million in the quarter ended March 31, 2004, an increase of $1.0 million or 12%. The increase in sales and marketing expenses is primarily related to $1.5 million of increased payroll, travel, and other employee related expenses due to the expansion of our sales force in the first quarter of 2005, and $0.9 million of marketing expenses for CUBICIN. These increases were partially offset by a decrease of $1.4 million in medical education programs and $0.2 million in consulting.

General and Administrative Expenses

General and administrative expense in the quarter ended March 31, 2005 was $4.8 million as compared to $4.6 million in the quarter ended March 31, 2004, an increase of $0.2 million or 4%. This increase is primarily due to higher insurance premiums.

Other Expense, net

The following table sets forth March 31, 2005 and 2004 other expense, net together with the percentage change in other expense, net:

	Three months ended March 31,
	2005			2004			% Change
	(in millions)
Interest income	$	0.8		$	0.4		100	%
Interest expense	(2.5		)	(3.2		)	-22	%
Other income	0.1			0.1			0	%
Total other expense, net	$	(1.6	)	$	(2.7	)	-41	%

Interest income in the quarter ended March 31, 2005 was $0.8 million as compared to $0.4 million in the quarter ended March 31, 2004, an increase of $0.4 million or 100%. The increase in interest income was due to a higher average cash balance in the first quarter of 2005 as compared to the first quarter of 2004 as well as an increase in interest rates.

Interest expense in the quarter ended March 31, 2005 was $2.5 million as compared to $3.2 million in the quarter ended March 31, 2004, a decrease of $0.7 million or 22%. Interest expense related to our $165.0 million 5½% subordinated convertible notes was approximately $2.3 million for both the quarters ended March 31, 2005 and 2004. Interest expense related to our 8½% senior convertible notes was zero and approximately $0.6 million in the quarter ended March 31, 2005 and 2004, respectively. Included in interest expense for the quarters ended March 31, 2005 and 2004 is $0.2 million and $0.3 million, respectively, of interest expense related to the amortization of debt issuance costs. Our remaining debt obligation as of March 31, 2005 relates to our $165.0 million 5½% subordinated convertible notes due in November 2008. We expect our interest expense to decrease in 2005 as compared to 2004 due to the reduction in our debt balance.

Other Income

Other income in the quarter ended March 31, 2005 was $0.1 million as compared to $0.1 million in the quarter ended March 31, 2004. Other income for the quarter ended March 31, 2005 primarily consisted of a gain of $0.1 million due to the merger of Syrrx, Incorporated, or Syrrx, and Takeda Pharmaceutical Company Limited which resulted in the return of our original investment in Syrrx.

Liquidity and Capital Resources

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

• product sales of CUBICIN;

• payments from our strategic collaborators including license fees, sponsored research funding and research grants;

• equity and debt financings;

• equipment financings; and

• interest earned on invested capital.

We have incurred net losses since our inception, principally as a result of research and development efforts including pre-clinical testing and clinical trials. As of March 31, 2005 we had an accumulated deficit of $464.8 million. We expect to incur losses for the foreseeable future related to the continued development and commercialization of CUBICIN for additional indications, the development of our other drug candidates, as well as investments in other product opportunities.

Net cash used in operating activities was $11.5 million for the quarter ended March 31, 2005 due to our net loss for the quarter, purchases of inventory and an increase in prepaids and other current assets. These uses of cash were partially offset by the timing of accounts payable and accrual payments and a decrease in accounts receivable.

Our investing activities have consisted of capital expenditures and strategic investments. Purchases of property and equipment during the quarter ended March 31, 2005 were $0.5 million as compared to $0.6 million in the quarter ended March 31, 2004. In the remainder of 2005, we plan to invest in additional computer hardware and software as well as development equipment related to our fermentation pilot plant.

Net cash of $0.8 million was provided by financing activities in the quarter ended March 31, 2005 as compared to $0.2 million provided by financing activities in the quarter ended March 31, 2004. Proceeds from financing activities for the three months ended March 31, 2005 consisted of $0.8 million of cash received from employees exercise of stock options and purchases of common stock through our employee stock purchase plan.

In March 2005, Cubist announced that it entered into an agreement to purchase from Eli Lilly a 2% reduction in the royalties payable to Eli Lilly on net sales of CUBICIN. Cubist issued to Eli Lilly $20.0 million in Cubist common stock with associated registration rights. A total of 1,876,173 shares were issued at a price of $10.66 per share, determined based on the average closing price of the stock over ten consecutive trading days ending March 2, 2005. Our global royalty obligation to Eli Lilly on CUBICIN sales was reduced by two percentage points upon registration of the common stock on April 22, 2005.

On September 29, 2004, we filed a shelf registration statement on Form S-3 to register the offering on a delayed or continuous basis of $100.0 million of common stock. The registration statement became effective on November 17, 2004. On November 22, 2004, we amended the registration statement to increase the aggregate offering price from $100.0 million to $120.0 million, resulting in the issuance of approximately 1,785,714 additional shares of common stock, based on a per share offering price of $11.20. On November 29, 2004, we completed the sale of 10,714,200 shares of common stock at $11.20 per share. Net cash proceeds from this offering were $112.4 million.

In October 2001, Cubist completed the private placement of $125.0 million of 5½% convertible subordinated notes (less financing costs of $4.0 million). The notes are convertible at any time prior to maturity into common stock at a conversion price of $47.20 per share, subject to adjustment upon certain events. On December 28, 2001, the initial purchasers exercised their option to purchase $40.0 million of 5½% convertible subordinated notes (less financing costs of $1.3 million). Interest is payable on each November 1 and May 1, beginning May 1, 2002. The deferred costs of $5.3 million are amortized to interest expense over the life of the debt. In the quarters ended March 31, 2005 and 2004, $0.2 million and $0.3 million was amortized to interest expense, respectively. The outstanding balance under this facility totaled $165.0 million at March 31, 2005.

Our total cash, cash equivalents and investments at March 31, 2005 was $117.2 million as compared to $128.4 million at December 31, 2004. Based on the net cash raised from our equity financing in November 2004 of $112.4 million, and the cash inflows from sales of CUBICIN, we now believe that our existing cash, cash equivalents, investments and cash flows from revenues will be sufficient to fund our operating expenses, debt obligation, milestone payments under our collaborative agreements and capital requirements under our current business plan through at least the end of 2006.

Commitments

Contractual Obligations

Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent liabilities, such as milestone payments and royalties on future sales, for which we cannot reasonably predict future payment. The following summarizes our significant contractual obligations at March 31, 2005 and the effects such obligations are expected to have on our liquidity and cash flows in future periods.

	Payments due by period
	1 year or less		2-3 Years		4-5 Years		More than 5 Years		Total
	(in millions)
Subordinated convertible notes	$	—	$	—	$	165.0			$	165.0
Interest on subordinated convertible notes	9.1		18.2		9.1		—		36.4
Capital lease	0.1		0.1		—		—		0.2
Operating leases, net of sublease income	0.3		0.5		0.5		0.1		1.4
Inventory purchase obligations	12.3		30.2		21.3		4.9		68.7
External collaborations	2.9		2.0		—		—		4.9
Total contractual cash obligations	$	24.7	$	51.0	$	195.9	$	5.0	$	276.6

The subordinated convertible notes consist of $165.0 million of 5½% convertible subordinated notes, due in November 2008. These notes require semi-annual interest payments in May and November of each year through maturity.

Our operating leases consist of 15,000 square feet of office and data center space at 55 Hayden Avenue in Lexington, Massachusetts, pursuant to a term lease that expires in July 2009, 24,000 square feet of commercial space at 24 Emily Street in Cambridge, Massachusetts, pursuant to a term lease that expires in September 2008 and 15,000 square feet of commercial space at 148 Sidney Street in Cambridge Massachusetts, pursuant to a term lease that expires in December 2010. We have subleased the space located at 24 Emily Street for a term that coincides with the September 2008 lease expiration. We have subleased the space located at 148 Sidney Street through October 2010.

The inventory purchase obligations listed above represent minimum volumes that we are required to purchase from our contract manufacturers. The external collaborations listed above represent minimum collaboration support payments as well as minimum royalties owed on sales of CUBICIN product.

Critical Accounting Policies and Estimates

In our Annual Report on Form 10-K for the year ended December 31, 2004, we disclosed our critical accounting policies and estimates upon which our financial statements are derived. There have been no changes to these policies since December 31, 2004. Readers are encouraged to review these disclosures in conjunction with the review of this Form 10-Q.

RISK FACTORS

Investing in our company involves a high degree of risk. You should consider carefully the risks described below, together with the other information in and incorporated by reference into this quarterly report. 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 Related to Our Business

We depend heavily on the success of our lead product CUBICIN, which may not be widely accepted by physicians, patients, third-party payors, or the medical community in general.

We have invested a significant portion of our time and financial resources in the development of CUBICIN. We anticipate that in the near term our ability to generate revenues will depend solely on the commercial success of CUBICIN, which depends upon its acceptance by the medical community and the future market demand and medical need for CUBICIN. CUBICIN was approved by the FDA in September 2003 and launched in the United States in November 2003. Because of the recent introduction of CUBICIN, we have limited experience as to the sales of this product. We cannot be sure that CUBICIN will continue to be accepted by purchasers in the pharmaceutical market. CUBICIN competes with a number of existing antiinfective drugs manufactured and marketed by major pharmaceutical companies and potentially against new antiinfective drugs that are not yet marketed. The degree of market acceptance of CUBICIN depends on a number of factors, including:

• the demonstration of the clinical efficacy and safety of CUBICIN;

• the advantages and disadvantages of CUBICIN compared to alternative therapies;

• our ability to educate the medical community about the safety and effectiveness of CUBICIN;

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

• the market price of CUBICIN.

We cannot be sure that physicians, patients, third-party payors, or the medical community in general will continue to accept and utilize CUBICIN. Even if the medical community accepts that CUBICIN is safe and efficacious for its approved indication, physicians may choose to restrict the use of CUBICIN due to antibiotic resistance concerns.

Our ability to grow revenues from the commercialization and sale of CUBICIN will be limited if we do not obtain approval to market CUBICIN for additional therapeutic uses or fulfill certain post-approval requirements of the FDA relating to CUBICIN.

The FDA granted approval for CUBICIN for the treatment of cSSSI in the United States. In order to implement our business plan for CUBICIN, we will need to obtain regulatory approval for additional indications and from foreign regulatory authorities. To do so, we will need to successfully conduct additional clinical trials and then apply for and obtain the appropriate regulatory approvals. If we are unsuccessful in our clinical trials or we experience a delay in obtaining or are unable to obtain authorizations for expanded uses of CUBICIN, our revenues may not grow as expected and our business and operating results will be harmed.

In addition, the FDA approval to market CUBICIN in the United States requires that we conduct a post-marketing clinical study to assess the safety, efficacy and pharmacokinetics of CUBICIN in renal impairment patients with cSSSI. Clinical sites began screening for eligible subjects for this study in February 2005. Our business would be seriously harmed if we do not complete this study and the FDA revokes its marketing approval for CUBICIN. In addition, adverse medical events that occur during the post-marketing clinical study could result in the temporary or permanent withdrawal of CUBICIN from commercial marketing, which could seriously harm our business and cause our stock price to decline.

We will need to obtain regulatory approvals for our other drug candidates, and our ability to generate revenues from the commercialization and sale of products resulting from our development efforts will be limited by any failure to obtain these approvals.

The FDA and comparable regulatory agencies in foreign countries impose substantial requirements for the development, production and commercial introduction of drug products. 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, and, to date, we

have not obtained government approval for any drug product other than CUBICIN for the indication of cSSSI in the United States. Pre-clinical testing, clinical trials and manufacturing of our drug candidates will be subject to rigorous and extensive regulation by the FDA and corresponding foreign regulatory authorities. In addition, such authorities, including the FDA, may impose more stringent requirements than currently in effect, which may adversely affect our planned drug development efforts. Satisfaction of the requirements of the FDA and of foreign regulatory agency requirements typically takes a significant number of years and can vary substantially based upon the type, complexity and novelty of the drug candidate.

No product can receive FDA approval unless human clinical trials show both safety and efficacy for each target indication in accordance with FDA standards. We have limited experience conducting clinical trials. The majority of drug candidates that begin human clinical trials fail to demonstrate the desired safety and efficacy characteristics. Failure to demonstrate the safety and efficacy of our drug candidates for each target indication in clinical trials would prevent us from obtaining required approvals from regulatory authorities, which would prevent us from commercializing those drug candidates. The results of our clinical testing of a drug candidate may cause us to suspend, terminate or redesign our clinical testing program for that drug candidate. We cannot be sure when we, independently or with our collaborative partners, might be in a position to submit additional drug candidates for regulatory review. Negative or inconclusive results from the clinical trials or adverse medical events during them could cause the clinical trials to be repeated, extended, or a program to be terminated, even if other studies or trials relating to the program are successful. In addition, data obtained from clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. In addition, we cannot be sure that regulatory approval will be granted for drug candidates that we submit for regulatory review. Moreover, if regulatory approval to market a drug product is granted, the approval may impose limitations on the indicated use for which the drug product may be marketed as well as additional post-approval requirements.

Our ability to generate revenues from the commercialization and sale of additional drug products will be limited by any failure to obtain these approvals.

If clinical trials for our drug candidates are unsuccessful or delayed, we will be unable to meet our anticipated development and commercialization timelines, which could harm our business.

Before we receive regulatory approvals for the commercial sale of any of our drug candidates, our drug candidates are subject to extensive pre-clinical testing and clinical trials to demonstrate their safety and efficacy in humans. Conducting pre-clinical testing and clinical trials is a lengthy, time-consuming and expensive process that often takes many years. 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 and pharmaceutical industries, including companies with greater experience in pre-clinical testing and clinical trials than we have, have suffered significant setbacks in advanced clinical trials, even after demonstrating promising results in earlier trials. For example, our clinical trials on CUBICIN for the treatment of pneumonia failed to demonstrate sufficient efficacy despite promising results in pre-clinical and early clinical trials.

Our clinical trials must be carried out under protocols that are acceptable to regulatory authorities and to the committees responsible for clinical studies at the sites at which the studies are conducted. There may be delays in preparing protocols or receiving approval for them that may delay either or both of the start and finish of our clinical trials. Feedback from regulatory authorities or results from earlier stage clinical studies might require modifications or delays in later stage clinical trials. These types of delays can result in increased development costs and delayed regulatory approvals.

Furthermore, there are a number of additional factors that may cause delays in our clinical trials. We have limited experience in conducting pre-clinical testing or clinical trials. We currently have one product candidate, HepeX-B, in clinical development, and CUBICIN is being studied in additional clinical trials. The rate of completion of our clinical trials is also dependent in part on the rate of patient enrollment. There may be limited availability of patients who meet the criteria for certain clinical trials. Delays in planned patient enrollment can result in increased development costs and delays in regulatory approvals. For example, our ongoing clinical trial to determine the safety and efficacy of using CUBICIN to treat infective endocarditis and for complicated bacteremia, for which we have now completed enrollment, experienced delays attributable to slow enrollment. In addition, our clinical trials may be delayed by one or more of the following factors:

• inability to manufacture sufficient quantities of materials for use in clinical trials;

• inability to adequately follow patients after treatment;

• the failure of third-party clinical trial managers to perform their oversight of the trials;

• the failure of our clinical investigational sites and related facilities and records to be in compliance with the FDA’s Good Clinical Practices; or

• inability to enroll study subjects.

If clinical trials for our drug candidates are unsuccessful or delayed, we will be unable to meet our anticipated development and commercialization timelines, which could harm our business and cause our stock price to decline.

We will face significant competition from other biotechnology and pharmaceutical companies, particularly with respect to CUBICIN, and our operating results will suffer if we fail to compete effectively.

The biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the United States and internationally, including major multinational pharmaceutical and chemical companies, biotechnology companies and universities and other research institutions. Many of our competitors have greater financial and other resources, such as larger research and development staffs and more experienced marketing and manufacturing organizations. Our competitors may succeed in developing or licensing on an exclusive basis technologies and drug products that are more effective or less costly than any drug candidate that we are currently developing or that we may have or develop, which could render our technology obsolete and noncompetitive.

The competition in the market for therapeutic products that address infectious diseases is intense. CUBICIN faces competition from commercially available drugs such as vancomycin, marketed generically by Abbott, Shionogi & Co., Ltd., and others, Zyvox, marketed by Pfizer, Inc., and Synercid, marketed by King Pharmaceuticals, Inc. These products have established safety and efficacy profiles. In particular, vancomycin has been a widely used and well known antibiotic for over 40 years and is sold in a relatively inexpensive generic form. Accordingly, if price competition inhibits the acceptance of CUBICIN or if the reluctance of physicians to switch from existing drugs to CUBICIN inhibits the acceptance of CUBICIN, we will not achieve our business plan. In addition, CUBICIN may face competition from drug candidates currently in clinical development, including drug candidates that could receive regulatory approval before CUBICIN in countries outside the United States. The inability to compete with existing drug products or subsequently introduced drug products would have a material adverse impact on our operating results.

We are completely dependent on third parties to manufacture CUBICIN, and our commercialization of CUBICIN could be stopped, delayed, or made less profitable if those third parties fail to provide us with sufficient quantities of CUBICIN or fail to do so at acceptable prices.

We do not have the capability to manufacture our own CUBICIN bulk drug substance. We have entered into manufacturing and supply agreements with both DSM Capua SpA , or DSM, and ACS to manufacture and supply to us CUBICIN drug substance for commercial purposes. ACS was not approved by the FDA to produce commercial supply of CUBICIN drug substance until February 2005. Therefore, our supply to date of CUBICIN drug substance has come from one supplier, DSM. ACS has recently begun manufacturing CUBICIN drug substance for commercial sale.

We do not have the capability to manufacture our own CUBICIN finished drug product. We have entered into manufacturing and supply agreements with both Hospira, Inc., or Hospira, and Cardinal to manufacture and supply to us finished drug product. However, only Hospira is currently capable of manufacturing finished product for commercial sale. We do not expect to be able to sell product finished from Cardinal until sometime in the second quarter of 2005. Therefore, we anticipate that we will continue to depend entirely on one company, Hospira, to manufacture clinical grade vialed formulations of CUBICIN and to manufacture and supply final vialed CUBICIN commercial drug product until that time.

If Cardinal is unable to meet or is delayed in meeting the final regulatory requirements necessary for the fill/finish of CUBICIN for commercial sale, or Hospira experiences any significant difficulties in its manufacturing processes for CUBICIN we could experience significant interruptions in the supply of CUBICIN. Because both the DSM and ACS manufacturing facilities are located in Italy, we may also experience interruption or significant delay in the supply of CUBICIN drug substance due to natural disasters, acts of war or terrorism, labor unrest or political instability in Italy. In addition, given our current fill schedule with Hospira, if Cardinal fails to meet the final regulatory requirements by the third quarter of 2005, we believe it will be necessary to obtain additional filling runs from Hospira in order to meet our expected demand for 2005.

If we are required to transfer manufacturing processes from our bulk or finished drug product manufacturers to other third-party manufacturers, we would be required to satisfy various additional regulatory requirements, and we could experience significant interruptions in the supply of CUBICIN.

We cannot guarantee that we will be able to reduce the costs of commercial scale manufacturing of CUBICIN over time. If the manufacturing costs of CUBICIN are too high, it may significantly delay or prevent Cubist from achieving profitability. In order to reduce costs, we may need to develop and implement process improvements. In order to implement such process improvements, we will need, from time to time, to notify or make filings with regulatory authorities, and the improvements may be subject to approval by such regulatory authorities. We cannot be sure that such approvals will be granted or granted in a timely fashion. We cannot guarantee that we will be able to enhance and optimize output in our commercial manufacturing process. If we cannot enhance and optimize output, we may not be able to reduce our costs over time. In addition, we have been approached by certain of our wholesale customers regarding new fees related to various data supply and administrative services. If we are required to pay substantial additional fees to our wholesalers, our net product revenue will be impacted.

We have collaborative relationships that may expose us to a number of risks.

We have entered into, and anticipate continuing to enter into, collaborative arrangements with multiple third parties to discover, test, manufacture and market drug candidates and drug products. On October 3, 2003, we announced an international commercialization agreement with Chiron to seek regulatory approvals and commercialize CUBICIN in Western and Eastern Europe, Australia, New Zealand, India and certain Central American, South American and Middle Eastern countries. Collaborations such as these are necessary for us to research, develop, and commercialize drug candidates. We cannot be sure that we will be able to establish any additional collaborative relationships on terms acceptable to us.

Reliance on collaborative relationships poses a number of risks including the following:

• our collaborators may not perform their obligations as expected;

• the amount and timing of resources dedicated by our collaborative partners to their respective collaborations with us is not under our control;

• some drug candidates discovered in collaboration with us may be viewed by our collaborative partners as competitive with their own drug candidates or drug products;

• our collaborative partners may not elect to proceed with the development of drug candidates that we believe to be promising;

• disagreements with collaborators, including disagreements over proprietary rights, might cause delays or termination of the research, development or commercialization of drug candidates, might lead to additional responsibilities with respect to drug candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive; and

• some of our collaborative partners might develop independently, or with others, drug products that could compete with ours.

Collaborative arrangements with third parties are a critical part of our business strategy, and any inability on our part to be able to establish collaborations on terms favorable to us or to work successfully with our collaborators will have an adverse effect on our operations and financial performance.

We depend on third parties in the conduct of our clinical trials for CUBICIN and expect to do so with respect to other drug candidates and any failure of those parties to fulfill their obligations could adversely affect our development and commercialization plans.

We depend on independent clinical investigators, contract research organizations and other third party service providers in the conduct of our clinical trials for CUBICIN and expect to do so with respect to other drug candidates. We rely heavily on these parties for successful execution of our clinical trials but do not control many aspects of their activities. For example, the investigators are not our employees. However, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of CUBICIN and future drug candidates.

If we are unable to continue to develop satisfactory sales and marketing capabilities, we may not succeed in commercializing CUBICIN.

Until our launch of CUBICIN in November 2003, we had not previously marketed or sold a drug product. In connection with our launch of CUBICIN, we developed our own sales and marketing capabilities in the United States, and we continue to develop those capabilities. Our U.S. sales and marketing team has worked together for a limited period of time. We cannot guarantee that we will continue to be successful in selling and marketing CUBICIN on our own in the United States. Even if we obtain approval to market CUBICIN in one or more of the countries in which we intend to commercialize CUBICIN pursuant to our collaboration agreement with Chiron or our other current or future collaborations, we cannot guarantee that we will be successful in marketing CUBICIN in international markets.

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 incurred a net loss of $12.9 million for the three months ended March 31, 2005 and $76.5 million for the twelve months ended December 31, 2004. At March 31, 2005 we had an accumulated deficit of $464.8 million. These losses have resulted from costs associated with conducting research and development, conducting clinical trials, commercialization efforts and associated administrative costs.

We expect to incur significant additional operating losses for the foreseeable future related to the continued development and commercialization of CUBICIN, the development of our other drug candidates, as well as investments in other product opportunities. 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 our common stock may decline.

We may require additional funds.

Currently, we are not a self-sustaining business, and certain economic and strategic factors may require us to seek additional funds. We believe that our existing cash, cash equivalents, investments and the anticipated cash flow from revenues will be sufficient to fund our operating expenses, debt obligations, milestone payments under our collaborative arrangements and capital requirements under our current business plan at least through 2006. We expect capital outlays and operating expenditures to increase over the next several years as we continue our commercialization of CUBICIN and expand our infrastructure and research and development activities. We may need to spend more money than currently expected because of unforeseen circumstances or circumstances beyond our control. We have no committed sources of capital and do not know whether additional financing will be available when needed, or, if available, that the terms will be favorable to our stockholders or us.

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 providing 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.

Our annual debt service obligations on our 5½% subordinated convertible notes due in November 2008 are approximately $9.1 million per year in interest payments. We may add additional lease lines to finance capital expenditures and may obtain additional long-term debt and lines of credit. If we issue other debt securities in the future, our debt service obligations will increase further. If we are unable to generate sufficient cash to meet these obligations and need to use existing cash or liquidate investments in order to fund our debt service obligations or to repay our debt, we may be forced to delay or terminate clinical trials or curtail operations. We may also be forced to obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights or potential markets or grant licenses on terms that are not favorable to us. If we fail to obtain additional capital, we will not be able to execute our current business plan successfully.

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

Our commercial success will depend in part on obtaining and maintaining U.S. and foreign patent protection for CUBICIN, our drug candidates, and our research technologies and successfully enforcing and defending these patents against third party challenges. We consider that in the aggregate our unpatented proprietary technology, patent applications, patents and licenses under patents owned by third parties are of material importance to our operations. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. The actual protection afforded by a patent can vary from country to country and may depend upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. Legal standards relating to the validity and scope of patents covering pharmaceutical and biotechnological inventions are continually developing, both in the United States and other important markets outside the United States. Our patent position is highly uncertain and involves complex legal and factual questions, and we cannot predict the scope and breadth of patent claims that may be afforded to our patents or to other companies’ patents. We cannot assure you that the patents we obtain or the unpatented proprietary technology we hold will afford us significant commercial protection.

The primary composition of matter patent covering CUBICIN in the United States has expired. We own or have licensed a limited number of patents directed toward methods of administration and methods of manufacture of CUBICIN. We cannot be sure that patents will be granted with respect to any of our pending patent applications for CUBICIN, our other drug candidates, or our research technologies, 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 CUBICIN, our other drug candidates or our other technology.

The degree of future protection for our proprietary rights is uncertain. 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, 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 invalid and/or unenforceable. Even if we have valid and enforceable patents, these patents still may not provide sufficient protection against competing products or processes.

If our collaborative partners or consultants develop inventions or processes independently that may be applicable to our products under development, disputes may arise about ownership of proprietary rights to those inventions and/or processes. Such inventions and/or processes will not necessarily become our property, but may remain the property of those persons or their employers. Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights. Moreover, the laws of foreign countries in which we market our drug products may afford little or no effective protection of our intellectual property, thereby easing our competitors’ ability to compete with us in such countries.

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

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

Our trademarks, CUBICIN, Cubist, and HepeX-B (licensed from XTL Biopharmaceuticals, Ltd.) in the aggregate are considered to be material to our business. All are covered by registrations or pending applications for registration in the U.S. Patent and Trademark Office and in other countries. Trademark protection continues in some countries for as long as the mark is used and, in other countries, for as long as it is registered. Registrations generally are for fixed, but renewable, terms. We cannot assure you that the trademark protection that we have pursued or will pursue in the future will afford us significant commercial protection.

Third-party patent and intellectual property rights may interfere with our ability to commercialize drug products and research technologies.

Because the patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions, there can be no assurance that the patents owned and licensed by us, or any future patents, will ensure that others will not be issued patents that may prevent the sale of our drug products or require licensing and the payment of significant fees or royalties. Moreover, to the extent that any of our drug products or methods infringe the patents of a third party, or that our patents or future patents fail to give us an exclusive position in the subject matter claimed in those patents, we will be adversely affected. Patent disputes are frequent and can preclude the commercialization of products. If our drug candidates, drug products, or processes are found to infringe 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 or drug products could be severely restricted or prohibited. We may be unable to avoid infringement of a third-party patent and may have to obtain a license, defend an infringement action, or challenge the validity of a patent in a court of law or agency of competent jurisdiction. A license may be unavailable on terms and conditions acceptable to us, if at all. Intellectual property litigation can be expensive and time-consuming, and we may be unable to prevail in any such litigation or devote sufficient resources to pursue such litigation. If we do not obtain an appropriate license, if we are found liable for patent infringement or trade secret misappropriation, or if we are not able to have such patents declared invalid and/or unenforceable, we may be liable for significant monetary damages, may encounter significant delays in bringing products to market, and/or may be precluded from participating in the manufacture, use, or sale of products or methods of treatment requiring such licenses.

If we are unable to discover or in-license drug candidates, develop drug candidates or commercialize drug products, we will not generate significant revenues or become profitable.

In order to implement our business plan we will need to identify, develop and commercialize additional drug products. Our approach to drug discovery is unproven. We have not tested in humans any drug candidates developed from our drug discovery program, and we cannot assure you that we will test in humans any internally developed drug candidates or that there will be clinical benefits associated with any drug candidates that we do develop.

Our drug product, CUBICIN, and our other current and former drug candidates are the result of in-licensing patents and technologies from third parties. These in-licensing activities represent a significant expense for Cubist and generally require us to pay royalties to other parties on product sales. Unless we are able to use our drug discovery approach to identify suitable drug candidates, in-licensing will be our only source of drug candidates. However, there can be no assurance that we will be able to in-license additional desirable drug candidates on acceptable terms, or at all, or that we will be successful in developing them. For example in February 2004, we discontinued, due to observed adverse events, clinical development of CAB-175, a parenteral cephalosporin antibiotic that we had in-licensed from Sandoz GmbH, and in April 2004, we discontinued, as a result of data from human clinical research studies, clinical development of oral formulations of ceftriaxone, a broad-spectrum antibiotic for which we had licensed the underlying technology from International Health Management Associates

and the University of Utah. Our failure to develop or in-license new drug candidates on acceptable terms would have a material adverse effect on our business, operating results and financial condition.

A variety of risks associated with our international business relationships could materially adversely affect our business.

We have manufacturing, collaborative and clinical trial relationships outside the United States, and we expect CUBICIN to be marketed worldwide. Consequently, we are, and will continue to be, subject to additional risks related to operating in foreign countries. Associated risks of conducting operations in foreign countries include:

• differing regulatory requirements for drug approvals in foreign countries;

• the potential for so-called parallel importing;

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

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

• compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

• foreign taxes, including withholding of payroll taxes;

• 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;

• workforce uncertainty in countries where labor unrest is more common than in the United States;

• production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

• business interruptions resulting from geo-political actions, including war and terrorism.

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

If we are not successful in our management transition or in attracting and retaining management team members and other highly qualified individuals in our industry, we may not be able to successfully implement our business strategy.

Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries, depends in large part upon our ability to attract and retain highly qualified managerial personnel. We historically have been highly dependent on our senior management and scientific team. On June 10, 2003, Michael W. Bonney became our Chief Executive Officer after having served as our President and Chief Operating Officer since 2002. Mr. Bonney has not previously served as the chief executive officer of a publicly traded corporation. Six of our seven executive officers, including Mr. Bonney, have joined us since December 2001. In addition, we have hired several other key members of our management team since June 2002. As a result, our management team has only worked together for a limited period of time. Our future success depends on a successful management transition and will also depend on our continuing to attract, retain and motivate highly skilled management team members. The loss of the services of any of our executive officers or other key employees could potentially harm our business or financial results.

We may undertake additional strategic acquisitions in the future, and difficulties integrating such acquisitions could damage our ability to attain or maintain profitability.

Although we have limited experience in acquiring businesses and have completed only one business acquisition since our inception, we may acquire additional businesses that complement or augment our existing business. If we acquire businesses with promising drug candidates or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to move one or more drug candidates through pre-clinical and/or clinical development to regulatory approval and commercialization. Integrating any newly acquired businesses or technologies could be expensive and time-consuming, resulting in the diversion of resources from our current business. We may not be able to integrate any acquired business successfully. We cannot assure you that, following an acquisition, we will achieve revenues, specific net income or loss levels that justify the acquisition or that the acquisition will result in increased earnings, or reduced losses, for the combined company in any future period. Moreover, we may need to raise additional funds through public or private debt or equity financing to acquire any businesses, which would result in dilution for stockholders or the incurrence of indebtedness. We may not be able to operate acquired businesses profitably or otherwise implement our growth strategy successfully.

Risks Related to Our Industry

Our products will be subject to ongoing regulatory review.

Regulatory approvals can be conditioned on certain factors that may delay the marketing of drug products and increase the cost of developing, manufacturing, or marketing drug products. Our company, our drug products and the manufacturing facilities for our drug products are subject to continual review and periodic inspection by the FDA and other regulatory agencies for compliance with post-approval regulatory requirements, including Good Manufacturing Practices, or GMP regulations, adverse event reporting and other requirements. In addition, if there are any modifications to a drug product, further regulatory approval will be required. Failure to comply with manufacturing and other post-approval regulations of the FDA and other regulatory agencies can, among other things, result in fines, denial or withdrawal of regulatory approvals, product recalls or seizures, operating restrictions and criminal prosecution. Later discovery of previously unknown problems with a drug product, manufacturer or facility may result in restrictions on the drug product, us or our manufacturing facilities, including withdrawal of the drug product from the market. The cost of compliance with pre- and post-approval regulation may have a negative effect on our operating results and financial condition.

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

The nature of our business exposes us to potential liability risks inherent in the testing, manufacturing and marketing of pharmaceutical and biotechnology products. Our products and the clinical trials utilizing our products and drug candidates may expose us to product liability claims and possible adverse publicity. Product liability insurance is expensive, is subject to deductibles and coverage limitations, and may not be available in the future. While we currently maintain product liability insurance coverage that we believe is adequate for our current operations, we cannot be sure that such coverage will be adequate to cover any incident or all incidents. In addition, we cannot be sure that we will be able to 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.

We may become involved in patent litigation or other intellectual property proceedings relating to our products or processes that could result in liability for damage or stop our development and commercialization efforts.

The pharmaceutical industry has been characterized by significant litigation and interference and other proceedings regarding patents, patent applications, trademarks and other intellectual property rights. The types of situations in which we may become parties to such litigation or proceedings include:

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

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

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

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

• If third parties initiate litigation claiming that our brand names infringe their trademarks, we and our collaborators will need to defend against such proceedings.

An adverse outcome in any litigation or other proceeding could subject us to significant liabilities to third parties and require us to cease using the technology that is at issue or to license the technology from third parties. We may not be able to obtain any required licenses on commercially acceptable terms or at all.

The cost of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the cost of such litigation and proceedings more effectively than we can because of their substantially greater resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

Our ability to generate future revenues from any drug products that we successfully develop and for which we obtain regulatory approval will depend on reimbursement and drug pricing.

Acceptable levels of reimbursement for costs of developing and manufacturing of drug products and treatments related to those drug products 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 drugs and drug candidates. We cannot be sure that reimbursement in the United States or elsewhere will be available for any drug products we may develop or, if already available, will not be decreased in the future. The U.S. Congress recently enacted a limited prescription drug benefit for Medicare recipients in the Medicare Prescription Drug and Modernization Act of 2003. While the program established by this statute may increase demand for our products, if we participate in this program, our prices will be negotiated with drug procurement organizations for Medicare beneficiaries and are likely to be lower than we might otherwise obtain. Non-Medicare third-party drug procurement organizations may also base the price they are willing to pay on the rate paid by drug procurement organizations for Medicare beneficiaries. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our drug products. Any reduction in demand would adversely affect our business. If reimbursement is not available or is available only at limited levels, we may not be able to obtain collaborative partners to manufacture and commercialize drug products, and may not be able to obtain a satisfactory financial return on our own manufacture and commercialization of any future drug products.

Third-party payors are increasingly 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. Outside the United States certain countries set prices in connection with the regulatory process. We cannot be sure that such prices will be acceptable to us or our collaborative partners.

Our corporate compliance program cannot ensure that we are in compliance with all applicable “fraud and abuse” laws and regulations, and a failure to comply with such regulations or prevail in litigation related to noncompliance could harm our business.

Pharmaceutical and biotechnology companies have faced lawsuits and investigations pertaining to violations of health care “fraud and abuse” laws, such as the federal false claims act, the federal anti-kickback statute, and other state and federal laws and regulations. While we have developed and implemented a corporate

compliance program based upon what we believe are current best practices, we cannot guarantee that this program will protect us from future lawsuits or investigations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

Competitors may develop drug products that make our drug products obsolete.

Researchers are continually learning more about diseases, which may lead to new technologies for treatment. Even if we are successful in developing effective drug products, new drug products introduced after we commence marketing of any drug product may be safer, more effective, less expensive, or easy to administer than our drug products.

We operate in a competitive labor market, and our inability to hire and retain highly qualified personnel could limit our operations and results.

Our success in large part depends upon our ability to attract, train, motivate and retain qualified personnel for all aspects of our business. Because of great demand for qualified personnel and the numerous opportunities available to them in the biotechnology and pharmaceutical industries, we have experienced intense competition in attracting and retaining employees from the limited number of qualified personnel available. Because of this intense competition, we have had to interview a large number of candidates to meet our hiring needs. Other biotechnology and pharmaceutical companies with whom we compete for qualified personnel have greater financial and other resources, different risk profiles, and a longer history in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these factors may be more appealing to high quality candidates than what we have to offer. If we are unable to continue to attract and retain high quality personnel, the rate at which we can discover, develop and commercialize drug candidates will be limited.

Our use of hazardous materials, chemicals, viruses and radioactive compounds exposes us to potential liabilities.

Our research and development involves the controlled use of hazardous materials, chemicals, viruses, bacteria and various radioactive compounds. We are subject to numerous environmental and safety laws and regulations. We are subject to periodic inspections for possible violations of any environmental or safety law or regulation. Any violation of, and the cost of compliance with, the regulations could adversely effect our operations. Although we believe that our safety procedures for handling and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or a determination of non-compliance, we could be held liable for significant damages or fines.

Risks Related to Ownership of Our Common Stock

Our stock price may be volatile, and your investment in our stock could decline in value.

The trading price of our common stock has been, and is likely to continue to be volatile. Our stock price could be subject to wide fluctuations in response to a variety of factors, including the following:

• failure to meet any revenue projections made by us or securities analysts;

• actual or anticipated variations in quarterly operating results;

• changes in financial estimates by securities analysts;

• failure of third party reporters of sales data to accurately report our sales figures;

• adverse results or delays in clinical trials;

• our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

• inability to obtain adequate product supply for any approved drug product or inability to do so at acceptable prices;

• the termination of a collaboration or the inability to establish additional collaborations;

• adverse regulatory decisions;

• unanticipated serious safety concerns related to the use of CUBICIN;

• introduction of new products or services offered by us or our competitors;

• announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

• our failure to commercialize additional drug products;

• issuances of debt or equity securities; and

• other events or factors, many of which are beyond our control.

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

An adverse outcome of the SEC’s investigation into trading in our common stock around the time we disclosed information about the results of our Community Acquired Pneumonia trial could cause our stock price to decline.

In May 2004, the staff of the SEC advised our former Chairman and us that it was considering whether our former Chairman or we had a duty under the anti-fraud provisions of the federal securities laws to disclose information about the results of our Community Acquired Pneumonia trial, or CAP trial, prior to our January 16, 2002 press release. Prior to being notified in May 2004 that the SEC had decided to investigate the Company, we had been aware that the staff of the SEC had been conducting a formal investigation captioned “In the Matter of Trading in the Securities of Cubist Pharmaceuticals, Inc.” We had understood that the investigation was regarding whether there had been any trading in shares of our common stock while certain individuals were in possession of material nonpublic information about the results of the CAP trial. We had discussions, which were completed last year, with the Nasdaq National Market in connection with a 2002 NASD Regulation inquiry into trading in advance of the January 16, 2002 press release. The SEC filed a civil enforcement action against the wife of our former Chairman, her brother and her brother’s neighbor on January 12, 2005. This action alleges that the wife of our former Chairman transmitted material non-public information about the results of the CAP trial to her brother, and her brother transmitted this information to his neighbor prior to our press release of January 16, 2002. Neither the Company nor our former Chairman was named as a defendant in the SEC’s action.

We cannot predict what action, if any, the SEC staff may finally recommend. If the investigation results in a determination that we have failed to properly disclose information relating to the results of our CAP trial, we could be subject to class action lawsuits and derivative actions, substantial fines or penalties and other sanctions, which may adversely affect our stock price and our ability to raise capital. In addition, if the SEC institutes any other proceedings as a result of its investigation, our stock price may decline, even if we are not specifically named as a party to any of these proceedings.

We are exposed to potential risks from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

The Sarbanes-Oxley Act requires that we maintain effective internal controls over financial reporting and disclosure controls and procedures. Among other things, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 has required and will continue to require that we incur substantial accounting expense and expend significant management efforts. In future years our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls that we would be required to remediate in a timely manner so as to be able to comply with the requirements of Section 404 each year. If we are not able to comply with the requirements of Section 404 in a timely manner each year, we could be subject to sanctions or investigations by the SEC, the Nasdaq National Market or other regulatory authorities which would require additional financial and management resources and could adversely affect the market price of our common stock.

If our officers, directors and certain stockholders choose to act together, they may be able to significantly influence our management and operations, acting in their best interests and not necessarily those of other stockholders.

As of January 1, 2005, our directors, executive officers and greater than 5% stockholders and their affiliates beneficially owned approximately 41% of our issued and outstanding common stock. Accordingly, they collectively may have the ability to significantly influence the election of all of our directors and to significantly influence the outcome of corporate actions requiring stockholder approval. They may exercise this ability in a manner that advances their best interests and not necessarily those of other stockholders.

We have implemented anti-takeover provisions that could discourage, prevent or delay a takeover, even if the acquisition would be beneficial to our stockholders.

The existence of our stockholder rights plan and provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it difficult for a third party to acquire us, even if doing so would benefit our stockholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in information affecting our market risk since the end of the fiscal year ended December 31, 2004, as described in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2004.

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 (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2005, the Chief Executive and Chief Financial Officers have concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and regulations.

There has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As previously reported in the Company’s filings with the SEC, in May 2004, the Staff of the Boston Office of the SEC informed us that it was considering whether the Company or its former Chairman had a duty under the federal securities laws to disclose information about the results of the Company’s Community Acquired Pneumonia trial, or CAP trial, prior to the Company’s January 16, 2002 press release regarding the results of the CAP trial.

We had discussions, which were completed last year, with the Nasdaq National Market in connection with a 2002 NASD Regulation inquiry into trading in advance of the January 16, 2002 press release. The SEC filed a civil enforcement action against the wife of our former Chairman, her brother and her brother’s neighbor on January 12, 2005. This action alleges that the wife of our former Chairman transmitted material non-public information about the results of the CAP trial to her brother, and her brother transmitted this information to his neighbor prior to our press release of January 16, 2002. Neither the Company nor our former Chairman was named as a defendant in the SEC’s action.

ITEM 6. EXHIBITS

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

		10.1 Amendment No. 2 dated March 3, 2005 to the Assignment and License Agreement dated October 20, 2000 between Cubist and Eli Lilly

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

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

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

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

SIGNATURE

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

CUBIST PHARMACEUTICALS, INC.

May 5, 2005
By:		/s/ David W.J. McGirr
		David W.J. McGirr Senior Vice President and Chief Financial Officer
	(Authorized Officer and Principal Finance and Accounting Officer)

Item

PART I. Financial information

1.		Condensed Consolidated Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004
		Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004
		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
		Notes to the Condensed Consolidated Financial Statements
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
3.		Quantitative and Qualitative Disclosures About Market Risk
4.		Controls and Procedures

PART II. Other Information

1.	Legal proceedings
6.	Exhibits
	Signatures