10-K

Use these links to rapidly review the document
Cubist Pharmaceuticals, Inc. Annual Report on Form 10-K Table of Contents
ITEM 8. FINANCIAL STATEMENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-21379

CUBIST PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)	22-3192085 (I.R.S. Employer Identification No.)
65 Hayden Avenue, Lexington, MA 02421 (Address of Principal Executive Offices and Zip Code)
(781) 860-8660 (Registrant's Telephone Number, Including Area Code)

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

Title of each class	Name of each exchange on which registered
Common Stock, $0.001 Par Value	Nasdaq Global Select MarketSM
Series A Junior Participating Preferred Stock Purchase Rights	Nasdaq Global Select MarketSM

Securities registered pursuant to Section 12(g) of the Act:
None

(Title of Each Class)

(Name of Each Exchange on Which Registered)

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No ý

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

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

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

Large accelerated filer ý Accelerated filer o Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company o

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

         The aggregate market value of the registrant's common stock, $0.001 par value per share, held by non-affiliates of the registrant as of June 30, 2007 was approximately $930.0 million, based on 47,186,820 shares held by such non-affiliates at the closing price of a share of common stock of $19.71 as reported on the NASDAQ Global Select Market^SM on such date. The number of outstanding shares of common stock of Cubist on February 25, 2008 was 56,218,625.

DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 10, 2008
ARE INCORPORATED BY REFERENCE INTO PART III.

Cubist Pharmaceuticals, Inc.

Annual Report on Form 10-K

Table of Contents

Item		Page
PART I
1.	Business	4
1A.	Risk Factors	20
1B.	Unresolved Staff Comments	39
2.	Properties	39
3.	Legal Proceedings	40
4.	Submission of Matters to a Vote of Security Holders	40
PART II
5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	41
6.	Selected Financial Data	43
7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	44
7A.	Quantitative and Qualitative Disclosures About Market Risk	61
8.	Financial Statements and Supplementary Data	63
9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	98
9A.	Controls and Procedures	98
9B.	Other Information	98
PART III
10.	Directors, Executive Officers and Corporate Governance	99
11.	Executive Compensation	99
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	99
13.	Certain Relationships and Related Transactions, and Director Independence	99
14.	Principal Accountant Fees and Services	99
PART IV
15.	Exhibits and Financial Statement Schedule	100
	Signatures	106

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 Annual Report. The forward-looking statements contained and incorporated herein represent our judgment as of the date of this Annual Report, and we caution readers not to place undue reliance on such statements. The information contained in this Annual Report is provided by us as of the date of this Annual Report, and we do not undertake any obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise.

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

•

our expectations regarding publishing, clinical trials, development time lines and regulatory authority approval for and oversight of CUBICIN or other drug candidates;



•

our expected research and development investment and expenses and gross margins;



•

our expectations regarding our personnel needs, including with respect to our sales force;



•

our expectations regarding our acquisition and integration of Illumigen Biosciences, Inc., or Illumigen;



•

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



•

our expectations regarding our needs for CUBICIN active pharmaceutical ingredient, or API;



•

our intention not to repurchase our shares in the foreseeable future;



•

our expectations regarding the payment of dividends and potential repurchases of our securities;



•

the impact of new accounting pronouncements;



•

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



•

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



•

our business strategy and our expectations regarding general business conditions and growth in the biopharmaceutical industry and the 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:

•

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;



•

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

2

•

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



•

whether or not third parties may seek to market generic versions of our products by filing Abbreviated New Drug Applications, or ANDAs, with the FDA, and the results of any litigation that we file to defend and/or assert our patents against such generic companies;



•

competition in the markets in which we and our partners market CUBICIN, including marketing approvals for new products that will be competitive with CUBICIN;



•

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



•

the ability of our third party manufacturers, including our single source provider of API, to manufacture sufficient quantities of CUBICIN in accordance with Good Manufacturing Practices and other requirements of the regulatory approvals for CUBICIN and at an acceptable cost;



•

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



•

whether the U.S. Food and Drug Administration, or FDA, accepts proposed clinical trial protocols that may be achieved in a timely manner for additional studies of CUBICIN or any other drug candidate we seek to enter into clinical trials;



•

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



•

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



•

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



•

legislative and policy changes in the United States and other jurisdictions where our products are sold that may affect the ease of getting a new product or a new indication approved;



•

changes in government reimbursement for our or our competitors' products;



•

our dependence upon collaborations with our partners and our partners' ability to execute on development, regulatory and sales expectations in their territories;



•

our ability to finance our operations;



•

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



•

our ability to protect our proprietary technologies; and



•

a variety of risks common to our industry, including ongoing regulatory review, public and investment community perception of the industry, legislative or regulatory changes, and our ability to attract and retain talented employees.

3

PART I

ITEM 1.    BUSINESS

        Cubist Pharmaceuticals, Inc., which we refer to as "Cubist" or the "Company", was incorporated in Delaware in 1992. We completed our initial public offering in 1996, and our shares are listed on the NASDAQ Global Select Market, where our symbol is CBST. Our principal offices are located at 65 Hayden Avenue, Lexington, Massachusetts. Our telephone number is 781-860-8660, and our website address is www.cubist.com.

Corporate Overview and Business Strategy

        Cubist is a biopharmaceutical company focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. To date, we have concentrated exclusively on developing products for the anti-infective marketplace.

        Cubist has one marketed product, an intravenous (IV) antibiotic, CUBICIN® (daptomycin for injection), which was launched in the U.S. in November 2003. CUBICIN is approved in the U.S. for the treatment of complicated skin and skin structure infections, or cSSSI, caused by Staphylococcus aureus (S. aureus) and certain other Gram-positive bacteria, and for blood-stream infections (bacteremia), including right-sided infective endocarditis, caused by methicillin susceptible and methicillin resistant S. aureus (MSSA and MRSA). Since its U.S. launch, CUBICIN also has received similar regulatory approvals in many markets outside the U.S., including the European Union and Canada. Cubist commercializes CUBICIN in the U.S. and has established marketing agreements with other companies for commercialization of CUBICIN in all countries outside the U.S.

        We have focused our pipeline building efforts on opportunities that leverage our anti-infective and acute-care discovery, development, regulatory, and commercialization expertise. Currently, we have two anti-infective programs approaching the Investigational New Drug Application, or IND, filing stage preparatory to clinical trials. These programs are described in the Product Pipeline section of this report.

The Markets for Which We Develop and Market Acute Care Therapy Today

Antibacterial Agents for Serious Infections

        Antibacterial therapies work by inhibiting specific critical processes in a bacterial pathogen. Such therapies can be either static—inhibiting growth of the pathogen, or cidal—causing the death of the pathogen. Many antibiotics in use today were developed and introduced into the market from the 1950s to the 1980s. Most of these were developed from existing classes of drugs such as semi-synthetic penicillins, cephalosporins, macrolides, quinolones and carbapenems. Only two new antibiotics from new chemical classes have been introduced to the market in the past 35 years—Zyvox, a static agent which is known generically as linezolid and is from the oxazolidinones chemical class, and CUBICIN, a cidal agent known generically as daptomycin, which is a lipopeptide.

        The increasing prevalence of drug-resistant bacterial pathogens has led to increased mortality rates, prolonged hospitalizations, and increased healthcare costs. The resistant organisms have emerged from both the Gram-positive and Gram-negative classes of bacteria. Gram-positive bacteria can be differentiated from Gram-negative bacteria by the differences in the structure of the bacterial envelope. Gram-positive bacteria possess a single cellular membrane and a thick cell wall component, whereas Gram-negative bacteria possess a double cellular membrane with a thin cell wall component. These cellular structures greatly affect the ability of an antibiotic to penetrate the bacterium and reach its target site.

4

        Examples of drug-resistant Gram-positive bacterial pathogens include:

•

MRSA (methicillin-resistant Staphylococcus aureus):  S. aureus, often referred to simply as "staph," are bacteria commonly carried on the skin or in the nose of healthy people. In some cases, S. aureus can cause an infection, and these bacteria are among the most common causes of skin infections in the U.S. These infections can be minor (such as pimples or boils) which can be treated in many cases without antibiotics (by draining an abscess for example). However, S. aureus bacteria can also cause more serious infections (such as post-surgical wound infections, pneumonia, and infections of the bloodstream and of the bone and joints). Over the past 50 years, treatment of these infections has become more difficult due to the prevalence of MRSA, that is, S. aureus that have become resistant to various antibiotics, including commonly used penicillin-related antibiotics. As reported by the CDC and others, more than 60% of S. aureus isolates in the U.S. are methicillin-resistant.

        The practical definition of resistance for a pathogen is when the minimum inhibitory concentration, or MIC value, exceeds a pre-specified limit for that specific antibiotic. Vancomycin has been the standard of care for patients who have serious MRSA infections. However, several strains of staphylococci, such as GISA (glycopeptides intermediate Staphylococcus aureus, MIC = 8-16 µg/ml), and VRSA (vancomycin-resistant Staphylococcus aureus, MIC >/= 32 µg/ml), have developed reduced susceptibility or resistance to vancomycin. In addition, recent published reports document a poor clinical success rate for vancomycin therapy against some S. aureus isolates with a vancomycin MIC of 1.0 to 2.0 µg/ml; levels which are still officially designated as within the FDA susceptibility range (</= 4 µg/ml) for vancomycin. In recognition of the issues with vancomycin susceptibility, the Clinical Laboratory Standards Institute, or CLSI has approved lower susceptibility criteria (</=2 mcg/mL as susceptible) for vancomycin against S. aureus, and the American Society of Microbiology has issued a statement in support of these tighter standards.

        While infections caused by MRSA had been associated mostly with hospital and long-term care settings, the incidence of community-acquired MRSA, or CA-MRSA, infections has been increasing rapidly. Of great concern to the infectious disease community and public health authorities, such as the U.S. Centers for Disease Control and Prevention, is the fact that community-acquired MRSA infections show up in otherwise healthy individuals—not fitting the traditional profile for an "at risk" patient such as a frequent user of the health care system who is more likely to be exposed to MRSA infections. As a result, individuals contracting a MRSA infection outside of the healthcare system can be misdiagnosed and receive inappropriate initial therapy. Such patients can get more seriously ill and require hospitalization. Of additional concern to the infectious disease community is the fact that most community-acquired MRSA strains are more virulent than the strains traditionally found in hospitals. The CA-MRSA strains have the ability to defeat the host's immune system, thereby resulting in an infection becoming more severe more quickly.

•

GISA or VISA (glycopeptide- or vancomycin-intermediately susceptible S. aureus):  The first reports of S. aureus infections with decreased susceptibility to vancomycin occurred in 1998. Such bacterial strains have been found in wide geographic areas throughout Japan and North America and have recently emerged in Europe. However, the incidence of these strains remains rare.



•

Heteroresistance:  Heteroresistance refers to the situation in which a small sub-population of bacteria survives at concentrations of antibiotic that effectively kill the majority of the population (or stop them from growing). Specialized testing techniques are required to detect heteroresistance to vancomycin, which appears to be becoming more common in S. aureus. The clinical impact of heteroresistance is unknown.

5

•

VRSA (vancomycin-resistant S. aureus):  During 2002, the first isolates of fully vancomycin-resistant S. aureus were discovered in the U.S. Unexpectedly, rather than evolving from a VISA strain, these VRSA emerged from MRSA strains that had acquired the vancomycin-resistance gene from vancomycin-resistant Enterococci, or VRE.



•

VRE (vancomycin-resistant Enterococci):  The emergence of VRE strains in the 1990s has led to infections for which only limited commercially available therapy exists.



•

Clostridium difficile:C.difficile is an opportunistic anaerobic Gram-positive bacterium causing the most commonly diagnosed form of hospital-acquired, or nosocomial, diarrhea—Clostridium difficile associated diarrhea, or CDAD. Recent years have witnessed the emergence of a hypervirulent strain of C. difficile that produces much higher levels of toxins. This strain also demonstrates high level resistance to fluoroquinolones which may have contributed to its spread through the U.S., Canada, the United Kingdom, the Netherlands and Belgium. Physicians have noted an increase in incidence and mortality rates as well as increases in numbers of patients requiring emergency colectomy (removal of all or part of the colon) or admission to ICUs.

        Examples of resistant Gram-negative pathogens are:

•

Pan-resistant Pseudomonas aeruginosa: P.aeruginosa is a major cause of opportunistic infections among immunocompromised patients. Multi-drug resistance is increasingly observed in clinical isolates reflecting both their innate resistance (limited permeability of the P. aeruginosa outer membrane) along with acquisition of resistance mechanisms. It is now commonplace for a burn patient to develop an infection with a pan-resistant organism—resistant to B-lactams, fluoroquinolones, tetracycline, chloramphenicol, macrolides, trimethoprim/sulfa, and aminoglycosides.



•

ESBL positive Gram-negatives:  Extended-spectrum B-lactamases (ESBLs) are plasmid-mediated bacterial enzymes that result from genetic mutations of native B-lactamases such that they confer resistance to a broader group of antibiotics including third-generation cephalosporins. Since the first ESBL positive strain was recognized approximately 20 years ago, these ESBL producing pathogens have spread and are now found in every part of the world. Clinical failures have been associated with use of the third generation cephalosporins—most frequently ceftazidime. Proper detection of ESBLs and appropriate treatment strategies are needed to overcome such rising resistance.

        The prevalence of resistant organisms creates a growing need for therapies with novel mechanisms of action.

Antiviral therapy for Hepatitis C Virus (HCV) infections

        HCV is a virus that primarily targets the liver, currently causing infection in more than 4 million people in the U.S. and 180 million people worldwide. The virus is difficult to eradicate, with infected patients eventually developing chronic liver infection, and, in some cases, liver cancer. HCV infection is the most common reason for liver transplantation in the U.S. and Western Europe and the leading cause of death from liver disease.

        No vaccine is currently available to prevent HCV infection. Current HCV therapy combines a pegylated-interferon with ribavirin for up to 48 weeks of treatment. Current therapy has significant problems with both safety (e.g., significant treatment limiting adverse effects and contraindications) and efficacy (e.g., 80% of HCV infections in the U.S. are due to genotype 1 virus for which the efficacy rate of current therapy is approximately 40 to 50%). The HCV market was $2.2 billion in 2005 and is projected to double to $4.4 billion in 2010. This growth will be driven by an increase in the number of patients being treated, uptake of new drugs, and the use of multi-drug treatment regimens.

6

Our Flagship Product: CUBICIN

        CUBICIN is the first antibiotic from a class of anti-infectives called lipopeptides. CUBICIN is currently the only marketed once-daily, bactericidal, intravenous (IV) antibiotic with activity against methicillin-resistant S. aureus, or MRSA. CUBICIN is approved in the U.S. for the treatment of complicated skin and skin structure infections, or cSSSI, caused by S. aureus and certain other Gram-positive bacteria, and for S. aureus bloodstream infections (bacteremia), including right-sided infective endocarditis caused by MRSA and MSSA. In the European Union, or EU, CUBICIN is approved for the treatment of complicated skin and soft tissue infections, or cSSTI, where the presence of susceptible Gram-positive bacteria is confirmed or suspected. In September 2007, the Marketing Authorization for the CUBICIN label in the EU was expanded to include right-sided infective endocarditis, or RIE, due to S. aureus bacteremia and S. aureus bacteremia associated with RIE or cSSTI. Other markets where CUBICIN has an approved label for cSSSI caused by certain Gram-positive bacteria and for S. aureus blood stream infections include Argentina, Canada, India, Israel, Korea and Taiwan.

        We believe that CUBICIN provides important advantages over existing antibiotic therapies in its approved indications, given its rapid bactericidal properties demonstrated in vitro*, distinct mechanism of action, convenient once-daily dosing regimen, and established safety profile. In addition, CUBICIN's approval in the U.S. for the treatment of S. aureus bloodstream infections is the first such approval by the FDA in more than 20 years, and is based on results from the only prospective, randomized, and controlled registration trial of S. aureus bacteremia and endocarditis ever undertaken. CUBICIN's spectrum of activity includes both susceptible strains of Gram-positive pathogens and strains that are resistant to other antibiotic therapies.

*

the clinical relevance of in vitro data has not been established.

        In our review of the infectious disease marketplace above, we referenced the increasing prevalence of drug-resistant bacterial pathogens as a concern to the infectious disease community. The need for multiple mutation steps and the small impact of each step on susceptibility substantially decreases the likelihood that daptomycin-susceptible bacteria will become daptomycin-resistant. At year-end, CUBICIN had been on the market for 50 months and has been used in the treatment of an estimated 460,000 patients. The number of reported resistant isolates, compared to the number of patients treated (or the numbers of bacteria being tested for susceptibility) continues to be extremely small, consistent with the findings of the pre-New Drug Application, or NDA, clinical program. Where clinical circumstances are known, S. aureus nonsusceptible isolates are generally associated with antibiotic underdosing or difficult-to-treat infections involving undrained abscesses or retained material.

Clinical Development of CUBICIN

        We continue to undertake research which can add to the medical knowledge about CUBICIN. In 2007, we completed enrollment in a Phase 2 clinical study of CUBICIN designed to test the feasibility of treating complicated skin infections with shorter duration therapy at a higher dose of CUBICIN. We enrolled 102 patients in this initial evaluation of safety and efficacy of short duration therapy for cSSSI. In our conference call discussing our results for the fiscal 2007 year-end, we reported that:

•

Four days of CUBICIN therapy at 10mg/kg/day resulted in cure rates consistent with what we saw in the cSSSI pivotal studies. This is despite the fact that more patients in this trial had MRSA infections, which are more difficult to treat. The trial was not sized for statistical significance vs. standard of care therapy. There was a slightly higher numerical success rate for the longer—up to two weeks—standard of care therapy.

7

•

A dose of 10mg/kg/day for cSSSI was well tolerated, with safety findings consistent with what we have seen in our pivotal skin trials and with CUBICIN use since launch.



•

A majority of CUBICIN patients in the study were treated as outpatients at 10 mg/kg/day for 4 days.

        We expect to submit these findings for publication or presentation in appropriate peer-reviewed journals or forums. We may consider additional studies regarding shorter duration therapy, but would likely want to make refinements based on the learning from this study. The benefit of higher doses of CUBICIN, such as 10 mg/kg, may be more important in more serious infections, such as bacteremia, and it is likely that we will further investigate the effects of higher doses on such infections.

        Higher doses of CUBICIN are being investigated in a number of settings both by Cubist and outside investigators. One of these studies is our comparative dosing prosthetic joint infection, or PJI, Phase 2 trial. Here we are comparing 6 and 8 mg/kg of CUBICIN for 6 weeks against standard therapy (either vancomycin or teicoplanin) for PJI, which is one form of osteomyelitis (infection in the bone). This is a difficult trial in which to enroll candidates because the incidence of infections following knee or hip implants is very low (under 5%) and we are dealing with an older, sicker population who will not always qualify for the study based on the entry criteria. We will continue to monitor enrollment to determine if we need to seek approval from the FDA to loosen the entry criteria. We currently expect enrollment to continue through 2008 with data available from the PJI trial in 2009.

        We will begin to enroll patients this year in our Pediatric safety and efficacy trial in complicated skin infections. This is a regulatory commitment and represents an area of growing unmet need, and an opportunity to optimize the utility of CUBICIN in the infectious disease armamentarium. We plan to enroll 225 children, ages 7 to 17, with about 150 receiving CUBICIN therapy. The study should take approximately one year and, accordingly, we expect data to be available in 2009. We will begin a pharmacokinetics, or PK, study in younger children, ages 2 to 6. This should begin enrolling in Q3, but will be slower to enroll, with data expected to be available in 2010.

        Other development for CUBICIN this year includes progressing our work with renal-impaired patients. We have a PK study underway, in patients receiving hemodialysis or chronic ambulatory peritoneal dialysis, and following our receipt of these results, we will review them with the FDA and begin to prepare for a Phase 4 safety and efficacy study in renal-impaired patients with complicated skin infections.

        An additional post-approval regulatory commitment that we have with the FDA is a study of CUBICIN as part of combination therapy for infective endocarditis. Here we will compare safety and efficacy of CUBICIN at 6 mg/kg with and without gentamicin. We expect this exploratory Phase 2 study should begin enrollment in the first half of 2008.

CUBICIN in the U.S. Market

        We generated $285.1 million, $189.5 million and $113.4 million in U.S. net product sales of CUBICIN in 2007, 2006 and 2005, respectively. We market CUBICIN to more than 2,000 institutions (hospitals and outpatient acute care settings) that represent approximately 83% of the total market opportunity for IV antibiotics to treat serious Gram-positive infections. In addition to our in-house marketing team, our acute care sales force as of February 1, 2008 included approximately 157 clinical business managers (CBMs). We have been hiring CBMs over the past few months to achieve our stated goal of increasing the number of CBMs in the U.S. from 135 to 164 by April 1, 2008. In addition, the U.S. acute care sales organization includes small numbers of regional business directors (RBDs), regional access managers (RAMs) who help to facilitate the acquisition of CUBICIN for use in the outpatient infusion market, and Senior Sales Directors (SSDs).

8

Our International Marketing Partners for CUBICIN

        In 2007, total international revenue for CUBICIN was $5.3 million. CUBICIN is being introduced to markets outside the U.S. through alliances we have entered into with other companies. Novartis AG, or Novartis, through a subsidiary, is responsible for regulatory filings, sales, marketing and distribution costs in Europe, Australia, New Zealand, India, and certain Central American, South American and Middle Eastern countries. Other international partners for CUBICIN include Medison Pharma, Ltd., for Israel, Oryx Pharmaceuticals, Inc. for Canada, TTY BioPharm for Taiwan, and Kuhnil Pharma Co., Ltd. for Korea. AstraZeneca AB, or AstraZeneca, has licensed rights to CUBICIN in China as well as more than one hundred additional countries. In 2007, Cubist completed global marketing alliances for CUBICIN when it licensed the Japanese rights to CUBICIN to Merck & Co. which will develop and commercialize CUBICIN in Japan through its wholly owned subsidiary, Banyu Pharmaceutical Co., Ltd.

        Each partner is responsible for seeking regulatory approvals to market CUBICIN in its territory. Cubist is responsible for manufacturing and supplying CUBICIN to our partners in exchange for a transfer price and, in the case of Novartis, a possible additional royalty.

Our Product Pipeline

        Our research and development programs focus on opportunities created by unmet needs in the acute care and anti-infective market and leverage the expertise and experience we have gained through our past and continued development of CUBICIN. We have some promising preclinical programs underway.

        For example, in the fourth quarter of 2007, we acquired a pre-clinical hepatitis C therapy candidate, IB657, when we purchased Illumigen. IB657 is a protein therapeutic which is an optimized oligoadenylate synthetase (or OAS). IB657 has potent in vitro antiviral activity against HCV and some other viruses, and has the potential to be a safe and effective mainstay of therapy for Hepatitis C. We have valued the compound as an add-on to current HCV therapy, where it could act as an interferon-sparing agent. This program is moving forward in pre-IND mode. We expect to create good manufacturing practices, or GMP, quality materials and assemble an IND dossier while also beginning to work on contract research organization, or CRO, logistics so we will be prepared to move quickly into the clinic. We have set an objective of an IND filing in the second half of 2008.

        As announced in our conference call announcing our results for our 2007 fiscal year, Cubist scientists have been working on an antibiotic agent for the treatment of CDAD. We have identified an interesting lead molecule with preclinical efficacy against C. difficile. Unlike other marketed agents for C. difficile, our research shows this candidate is rapidly cidal, meaning it kills the bacteria quickly, which could give the compound advantages in treatment of infections caused by C. difficile. We are focusing attention on this antibiotic CDAD program and are moving aggressively towards our goal of an IND filing by the end of this year.

        We also are developing compounds which we believe have promise as potential therapy for infections caused by resistant Gram-negative pathogens, where there is a significant unmet medical need. We have made progress in assessing potency, efficacy, PK, and safety of the molecules we are developing, in animal models of infections caused by a variety of Gram-negative pathogens.

        In the past, we have referenced two additional preclinical programs: our lipopeptide program for a CUBICIN-like therapy with activity in the lung, and a toxin binder therapy for the treatment of CDAD we were developing in collaboration with Ilypsa. In the fourth quarter, we suspended our lipopeptide pneumonia program due to the difficulty in improving upon daptomycin and adding pulmonary activity, and we terminated our CDAD toxin binder research collaboration with Ilypsa which we began in 2006.

9

Our Research and Development Expenditures

        Our research and development expenditures, which include research related to CUBICIN, as well as our drug discovery projects, were $85.2 million, $57.4 million and $51.7 million in 2007, 2006 and 2005, respectively. Based on our ongoing investments in CUBICIN, and the progression of our product pipeline programs, we expect that our investments in research and development will grow in 2008.

Our Significant Customers

        Revenues from Cardinal Health, Inc., or Cardinal, accounted for approximately 32%, 33% and 32% of all revenues for the years ended December 31, 2007, 2006 and 2005, respectively. Revenues from Amerisource Bergen Drug Corporation accounted for approximately 30%, 32% and 31% of all revenues for the years ended December 31, 2007, 2006 and 2005, respectively. Revenues from McKesson Corporation accounted for approximately 20%, 21% and 21% of all revenues for the years ended December 31, 2007, 2006 and 2005, respectively.

Our Intellectual Property Portfolio

        We seek to protect our novel compounds, cloned targets, expressed proteins, assays, organic synthetic processes, screening technology and other technologies by, among other things, filing, or causing to be filed on our behalf, patent applications.

        To date, Cubist and its subsidiaries own or co-own 34 issued U.S. patents, 28 pending U.S. patent applications, 42 issued foreign patents and approximately 189 pending foreign patent applications. We have exclusively licensed technology from Eli Lilly and Company, or Eli Lilly, related to the composition, manufacture, and use of daptomycin, the active ingredient in CUBICIN. The primary composition of matter patent covering daptomycin in the U.S. has expired; however, currently there are five issued U.S. patents owned by Cubist (U.S. Patent Nos. 6,852,689; 6,696,412; 6,468,967; RE39,071; and 4,885,243) that cover the drug product, manufacture, and/or administration or use of daptomycin. In addition, we have also filed a number of patent applications in our name relating to the composition, manufacture, administration and/or use of daptomycin and/or other lipopeptides.

Manufacturing, Distribution and Other Agreements

        In September 2001, we entered into a manufacturing and supply agreement with ACS Dobfar SpA, or ACS, pursuant to which ACS agreed to provide scale-up services and to construct a production facility dedicated to the manufacture and sale of API for CUBICIN exclusively to us for commercial purposes. In accordance with this agreement, we purchase API from ACS subject to minimum annual quantity requirements. We also currently engage ACS to manufacture API for our clinical trials of CUBICIN. Upon the termination of our contract with a previous supplier in 2006, ACS became the single source supplier of API for CUBICIN. We expect that ACS's substantial fermentation and purification plant capacity can meet all of our anticipated needs for CUBICIN API.

        In April 2000, we entered into an agreement with Hospira, Inc., or Hospira, formerly the core global hospital products business of Abbott Laboratories. Under this agreement, Hospira currently converts API into our finished, vialed formulation of CUBICIN. In September 2003, we entered into a packaging services agreement with Catalent Pharma Solutions, LLC, or Catalent, the successor-in-interest to Cardinal Health PTS, LLC, pursuant to which Catalent packages and labels the finished CUBICIN product. In September 2004, we entered into an additional services agreement with Catalent to provide fill/finish as well as packaging services for the finished CUBICIN product. Hospira and Catalent both continue to provide fill/finish services for CUBICIN, with Catalent also providing packaging services.

10

        In June 2003, we entered into a services agreement with Integrated Commercialization Solutions, Inc., or ICS, whereby ICS agreed to exclusively manage our CUBICIN warehousing and inventory program and to distribute finished product to our customers. ICS also provides us with order processing, order fulfillment, shipping, collection and invoicing services in support of the direct ship model we have employed since the launch of CUBICIN in the U.S.

        In September 2001, Cubist entered into a services agreement with PPD Development, LLC, or PPD, pursuant to which PPD has agreed to provide various clinical, laboratory, GMP and other research and testing services. In December 2006, Cubist received approval from the FDA to begin release testing of CUBICIN at its Lexington facility. Testing for the U.S. market that was previously performed at PPD is now performed by Cubist.

Competition

        CUBICIN is currently approved in the U.S. for the treatment of cSSSI caused by certain Gram-positive bacteria, and for the treatment of S. aureus bloodstream infections (bacteremia), including right-sided infective endocarditis caused by MRSA and MSSA. There are many currently approved antibiotics used to treat these types of infections. The most commonly prescribed antibiotics for susceptible strains of bacteria are: first-generation cephalosporins, such as cefazolin, and semi-synthetic penicillins, such as oxacillin and nafcillin. For the treatment of resistant organisms, the most commonly prescribed treatments are vancomycin and linezolid. All of these antibiotics, except linezolid, which is marketed as Zyvox®, and tygacycline, a broad spectrum antibiotic which is marketed as Tygacil®, are distributed by generic manufacturers at relatively low drug acquisition cost. In addition, the FDA is reviewing an NDA for the Gram-positive agent telavancin (submitted by Theravance, Inc., whose partner for telavancin is Astellas Pharma US, Inc.). Telavancin received an approvable letter on October 22, 2007. The FDA also is reviewing ceftobiprole, a broad spectrum agent with MRSA activity (NDA submitted in May 2007 by a division of Johnson & Johnson). Another Gram-positive agent under review is dalbavancin from Pfizer, Inc. Pfizer received its first approvable letter for dalbavancin in September 2005, and has received multiple approvable letters from the FDA since then, citing the need for additional data, among other requests. In February 2008, Targanta Therapeutics Corporation announced that it had submitted an NDA to the FDA for oritivancin to be used for the treatment of cSSSI caused by Gram-positive bacteria, including MRSA. In July 2007, Arpida Ltd. reported the completion of the Phase 3 trial for iclaprim, a broad spectrum agent with MRSA activity, in cSSSI. Accordingly, some or all of these agents may be approved and marketed in the near future and could compete with CUBICIN.

Government Regulation

Overview

        Our development, manufacture and marketing of pharmaceutical drugs is subject to extensive regulation by numerous governmental agencies within the jurisdictions where we choose to market our products, principally the FDA in the United States, the European Medicines Agency, or EMEA for EU member states, and by various country-specific regulatory bodies in other countries. These regulations not only dictate the form and content of safety and efficacy data regarding a proposed product, but also impose specific requirements regarding manufacture of the product, quality assurance, packaging, storage, documentation and record keeping, labeling, advertising and marketing procedures. All of these regulations and required oversight are intended to ensure the efficacy, safety and consistency of pharmaceuticals. The time and expense involved in meeting the requirements to obtain and maintain regulatory approvals are quite substantial.

11

U.S.—FDA Process

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

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

        Phase 1 Clinical Trials:    Phase 1 clinical trials represent the initial administration of the investigational drug to a small group of healthy human subjects or, more rarely, to a group of select patients with the targeted disease or disorder. The goal of Phase 1 clinical trials is typically to test for safety, dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical pharmacology and, if possible, to gain early evidence regarding efficacy.

        Phase 2 Clinical Trials:    Phase 2 clinical trials involve a small sample of the actual intended patient population and seek to assess the efficacy of the drug for specific targeted indications, to determine dose response and the optimal dose range and to gather additional information relating to safety and potential adverse effects.

        Phase 3 Clinical Trials:    Once an investigational drug is found to have some efficacy and an acceptable safety profile in the targeted patient population, Phase 3 clinical trials are initiated to establish further clinical safety and efficacy of the investigational drug in a broader sample of the general patient population at geographically dispersed study sites in order to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for product labeling. The Phase 3 clinical development program consists of expanded, large-scale studies of patients with the target disease or disorder to obtain definitive statistical evidence of the efficacy and safety of the proposed product and dosing regimen.

        All of the phases of clinical studies must be conducted in conformance with the FDA's bioresearch monitoring regulations.

        New Drug Application:    All data obtained from a comprehensive development program including research and product development, manufacturing, pre-clinical and clinical trials and related information are submitted in a New Drug Application, or NDA, to the FDA and in similar regulatory filings with the corresponding agencies in other countries for review and approval. In certain circumstances, this information is submitted in a Biologics License Application, or BLA. In addition to reports of the trials conducted under the IND, the NDA includes information pertaining to the

12

preparation of the new drug, analytical methods, details of the manufacture of finished products and proposed product packaging and labeling. Although the Food Drug and Cosmetic Act requires the FDA to review NDAs within 180 days of their filing, in practice, longer times may be required.

        In some cases, the FDA may decide to expedite the review of new drugs that are intended to treat serious or life threatening conditions and demonstrate the potential to address unmet medical needs. Cubist was granted such a Priority Review after the CUBICIN NDA was submitted in 2002; and in 2005 after submission of the supplemental new drug application, or sNDA, for the expansion of the CUBICIN label.

        Phase 4 Clinical Trials:    Phase 4 clinical trials are studies that are conducted after a product has been approved. These trials can be conducted to collect long-term safety information or to collect additional data about a specific population. As part of a product approval, the FDA may require that certain Phase 4 studies be conducted post-approval, and in these cases these Phase 4 studies are called post-marketing commitments.

        Hatch-Waxman Act:    Under the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, Congress created an abbreviated FDA review process for generic versions of pioneer (brand name) drug products like CUBICIN. The law also provides incentives by awarding, in certain circumstances, non-patent marketing exclusivities to pioneer drug manufacturers. Newly approved drug products and changes to the conditions of use of approved products may benefit from periods of non-patent marketing exclusivity in addition to any patent protection the drug product may have. The Hatch-Waxman Act provides five years of "new chemical entity", or NCE, marketing exclusivity to the first applicant to gain approval of an NDA for a product that does not contain an active ingredient found in any other approved product. The FDA granted CUBICIN five years of NCE exclusivity, which expires on September 12, 2008. During this five-year period, the FDA is prohibited from accepting any Abbreviated New Drug Application, or ANDA, for a generic drug. The FDA is also prohibited from accepting any NDA during this five-year period where the applicant does not own or have a legal right of reference to all of the data required for approval, otherwise known as a 505(b)(2) application. The five-year exclusivity protects the entire new chemical entity franchise, including all products containing the active ingredient for any use and in any strength or dosage form. This exclusivity will not prevent the submission or approval of a full NDA, as opposed to an ANDA or 505(b)(2) application, for any drug, including, for example, a drug with the same active ingredient, dosage form, route of administration, strength and conditions of use.

        The Hatch-Waxman Act also provides three years of exclusivity for applications containing the results of new clinical investigations (other than bioavailability studies) essential to the FDA's approval of new uses of approved products, such as new indications, dosage forms, strengths, or conditions of use. The FDA granted CUBICIN three years of exclusivity, which expires on May 25, 2009, for the additional indication of Staphylococcus aureus, or S. aureus, bloodstream infections (bacteremia). However, this exclusivity only protects against the approval of ANDAs and 505(b)(2) applications for the protected use and will not prohibit the FDA from accepting or approving ANDAs or 505(b)(2) applications for other products containing the same active ingredient.

        The Hatch-Waxman Act requires NDA applicants and NDA holders to provide certain patent information for listing in "Approved Drug Products with Therapeutic Equivalence Evaluations," also known as the "Orange Book". ANDA and 505(b)(2) applicants must then certify regarding each of the patents listed with the FDA for the reference product(s). A certification that each listed patent is invalid or will not be infringed by the marketing of the applicant's product is called a "Paragraph IV certification." If the ANDA or 505(b)(2) applicant provides such a notification of patent invalidity or noninfringement, then the FDA may accept the ANDA or 505(b)2) application four years after approval of the NDA.

13

        If a Paragraph IV certification is filed and the ANDA has been accepted as a reviewable filing by the FDA, the ANDA or 505(b)(2) applicant must then within 30 days provide notice to the NDA holder and patent owner stating that the application has been submitted and providing the factual and legal basis for the applicant's opinion that the patent is invalid or not infringed. If the NDA holder or patent owner files suit against the ANDA or 505(b)(2) applicant for patent infringement within 45 days of receiving notice of the Paragraph IV certification, a one-time 30-month stay of the FDA's ability to approve the ANDA or 505(b)(2) application is triggered. The 30 month stay begins at the end of the NDA holder's 5 years of data exclusivity, or, if data exclusivity has expired, on the date that the patent holder is notified. The FDA may approve the proposed product before the expiration of the 30-month stay if a court finds the patent invalid or not infringed, or if the court shortens the period because the parties have failed to cooperate in expediting the litigation.

        Pediatric Exclusivity:    Section 505(a) of the Food & Drug Act provides for 6 months of exclusivity based on the submission of pediatric data subsequent to a written request from the FDA. This period of exclusivity is added to whatever period of exclusivity covers a drug (e.g., Hatch-Waxman, Orphan, patent). This is not a patent term extension, rather, it extends the period during which the FDA cannot approve an ANDA.

European Union—EMEA Process

        In the EU, the EMEA requires approval of a marketing authorization application, or MAA before a pharmaceutical drug is brought to market in EU member states. In many EU countries, pricing negotiations also must take place before the product is sold.

Other International Markets—Drug approval process

        In some international markets (e.g., China, Japan) additional clinical trials may be required prior to the filing or approval of marketing applications within the country.

Other Regulatory Processes

        We are subject to a variety of financial disclosure and securities trading regulations as a public company in the United States, including the laws relating to the oversight activities of the Securities and Exchange Commission and the regulations of the NASDAQ Stock Market, on which our shares are traded. We are also subject to regulation under other federal laws and regulation under state and local laws, including laws relating to occupational safety, laboratory practices, environmental regulations, and hazardous substance control.

Our Employees

        As of February 1, 2008, we had approximately 489 full-time employees, approximately 140 of whom were engaged in research and development and approximately 349 of whom were engaged in management, marketing, sales, administration and finance. We consider our employee relations to be good.

14

Our Executive Officers and Directors

Michael W. Bonney	49	President, Chief Executive Officer and Director
Robert J. Perez, MBA	43	Executive Vice President, Chief Operating Officer
Lindon M. Fellows	56	Senior Vice President, Technical Operations
Steven C. Gilman, Ph.D.	55	Senior Vice President, Discovery and Non-clinical Development and Chief Scientific Officer
Christopher D.T. Guiffre, J.D., MBA	39	Senior Vice President, General Counsel and Secretary
David W.J. McGirr, MBA	53	Senior Vice President and Chief Financial Officer
Kenneth M. Bate, MBA(1)	57	Lead Director
Sylvie Grégoire, Pharm. D.(3)(4)	46	Director
David W. Martin, Jr., M.D.(2)(4)*	67	Director
Walter R. Maupay, Jr., MBA(2)(3)*	69	Director
Martin Rosenberg, Ph.D. (3)(4)	62	Director
J. Matthew Singleton, MBA, CPA(1)*	55	Director
Martin H. Soeters(1)(3)	53	Director
Michael B. Wood, M.D.(2)*	64	Director

(1)

Member of Audit Committee

(2)

Member of Compensation Committee

(3)

Member of Corporate Governance and Nominating Committee

(4)

Member of Scientific Affairs Committee

*

Chair of Committee

Mr. Bonney has served as our President and Chief Executive Officer and as a member of the Board of Directors since June 2003. From January 2002 to June 2003, he served as our President and Chief Operating Officer. From 1995 to 2001, he held various positions of increasing responsibility at Biogen, Inc., a biopharmaceutical company, including Vice President, Sales and Marketing from 1999 to 2001. While at Biogen, Mr. Bonney built the commercial infrastructure for the launch of Avonex. Prior to that, Mr. Bonney held various positions of increasing responsibility in sales, marketing and strategic planning at Zeneca Pharmaceuticals, ending his eleven-year career there serving as National Business Director. Mr. Bonney received a B.A. in Economics from Bates College. Mr. Bonney is a director of NPS Pharmaceuticals, Inc., a biopharmaceutical company, and serves on the Boards of Trustees of the Beth Israel Deaconess Medical Center and Bates College. Mr. Bonney is also a member of the Biotechnology Industry Organization, or BIO, Health Section Governing Body.

Mr. Perez has served as our Executive Vice President and Chief Operating Officer since August 2007. Prior to this, he was our Senior Vice President, Commercial Operations since July 2004. From August 2003 to July 2004 he served as our Senior Vice President, Sales and Marketing. Prior to joining Cubist, he served as Vice President of Biogen, Inc.'s CNS Business Unit where he was responsible for leading the U.S. neurology franchise. From 1995 to 2001 he served as a Regional Director, Director of Sales, and Avonex® Commercial Executive at Biogen. From 1987 to 1995, Mr. Perez held various sales and marketing positions at Zeneca Pharmaceuticals, ultimately serving as Regional Business Director, responsible for sales, marketing and national accounts for the Western Regional Business Unit. Mr. Perez is a director of EPIX Pharmaceuticals, Inc., a biopharmaceuticals company. Mr. Perez

15

received a B.S. from California State University, Los Angeles and an M.B.A. from The Anderson School at UCLA.

Mr. Fellows has served as our Senior Vice President, Technical Operations since August 2005. From July 2004 until August 2005 Mr. Fellows was Vice President, Corporate Quality Assurance of Millennium Pharmaceuticals, a biopharmaceutical company, where he was responsible for ensuring product quality and compliance to both U.S. and international requirements. From July 1995 until July 2004, Mr. Fellows held various positions of increasing responsibility at DSM Life Sciences Products, including Managing Director, Director of Quality Compliance, and Vice President of Quality Assurance and Regulatory Affairs with responsibility for anti-infectives, fine chemicals, and food sciences. Mr. Fellows holds a B.S. in Microbiology from Colorado State University.

Dr. Gilman has served as our Senior Vice President, Discovery & Nonclinical Development and Chief Scientific Officer, since February 2008. From April 2007 until February 2008 Dr. Gilman served as Chairman of the board of directors and CEO of ActivBiotics, a biopharmaceutical company. From 2004 to April 2007, he served as President, CEO, and a member of the board of directors of ActivBiotics. Previously Dr. Gilman worked at Millennium Pharmaceuticals, Inc., where he held a number of senior leadership roles including Vice President and General Manager, Inflammation, responsible for all aspects of the Inflammation business from early gene discovery to product commercialization. Prior to Millennium, he was Group Director at Pfizer Global Research and Development, where he was responsible for drug discovery of novel antibacterial agents as well as several other therapeutic areas. Dr. Gilman has also held scientific, business, and academic appointments at Wyeth, Cytogen Corporation, Temple Medical School, and Connecticut College. He currently serves on the boards of directors of the Massachusetts Biotechnology Council and Nextcea, Inc., a private drug discovery company. Dr. Gilman received his Ph.D. and M.S. degrees in microbiology from Pennsylvania State University, his post-doctoral training at Scripps Clinic and Research Foundation, and received a B.A. in microbiology from Miami University of Ohio.

Mr. Guiffre has served as our Senior Vice President, General Counsel and Secretary since January 2004. He served as our Vice President, General Counsel and Secretary from December 2001 to December 2003. From 1997 to 2001, Mr. Guiffre held various positions of increasing responsibility at Renaissance Worldwide, Inc., a provider of information technology consulting services, including Counsel, Corporate Counsel and Director of Legal Affairs, and Vice President, General Counsel and Clerk. Prior to joining Renaissance Worldwide, he was an Associate at Bingham McCutchen LLP, a national law firm. He received a B.S. in Marketing from Babson College, a J.D. from Boston College Law School, and an M.B.A. from Boston College Carroll School of Management. Mr. Guiffre is a member of the Massachusetts Bar.

Mr. McGirr has served as our Senior Vice President and Chief Financial Officer since November 2002. He also served as our Treasurer from November 2002 until January 2003. From 1999 to 2002, Mr. McGirr was the President and Chief Operating Officer of hippo inc, an internet technology, venture-financed company. Mr. McGirr served as a member of hippo's Board of Directors from 1999 to 2003. From 1996 to 1999, he was the President of GAB Robins North America, Inc., a risk management company, serving also as Chief Executive Officer from 1997 to 1999. Mr. McGirr was a private equity investor from 1995 to 1996. From 1978 to 1995, Mr. McGirr served in various positions within the S.G. Warburg Group, ultimately as Chief Financial Officer, Chief Administrative Officer and Managing Director of S.G. Warburg & Co., Inc., a position held from 1992 to 1995. Mr. McGirr is a director of LifeCell Corporation, or LifeCell, a biotechnology company, and also serves as Chairman of the Audit Committee of LifeCell. Mr. McGirr received a B.Sc. in Civil Engineering from the University of Glasgow and received an M.B.A. from The Wharton School at the University of Pennsylvania.

Mr. Bate has served as one of our directors since June 2003 and became our lead director in June 2006. Since January 2007, Mr. Bate has been President and Chief Executive Officer and a director of

16

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

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

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

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

Dr. Rosenberg has served as one of our directors since March 2005. Since 2003, Dr. Rosenberg has been the Chief Scientific Officer of Promega Corporation, a biotechnology company. From 2001 to 2003, Dr. Rosenberg served as Vice President, Research and Development of Promega Corporation.

17

From 2000 until 2001, Dr. Rosenberg was Senior Vice President, Anti-Infectives, Drug Discovery at GlaxoSmithKline, a pharmaceutical company. From 1996 until 2000, Dr. Rosenberg was Senior Vice President, Anti-Infectives at SmithKline Beecham Corporation, a predecessor company to GlaxoSmithKline. Prior to 2000, Dr. Rosenberg held a variety of roles of increasing responsibility with SmithKline Beecham Corporation. Before joining SmithKline Beecham, Dr. Rosenberg spent 10 years at the National Institutes of Health and was a Section Chief at the National Cancer Institute. Dr. Rosenberg is a director of Promega Corporation, the Medical College of Wisconsin Research Foundation, and Scarab Genomics, a biotechnology company. He also serves as a member of the Advisory Council for the National Institutes of Allergy & Infectious Diseases at the National Institute of Health. He participates on a variety of academic and industry Scientific Advisory Boards and holds an adjunct Professorship at the University of Wisconsin, Department of Bacteriology, Madison, WI. Dr. Rosenberg is Editor-in-Chief of Current Opinions in Biotechnology, a Senior Editor of the Journal of Bacteriology and a member of several other journal Editorial Boards. Dr. Rosenberg received a B.A. degree from the University of Rochester and a Ph.D. from Purdue University.

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

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

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

18

WHERE YOU CAN FIND MORE INFORMATION

        We are subject to the information and reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, under which we file periodic reports, proxy and information statements and other information with the United States Securities and Exchange Commission, or SEC. Copies of the reports, proxy statements and other information may be examined without charge at the Public Reference Room of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, or on the Internet at http://www.sec.gov. Copies of all or a portion of such materials can be obtained from the Public Reference Room of the SEC upon payment of prescribed fees. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room.

        Financial and other information about Cubist is available on our website (http://www.cubist.com). We make available on our website, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies are available in print to any Cubist shareholder upon request in writing to "Investor Relations, Cubist Pharmaceuticals, Inc., 65 Hayden Ave., Lexington, MA 02421."

19

ITEM 1A.    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 annual 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 sole marketed product CUBICIN, which may not continue to be widely accepted in the United States by physicians, patients, third-party payors, or the medical community in general for the treatment of cSSSI and S. aureus bacteremia, including right-sided endocarditis, caused by MRSA and MSSA.

        We have invested a significant portion of our time and financial resources in the development of CUBICIN. For the foreseeable future, our ability to generate revenues will depend solely on the commercial success of CUBICIN, which depends upon its continued acceptance by the medical community and the future market demand and medical need for CUBICIN. CUBICIN was approved by the FDA in September 2003 for the treatment of complicated skin and skin structure infections, or cSSSI, and launched in the United States in November 2003. On May 25, 2006, the FDA approved CUBICIN for the additional indication of S. aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis, caused by methicillin-susceptible and methicillin-resistant isolates.

        As of December 31, 2007 we had just over four years experience selling this product, and only 19 months of sales since the approval of the S. aureus bacteremia indication. Although we have been successful in our commercialization of CUBICIN to date, because this is still a relatively new product, we cannot be sure that CUBICIN will continue to be accepted by purchasers in the pharmaceutical market for the treatment of cSSSI and S. aureus bacteremia. Further, CUBICIN currently competes with a number of existing anti-infective drugs manufactured and marketed by major pharmaceutical companies and potentially will compete against new anti-infective drugs whose approval is anticipated to be imminent and others that are in development at other companies.

        The degree of continued market acceptance of CUBICIN, and our ability to grow revenues from the sale of CUBICIN, depends on a number of additional factors, including:

•

the continued safety and efficacy of CUBICIN;



•

the ability of target organisms to develop resistance to CUBICIN;



•

risks of any unanticipated adverse reactions to CUBICIN in patients;



•

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



•

our ability to educate the medical community about the safety and efficacy of CUBICIN in compliance with FDA and other government rules and regulations;



•

the reimbursement policies of government and third-party payors;



•

the level of access that our sales force has to physicians who are likely to prescribe CUBICIN;



•

the market price of CUBICIN as compared to alternative therapies and physicians and third-party payors' attitudes towards the relative value of CUBICIN versus other therapies; and



•

our international partners' efforts and their success in selling CUBICIN in their respective territories.

20

        Because CUBICIN is the only product that we sell currently, any impediment to the success of this product would have a significant effect on our business and financial results.

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 in 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 commercial protection.

        The primary composition of matter patent covering CUBICIN in the United States has expired. We own or have licensed rights to a limited number of patents directed toward methods of administration and methods of manufacture of CUBICIN. We cannot be sure that patents will be granted 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. Even if we have valid and enforceable patents, these patents still may not provide sufficient protection against competing products or processes.

        Of particular concern for a company like ours, having one marketed product, is that third parties may seek to market generic versions of CUBICIN by filing an Abbreviated New Drug Application, or ANDA, with the FDA in which they claim that patents protecting CUBICIN owned or licensed by us and listed with the FDA in what is called "the Orange Book" are invalid, unenforceable and/or not infringed, a so-called Paragraph IV filing. From 1997 through 2002, about one third of all new chemical entities, such as daptomycin, the chemical ingredient in CUBICIN, have been the subject of a Paragraph IV filing. September 2007 was the first opportunity under United States patent law for a generic company to make a Paragraph IV filing. To date, Cubist has not received notice of a Paragraph IV filing. If such a filing is made, we may need to defend and/or assert our patents, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find our patents invalid, not infringed and/or unenforceable. During the period in which such litigation is pending, the uncertainty of its outcome may cause investors to disfavor our stock, and our stock price could decline.

21

        In September 2007, we asked the FDA to de-list one of the CUBICIN patents listed in the Orange Book, US Patent No. RE39,071. We sought this de-listing so that we could correct a technical error in the patent, originally issued to Eli Lilly and recently assigned to Cubist. The United States Patent and Trademark Office, or USPTO issued a certificate of correction for this patent. We have asked the FDA to re-list the patent in the Orange Book. The patent would have been re-listed upon our request, and this re-listing should be reflected in the next publication of the Orange Book. While this patent was de-listed, an ANDA filer that is seeking to market generic versions of CUBICIN would not have needed to address that patent as part of its ANDA filing.

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

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

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

        Our trademarks, CUBICIN and Cubist, in the aggregate are considered to be material to our business. These trademarks are covered by registrations or pending applications for registration in the USPTO 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 commercial protection.

        Beyond the specific concerns addressed above, intellectual property laws and regulations are constantly changing, and vary amongst different jurisdictions around the world, in ways that may affect our ability to protect or enforce our rights.

We 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, acquiring or licensing on an exclusive basis technologies and drug products that are more effective or less costly than CUBICIN or any drug candidate that we may have or develop, which could

22

render our technology obsolete and noncompetitive. If price competition inhibits the acceptance of CUBICIN, if physicians prefer existing drug products over CUBICIN, or if physicians switch to new drug products or choose to reserve CUBICIN for use in limited circumstances, we will not achieve our business plan. In addition, CUBICIN may face competition from drug candidates currently in clinical development and drug candidates that could receive regulatory approval before CUBICIN in countries where CUBICIN is not yet approved.

        The competition in the market for therapeutic products that address serious Gram-positive bacterial infections is intense. CUBICIN faces competition in the United States from commercially available drugs such as vancomycin, marketed generically by Abbott Laboratories, Shionogi & Co., Ltd. and others, Zyvox®, marketed by Pfizer, Inc., Synercid®, marketed by King Pharmaceuticals, Inc., and Tygacil®, marketed by Wyeth. 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. In addition, the FDA is reviewing an NDA for the Gram-positive agent telavancin (submitted by Theravance, Inc., whose partner for telavancin is Astellas Pharma US, Inc.). Telavancin received an approvable letter on October 22, 2007. The FDA also is reviewing ceftobiprole, a broad spectrum agent with MRSA activity (NDA submitted in May 2007 by a division of Johnson & Johnson). Another Gram-positive agent under review is dalbavancin from Pfizer, Inc. Pfizer received its first approvable letter for dalbavancin in September 2005, and has received multiple approvable letters from the FDA since, citing the need for additional data, among other requests. In February 2008, Targanta Therapeutics Corporation announced that it had submitted an NDA to the FDA for oritivancin to be used for the treatment of cSSSI caused by Gram-positive bacteria, including MRSA. In July 2007, Arpida Ltd. reported the completion of the Phase 3 trial for iclaprim, a broad-spectrum agent with MRSA activity in cSSSI. Accordingly, some or all of these agents may be approved and marketed in the near future and could compete with CUBICIN. Other antibiotics in clinical development could compete with CUBICIN, if approved by the appropriate regulatory agencies, in future years.

        Any inability on our part 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 active pharmaceutical ingredient, or API. We have entered into a manufacturing and supply agreement with ACS to manufacture and supply us with CUBICIN API for commercial purposes. ACS is our sole provider of our commercial supply of CUBICIN API. Pursuant to our agreement with ACS, ACS currently stores some CUBICIN API at its facilities in Italy.

        In order to offset the risk of a single-source API supplier, we currently hold a safety stock of API in addition to what is held at ACS. Any disaster at the facilities where we hold this safety stock, such as a fire or loss of power, that causes a loss of this safety stock, would heighten the risk that we face from having only one supplier of API.

        In addition, 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 and Catalent to manufacture and supply to us finished product.

        If Catalent, Hospira, or, in particular, ACS, experiences any significant difficulties in its respective manufacturing processes for CUBICIN API or finished product, we could experience significant interruptions in the supply of CUBICIN. Our inability to coordinate the efforts of our third party manufacturing partners, or the lack of capacity available at our third party manufacturing partners, could impair our ability to supply CUBICIN at required levels. Because of the significant regulatory

23

requirements that we would need to satisfy in order to qualify a new bulk or finished product supplier, we could experience significant interruptions in the supply of CUBICIN if we decided to transfer the manufacture of CUBICIN to one or more other suppliers in an effort to deal with these or other difficulties with our current suppliers.

        Because the ACS manufacturing facilities are located in Italy, we must ship CUBICIN API to the United States for finishing, packaging and labeling. Each shipment of our API is of significant value, and while in transit, it could be lost or damaged. Moreover, at any time after shipment to the United States, our API could be lost or damaged as it is stored at our warehouser, Integrated Commercialization Solutions, Inc., or ICS, and moves through our finished product manufacturers. We have taken risk mitigation steps and have purchased insurance to protect against such loss or damage. However, depending on when in this process the API is lost or damaged, we may have limited recourse for recovery against our finished product manufacturers or insurers. As a result, our financial performance could be impacted by any such loss or damage to our API. We are also subject to financial risk from volatile fuel costs due to shipping CUBICIN API to the United States, as well as shipping of finished product within the United States and to our international distribution partners for packaging, labeling and distribution.

        We may also experience interruption or significant delay in the supply of CUBICIN API due to natural disasters, acts of war or terrorism, shipping embargoes, labor unrest or political instability. In any such event in Italy, the supply of CUBICIN API stored at ACS could also be impacted.

        While we have reduced the cost of producing CUBICIN in recent years, we cannot guarantee that we will be able to continue to reduce the costs of commercial scale manufacturing of CUBICIN over time. In order to continue 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 submissions 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 further reduce our costs over time.

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

        We cannot guarantee that we will continue to be successful in marketing 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. In 2007, we added three new sales representatives to our existing sales force and expect to add 26 more in 2008. We do not yet know whether this sales force expansion will be successful.

        In addition, our partner in Europe, Novartis, has significant pharmaceutical sales experience but limited experience marketing and selling CUBICIN. Novartis began its launch of CUBICIN in nine EU countries in 2006 and six more in 2007. To date, sales of CUBICIN by Novartis have not been as strong as anticipated. Other than our partners in Israel, Canada and Macau, none of our other international partners have launched CUBICIN in their respective territories. We cannot guarantee that our partners will be successful in marketing CUBICIN in their markets.

If we are unable to discover, in-license, or acquire drug candidates, we will not be able to implement our current business strategy.

        Our approach to drug discovery is unproven. Notwithstanding the investment of significant resources to research and development over the years since Cubist was founded, we have not reached

24

the stage of clinical testing in humans of any drug candidates developed from our drug discovery program. We cannot assure you that we will reach this stage for any internally developed drug candidates or that there will be clinical benefits associated with any drug candidates that we do develop. While we are researching other drug candidates for potential clinical development, most drug candidates never make it to the clinical development stage. Even those that do make it into clinical development have only a small chance of gaining regulatory approval and becoming a drug product. We are making a significant investment in our research and development capabilities by increasing our research and development workforce by 20 employees. However, we cannot guarantee that this expansion will lead to greater success, so this investment may not be a useful expenditure of our limited resources.

        Our drug product, CUBICIN, and our other former drug candidates that reached the stage of clinical trials in humans were the result of in-licensing patents and technologies from third parties. These in-licensing activities represent a significant expense for Cubist and would 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, acquisition or in-licensing will be our only source of drug candidates. However, there can be no assurance that we will be able to acquire or in-license additional desirable drug candidates on acceptable terms, or at all. In fact, we have faced and will continue to face significant competition for the acquisition or in-licensing of any promising drug candidates from a variety of other companies with interest in the anti-infective and acute care marketplace, many of which have significantly more experience than we have in pharmaceutical development and sales and significantly more financial resources than Cubist. In particular, in recent years, very large pharmaceutical companies with significant resources have refocused their attention on opportunities in the anti-infective marketplace. Because of the rising intensity of the level of competition for such products, the cost of acquiring or in-licensing such candidates has grown dramatically in recent years, and candidates are often priced and sold at levels that we cannot afford or that we believe are not justified by market potential. Such competition and higher prices are most pronounced for late-stage candidates and already-marketed products, which have the lowest risk and would have the most immediate impact on our business.

        If we are unable to discover or acquire promising candidates, we will not be able to implement our business strategy. Even if we succeed in discovering or acquiring drug candidates, there can be no assurance that we will be successful in developing them to gain approval for use in humans. 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. Also, in April 2004, we discontinued, as a result of data from human clinical research studies, 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. More recently, we decided in 2006 not to make any further investment in the development of HepeX-B and have since terminated our license to the technology underlying HepeX-B. Failure to develop new drug candidates successfully could have a material adverse effect on our business, operating results and financial condition.

If pre-clinical or 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

25

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. In our own case, clinical trials of CUBICIN for the treatment of community acquired pneumonia failed to demonstrate sufficient efficacy despite promising results in pre-clinical and early clinical trials.

        Other than CUBICIN, all of the drug candidates that we are seeking to develop commercially are in the pre-clinical stage. In order for a drug candidate to move from this stage to human clinical trials, the FDA must approve an IND. The FDA will approve the IND if it is established that a potential drug candidate will not expose humans to unreasonable risks and that the compound has pharmacological activity that justifies commercial development. It takes significant time and expense to generate the data to support an IND filing. In many cases, companies spend the time and resources only to discover that the data is not sufficient to support a filing or gain IND approval. This has happened to us in the past, and likely will happen again in the future. In fact, most compounds that are discovered never make it into human clinical trials.

        Once a drug candidate enters human clinical trials, the trials must be carried out under protocols that are acceptable to regulatory authorities and to the 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 the clinical trials. Feedback from regulatory authorities or results from earlier stage clinical studies might require modifications or delays in later stage clinical trials or could cause a termination or suspension of drug development. These types of delays or suspensions can result in increased development costs and delayed regulatory approvals. Our ability to secure clinical trial insurance at a reasonable cost could also cause delays.

        Furthermore, there are a number of additional factors that may cause delays in our clinical trials. The rate of completion of our clinical trials is dependent in part on the rate of patient enrollment. There may be limited availability of patients who meet the criteria for certain clinical trials. For example, the limited number of patients each year who receive liver transplants for Hepatitis B, the target population for our former drug candidate HepeX-B, in part led us to discontinue investment in clinical development of HepeX-B. Delays in planned patient enrollment can result in increased development costs and delays in regulatory approvals. For example, our clinical trial to determine the safety and efficacy of using CUBICIN to treat bacteremia with known or suspected endocarditis 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 acceptable 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;



•

inability to enroll study subjects;



•

our inability to reach agreement with the FDA on a trial design that we are able to execute; or



•

the FDA placing a trial on "clinical hold" or temporarily or permanently stopping a trial for a variety of reasons, principally for safety concerns.

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

26

We will need to obtain regulatory approvals for any 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. Any drug candidate will require governmental approvals for commercialization. To date, we have not obtained government approval in the United States for any drug product other than CUBICIN for the indications of cSSSI and S. aureus bacteremia, including those with right-sided infective endocarditis. Our collaborator, Novartis, has received approval for marketing CUBICIN in the EU and other non-EU European countries for the indications of cSSTI, RIE due to S. aureus bacteremia, and S. aureus bacteremia associated with RIE or cSSTI, in Argentina and Colombia for cSSSI, SAB and RIE, in Switzerland for cSSTI and S. aureus bacteremia and in India for cSSSI and S. aureus bacteremia. Our collaborator, AstraZeneca, received an import license for Macau for CUBICIN for cSSSI, SAB and RIE. Our collaborators Oryx Pharmaceuticals Inc., Kuhnil Pharmaceutical Corp., TTY Biopharm Co. Ltd., and Medison Pharma, Ltd., have received approval for marketing CUBICIN in Canada, South Korea, Taiwan and Israel, respectively, for the same, or very similar, indications for which we have approval in the United States. We and our partners are pursuing approvals for CUBICIN in various other countries. 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, regulation is not static and regulatory authorities, including the FDA, evolve in their staff, interpretations and practices and may impose more stringent requirements than currently in effect, which may adversely affect our planned drug development and/or our sales and marketing efforts. Satisfaction of the requirements of the FDA and of foreign regulators typically takes a significant number of years and can vary substantially based upon the type, complexity and novelty of the drug candidate. The approval procedure and the time required to obtain approval also varies among countries. Regulatory agencies may have varying interpretations of the same data, and approval by one regulatory authority does not ensure approval by regulatory authorities in other jurisdictions.

        No product can receive FDA approval unless human clinical trials show both safety and efficacy for each target indication in accordance with FDA standards. The large 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 any drug candidates for each target indication in clinical trials would prevent us from obtaining required approvals from regulatory authorities, which would prevent us from commercializing those drug candidates. The results of our clinical testing of a drug candidate may cause us to suspend, terminate or redesign our clinical testing program for that drug candidate. We cannot be sure when we, independently or with our collaborators, might be in a position to submit additional drug candidates for regulatory review. Negative or inconclusive results from the clinical trials or adverse medical events during the trials could lead to requirements that trials be repeated or extended, or that a program be terminated, even if other studies or trials relating to the program are successful. In addition, data obtained from clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval and could even affect the commercial success of a product that is already on the market based on earlier trials, such as CUBICIN. 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.

27

The FDA may change its approval requirements or policies for antibiotics, or apply interpretations to its requirements or policies, in a manner that could delay or prevent commercialization of any new antibiotic product candidates or any additional indications for CUBICIN that we may seek in the United States.

        Regulatory requirements for the approval of antibiotics in the United States may change in a manner that requires us to conduct additional large-scale clinical trials, which may delay or prevent commercialization of any new antibiotic product candidates or any additional indications for CUBICIN that we may seek. Historically, the FDA has not required placebo-controlled clinical trials for approval of antibiotics but instead has relied on non-inferiority studies. In a non-inferiority study, a drug candidate is compared with an approved antibiotic treatment, and it must be shown that the product candidate is not less effective than the approved treatment by a defined margin.

        In 2006, the FDA refused to accept approval studies of successfully completed non-inferiority studies as the basis for approval for certain types of antibiotics. In October 2007, the FDA issued draft guidance on the use of non-inferiority studies to support approval of antibiotics. Under this draft guidance, the FDA recommends that for some antibiotic indications, sponsor companies carefully consider study designs other than non-inferiority, such as placebo-controlled trials demonstrating the superiority of a drug candidate to placebo. Conducting placebo-controlled trials for antibiotics can be time-consuming, expensive, and difficult to complete. Institutional review boards may not grant approval for placebo-controlled trials because of ethical concerns about denying some participating patients access to any antibiotic therapy during the course of the trial. Even if institutional review board approval is obtained, it may be difficult to enroll patients in placebo-controlled trials because certain patients would not receive antibiotic therapy. While the indications called out by the FDA in the draft guidance are not indications currently being pursued by Cubist for CUBICIN, the draft guidance does not articulate clear standards or policies for demonstrating the safety and efficacy of antibiotics generally and reserves until a later date the FDA's guidance on the use of non-inferiority studies in all therapeutic areas. The lack of clear guidance from the FDA creates uncertainties about the standards for the approval of antibiotics in the United States. These factors could delay for several years or ultimately prevent commercialization of any new antibiotic product candidates or any additional indications for CUBICIN in the United States for which the FDA requires placebo-controlled trials. Even if we complete these trials, we may not be able to obtain adequate evidence of safety or efficacy to support approval.

        Moreover, recent events, including complications arising from FDA-approved drugs, have raised questions about the safety of marketed drugs and may result in new legislation by the U.S. Congress and increased caution by the FDA and comparable foreign regulatory authorities in reviewing new drugs based on safety, efficacy or other regulatory approvals. In particular, non-inferiority studies have come under scrutiny from Congress, in part because of a congressional investigation as to the safety of Ketek®, an antibiotic approved by the FDA on the basis of non-inferiority studies. Certain key members of Congress have asked the U.S. Government Accountability Office (GAO), an independent, nonpartisan arm of Congress, to investigate the FDA's reliance on non-inferiority studies as a basis for approval. Congress may draft, introduce, and pass legislation that could significantly change the process for approval of antibiotics by the FDA.

        The increased scrutiny by Congress and regulatory authorities may significantly delay or prevent regulatory approval, as well as impose more stringent product labeling and post-marketing testing requirements on pharmaceutical products generally and particularly in our areas of focus. Any delay in obtaining, or an inability to obtain, applicable regulatory approvals could prevent us from successfully commercializing any new antibiotic product candidates, receiving any additional indications for CUBICIN, generating revenues, and sustaining profitability.

28

If we are unable to generate revenues from any drug products other than CUBICIN, our ability to create long-term shareholder value may be limited.

        Apart from CUBICIN, we have no other drug products that have been approved by the FDA, and our current pipeline does not include any drug candidates that are in clinical development. Because of the long development time of drug candidates, even once they are in clinical development, none of the drug candidates that we are currently developing, even if one were to overcome the significant hurdles of a pre-clinical candidate ever making it to the commercial market, would generate revenues for many years. Unless and until we are able to develop, in-license or acquire other successful drug products, we will continue to rely solely on CUBICIN for our sales revenues. If we are unable to bring any of our current or future drug candidates to market, or to acquire any marketed drug products, our ability to create long-term shareholder value may be limited.

If we are not successful in attracting and retaining highly qualified personnel, 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, scientific and medical personnel. Historically, we have been highly dependent on our management and scientific and medical personnel. In order to induce valuable employees to remain at Cubist, we have provided options that vest over time. The value to employees of these options is significantly affected by movements in our stock price that we cannot control and may at any time be insufficient to counteract more lucrative offers from other companies. We have also provided retention letters to a limited number of key employees. Despite our efforts to retain valuable employees, members of our management, scientific and medical teams have in the past and may in the future terminate their employment with us. The loss of the services of any of our executive officers or other key employees could potentially harm our business or financial results if we are unable to effectively compensate for these losses.

        Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level, and senior managers as well as junior, mid-level, and senior scientific and medical personnel. Other biotechnology and pharmaceutical companies with which 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 characteristics may be more appealing to high quality candidates than what we have to offer. If we are unable to grow our business according to our business plan, including by developing or acquiring additional drug products, we may become a less attractive place to work for our existing employees and for high quality candidates. If we are unable to continue to attract and retain high quality personnel, the rate and success at which we can discover, develop and commercialize drug candidates will be limited.

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

        We acquired Illumigen in December 2007, which was only the second business acquisition since our inception. Although we have limited experience in acquiring businesses, we may acquire additional businesses that we believe will complement or augment our existing business. Acquisitions involve a number of risks, including: diversion of management's attention from current operations; disruption of our ongoing business; difficulties in integrating and retaining all or part of the acquired business, its customers and its personnel; assumption of disclosed and undisclosed liabilities; dealing with unfamiliar laws, customs and practices in foreign jurisdictions; and the effectiveness of the acquired company's internal controls and procedures. The individual or combined effect of these risks could have a material adverse effect on our business. As well, in paying for an acquisition we may deplete our cash resources

29

or dilute our shareholder base by issuing additional shares. Furthermore, there is the risk that our valuation assumptions and our models for an acquired product or business may turn out to be erroneous or inappropriate due to foreseen or unforeseen circumstances and thereby cause us to have overvalued an acquisition target. There also is the risk that the contemplated benefits of an acquisition may not materialize as planned or may not materialize within the time period or to the extent anticipated. Because our acquisition of Illumigen occurred so recently, many of these risks still exist with respect to this transaction.

        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. We cannot assure you that, following an acquisition, we will achieve revenues that justify the acquisition or that the acquisition will result in increased earnings, or reduced losses, for the combined company in any future period. Moreover, we may need to raise additional funds through public or private debt or equity financings 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.

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

        We invest our cash in a variety of financial instruments; principally securities issued by the U.S. government and its agencies, investment grade corporate bonds and notes, auction rate securities and money market instruments. These investments are subject to credit, liquidity, market and interest rate risk. For example, if the issuers of auction rate securities are unable to successfully close auctions or if the credit ratings of any of our investments decline after initial purchase, we may be required to adjust the carrying value of these investments through an impairment charge. In fact, in August 2007, auctions for $58.1 million of our investments in auction rate securities failed and have failed since then. These auction rate notes consist of private placement, credit swap structured securities which reference synthetic portfolios of corporate bonds. These securities have long-term nominal maturities for which the interest rates are reset through a monthly auction. These auctions have historically provided a liquid market for these securities. All of the auction rate securities that failed are still AAA rated and none are backed by sub-prime mortgages. As a result of the auction failure, we have recorded temporary unrealized losses of $14.7 million in other comprehensive income as a reduction in shareholders' equity. The failure resulted in the interest rate on these investments resetting at the default coupon rate per the terms of the certificate. While we now earn a premium interest rate on the investments, the investments are not liquid. In the event we need to access these funds, we will not be able to until a future auction on these investments is successful, or until they reach their underlying maturity. If the issuers are unable to successfully close future auctions and the credit ratings on the underlying corporate tracking bond portfolios deteriorate significantly, we may be required to adjust the carrying value of these investments through an other-than-temporary impairment charge. The credit and capital markets have continued to deteriorate in 2008 and the bids on the auction rate notes we hold have since declined. If a certain concentration, as defined in the auction rate documents, of the underlying reference portfolios default, or if the issuing bank fails to make the required interest payments or the final principal payment upon the ultimate maturity of the notes, or if the credit ratings on the underlying reference portfolios deteriorate significantly, the company may be required to adjust the carrying value of these investments through an other-than-temporary impairment charge. Such risks, including the failure of future auctions for the auction rate securities, may result in a loss of liquidity, substantial impairment to our investments, realization of substantial future losses, or a complete loss of the investment in the long-term, which may have a material adverse effect on our business, results of operations, liquidity and financial condition.

30

Our ability to grow revenues from the commercialization and sale of CUBICIN will be limited if we or our partners do not obtain approval to market CUBICIN for any additional indications in countries where CUBICIN is approved, or if our partners do not receive approvals to market CUBICIN at all in countries where CUBICIN is not yet approved, or if we fail to fulfill certain post-approval requirements of the FDA relating to CUBICIN.

        We may seek regulatory approval for additional indications for CUBICIN. To do so, we must successfully conduct additional clinical trials and then apply for and obtain the appropriate regulatory approvals. Our revenues may not grow as expected and our business and operating results may be harmed if additional indications for CUBICIN are not approved in the United States.

        In January 2006, the EMEA granted final approval for marketing CUBICIN in the EU for the treatment of cSSTI, where the presence of susceptible Gram-positive bacteria is confirmed or suspected. In August, 2007, the EMEA granted final approval for marketing CUBICIN in the EU for the additional indications of RIE due to S. aureus bacteremia and for S. aureus bacteremia associated with RIE or cSSTI. CUBICIN is also approved in Canada, Korea, Taiwan, India, Colombia and Israel for the same, or very similar, indications as our U.S. approval, in other non-EU European countries for the same indications as the EU approval, in Switzerland for cSSTI and S. aureus bacteremia and in Argentina for cSSSI, SAB and RIE. An import license for Macau was also received for CUBICIN for cSSSI, SAB and RIE. Our international collaborators have submitted or plan on submitting applications for approvals to market CUBICIN in other territories, however, we cannot be sure that any regulatory authority will approve these or any future submissions on a timely basis or at all.

        In connection with our United States marketing approvals for CUBICIN, we have made certain Phase 4 clinical study commitments to the FDA, including for studies of renal-compromised patients, pediatric patients, and those with RIE. We have worked with the FDA to design these studies, which we expect to initiate this year. Our business would be seriously harmed if we do not complete these studies and the FDA, as a result, requires us to change the marketing label for CUBICIN. In addition, adverse medical events that occur during clinical trials or during commercial marketing could result in claims against Cubist and the temporary or permanent withdrawal of CUBICIN from commercial marketing, which could seriously harm our business and cause our stock price to decline. In particular, our planned pediatric trial exposes us to more uncertain and potentially greater risk because of the age of the subjects.

We have collaborative relationships that 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. In October 2003, we entered into an international license and product supply agreement with a subsidiary of Chiron Corporation, or Chiron, to seek regulatory approvals and commercialize CUBICIN in Europe, Australia, New Zealand, India and certain Central American, South American and Middle Eastern countries. In April 2006, Novartis acquired Chiron. In December 2006, we entered into a license and product supply agreement with AstraZeneca to seek regulatory approvals and commercialize CUBICIN in China and other countries in Asia, Africa and the Middle East. In March 2007, we entered into a license agreement with Merck & Co., Inc., or Merck, for the development and commercialization of CUBICIN in Japan. We also have entered into agreements with partners for the commercialization of CUBICIN in Israel, Taiwan, Canada and South Korea. In addition to commercial collaborations, we collaborate with a variety of other companies for manufacturing, clinical trials, clinical and preclinical testing, and research activities. 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 or that we will be able to work successfully with our existing collaborators or their successors.

31

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

•

the focus, direction, amount and timing of resources dedicated by our collaborators to their respective collaborations with us is not under our control, which may result in less successful commercialization of CUBICIN in our partners' territories than if we had control over the CUBICIN franchise in these territories;



•

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



•

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



•

our collaborators 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, contract interpretation, or the preferred course of development or commercialization strategy, might cause delays or termination of the research, development or commercialization of drug candidates, lead to additional responsibilities with respect to drug candidates, or result in litigation or arbitration, any of which would be time-consuming and expensive; and



•

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

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

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 CUBICIN is marketed internationally through licensees and distributors. 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;



•

unexpected CUBICIN adverse events that occur in foreign markets that we have not experienced in the United States;



•

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



•

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;



•

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

32

•

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



•

business interruptions resulting from geo-political actions, including war and terrorism, and natural disasters in other countries.

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

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, CROs 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 further development, approval and commercialization of CUBICIN and that of future drug candidates.

We have incurred substantial losses in the past and may incur additional losses.

        Since we began operations, we incurred substantial net losses in every fiscal period until the third quarter of 2006. We generated income of $48.1 million for the year ended December 31, 2007 and incurred a net loss of $0.4 million for the year ended December 31, 2006. At December 31, 2007, we had an accumulated deficit of $436.0 million. These losses have resulted from costs associated with conducting research and development, conducting clinical trials, commercialization efforts and associated administrative costs.

        We cannot be certain that we will not incur future operating losses 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 make specific predictions about our continued profitability. If we fail to maintain profitability, the market price of our common stock may decline.

We may require additional funds and we do not know if additional funds would be available to us at all, or on terms that we find acceptable.

        Until the third quarter of 2006, we were not a self-sustaining business, and we cannot guarantee that certain economic and strategic factors will not 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 and capital requirements under our current business plan for the foreseeable future. We expect capital outlays and operating expenditures to increase over the next several years as we continue our commercialization of CUBICIN, actively seek to acquire or in-license additional products or product candidates, and expand our research and development activities and infrastructure. 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 and if needed, or, if available, that the terms will be favorable to our shareholders or us.

33

        We may seek additional funding through public or private financing or other arrangements with collaborators. 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 certain, however, that additional financing will be available from any of these sources or, if available, will be on acceptable or affordable terms.

        Our annual debt service obligations on our 2.25% subordinated convertible notes due in June 2013 are approximately $6.8 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, if needed, we will not be able to execute our current business plan successfully.

Our business may suffer if we fail to manage our growth effectively.

        If our potential drug candidates progress in development or we are able to continue expanding the commercialization of CUBICIN, we will need to continue to build our organization and require significant additional investment in personnel, management systems and resources. Our ability to develop and grow the commercialization of our products, achieve our research and development objectives, and satisfy our commitments under our collaboration agreements depends on our ability to respond effectively to these demands and expand our internal organization to accommodate additional anticipated growth. If we are unable to achieve or manage our continued growth effectively, there could be a material adverse effect on our business.

Risks Related to Our Industry

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;

34

•

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



•

If third parties file ANDAs with the FDA seeking to market generic versions of our products prior to expiration of relevant patents owned or licensed by us, we may need to defend our patents, including by filing lawsuits alleging patent infringement.

        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.

Competitors may develop drug products that make our drug products obsolete, less cost effective or otherwise less attractive to use.

        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 easier to administer than our drug products.

Revenues generated by products we currently market or that we successfully develop and for which we obtain regulatory approval depend on reimbursement from third-party payors such that if reimbursement for our products is reduced or is insufficient, there could be a negative impact on the utilization of our products.

        Acceptable levels of reimbursement for costs of developing and manufacturing drug products and treatments related to those drug products by government authorities, private health insurers, and other organizations, such as HMOs, can have an affect on the successful commercialization of, and attracting collaborative partners to invest in the development of, our drug products and drug candidates. In both the United States and in foreign jurisdictions, legislative and regulatory actions can affect health care systems and reimbursement for our products.

        For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and its implementing regulations, altered the manner in which Medicare sets payment levels for many prescription drugs, including CUBICIN. Under this legislation, beginning in 2005, Medicare reimbursement for CUBICIN was based on average sales price, or ASP, rather than average wholesale price in both the physician office and hospital outpatient settings. This resulted in lower payment rates in 2005 as compared to 2004. Moreover, under this payment methodology the payment rate for CUBICIN is set on a quarterly basis based upon the ASP for previous quarters, and significant downward fluctuations in such reimbursement rate could negatively affect sales of CUBICIN. In addition, further changes to this methodology are possible.

        Another action that may affect reimbursement related to our products involves a statutory requirement, and its implementing regulations, that Medicare may not make a higher payment for inpatient services that are caused by medical conditions arising after a patient is admitted to the hospital. Medicare pays for inpatient hospital services under a prospective payment system in which cases are grouped into Medicare Severity Diagnosis Related Groups, or MS-DRGs, and the amount of

35

the single Medicare payment depends upon the applicable MS-DRG. That can vary based on the condition of the patient. Under the statute, effective October 1, 2008, if a case would be assigned to a higher paying MS-DRG because of a specified condition that arose after admission to the hospital, the Medicare payment would remain at the lower paying MS-DRG that would have applied in the absence of such condition. The Centers for Medicare and Medicaid Services has specified the conditions to which this policy would apply and they include conditions that may be treated with CUBICIN. In addition, other conditions may be added in the future, including MRSA. As a result of this policy, in certain circumstances, hospitals may receive less reimbursement for Medicare patients that obtain a hospital acquired infection, which may be treated with CUBICIN. We cannot be sure what impact this upcoming policy will have on the demand for CUBICIN.

        There have been a number of other legislative and regulatory actions affecting health care systems. The current uncertainty and the potential for adoption of additional changes could affect the timing and amount of our product revenue, our ability to raise capital, obtain additional collaborators and market our products. Medicare payments for CUBICIN can influence pricing in the non-Medicare market as third party payors may base their reimbursement on the Medicare rate. 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 collaborators 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 possible legislative changes 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 drug products 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 collaborators. Such prices may negatively impact our sales revenue in those countries.

Our industry is highly regulated and our products are subject to ongoing regulatory review.

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

        State laws and regulations may also affect our ability to manufacture, market and ship our product, including legislation in California which, if implemented, would require an electronic "pedigree" on all pharmaceutical products delivered to patients in California. This, or other state law requirements, may be difficult or costly for us to implement, and if any changes to our product or the manufacturing process are required, we may have to seek approval from the FDA or other regulatory agencies in order to comply with the state law.

36

        Failure to comply with manufacturing and other post-approval state law, regulations of the FDA and other regulatory agencies can, among other things, result in fines, increased compliance expense, denial or withdrawal of regulatory approvals, product recalls or seizures, forced discontinuance of or changes to important promotion and marketing campaigns, operating restrictions 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.

New accounting pronouncements or guidance may require us to change the way in which we account for our operational or business activities.

        The Financial Accounting Standards Board, or FASB, the SEC, and other bodies that have jurisdiction over the form and content of our accounts are constantly discussing and interpreting proposals and existing pronouncements designed to ensure that companies best display relevant and transparent information relating to their respective businesses. The pronouncements and interpretations of pronouncements by FASB, the SEC and other bodies may have the effect of requiring us to account for revenues and/or expenses in a different manner than we have done in the past which could have a material adverse impact on our financial results.

Our corporate compliance program cannot ensure that we are in compliance with all applicable "fraud and abuse" laws and regulations and other applicable laws and regulations in the jurisdictions in which we sell CUBICIN, and a failure to comply with such regulations or prevail in litigation related to noncompliance could harm our business.

        Our general operations, and the research, development, manufacture, sale and marketing of our products, are subject to extensive laws and regulation, including but not limited to, health care "fraud and abuse" laws, such as the federal false claims act, the federal anti-kickback statute, and other state and federal laws and regulations. While we have developed and implemented a corporate compliance program based upon what we believe are current best practices, we cannot guarantee that this program will protect us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. 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.

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, 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.

37

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

        Our research and development efforts involve the controlled use of hazardous materials, chemicals, viruses, bacteria and various radioactive compounds. We are subject to numerous environmental and safety laws and regulations and to periodic inspections for possible violations of these laws and regulations. Any such violation and the cost of compliance with any resulting order or fine could adversely effect our operations. 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.

If we are unable to adequately protect our confidential, electronically stored, transmitted and communicated information, it could significantly harm our business.

        In our business, we electronically store large amounts of scientific, technical, employee, customer and other data. The amount of confidential, digital information that we store and that we transmit and communicate to third parties continues to grow as technology continues to evolve. If we have inadequate security to protect this information from a breach and/or if such a breach should occur, crucial confidential information about our research, development, employees, customers and future prospects could be unintentionally disclosed. In addition, our information could be improperly disclosed if we are unable to restrict what third parties with whom we share such information may do with the information, or how long they may access it. If our competitors were able to acquire our confidential information, our business and future prospects could be harmed.

Risks Related to Ownership of Our Common Stock

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

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

•

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



•

actual or anticipated variations in our quarterly operating results;



•

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



•

third parties filing ANDAs with the FDA, and the results of any litigation that we file to defend and/or assert our patents against such third parties;



•

adverse results or delays in our clinical trials;



•

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



•

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



•

our termination of a collaboration or our inability to establish additional collaborations;



•

regulatory decisions that are adverse to us and/or our products;



•

safety concerns related to the use of CUBICIN;



•

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

38

•

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



•

expectations in the financial markets that Cubist may or may not be the target of potential acquirors;



•

our failure to develop or acquire additional drug candidates and commercialize additional drug products;



•

our issuance of additional debt or equity securities;



•

litigation, including stockholder or patent litigation;



•

the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community; and



•

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

        In addition, the stock market in general, and the NASDAQ Global Select Market and 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.

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

        Our directors, executive officers and greater than 5% stockholders and their affiliates beneficially own a significant percentage of our issued and outstanding common stock. Accordingly, they collectively would have the ability to influence the election of all of our directors and to influence the outcome of some 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 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        Our headquarters are located at 65 Hayden Avenue in Lexington, Massachusetts, where we own approximately 88,000 square feet of commercial and laboratory space and twelve acres of land.

        Our operating leases consist of approximately 121,000 square feet of office and data center space at 45/55 Hayden Avenue in Lexington, Massachusetts, pursuant to a term lease that expires in April 2016, 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

39

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.

ITEM 3.    LEGAL PROCEEDINGS

        None.

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

        No matters were submitted to a vote of security holders during the last quarter of the fiscal year ended December 31, 2007.

40

PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        The information required to be disclosed by Item 201(d) of Regulation S-K, "Securities Authorized for Issuance Under Equity Compensation Plans," is included under Item 12 of Part III of this Annual Report on Form 10-K.

Market Information

        Cubist's common stock is traded on the NASDAQ Global Select Market^SM under the symbol CBST. The following table shows the high and low sales price for Cubist's common stock as reported by the NASDAQ Global Select Market^SM for each quarter in the years ended December 31, 2007 and 2006.

	Common Stock Price
	2007				2006
	High		Low		High		Low
First Quarter	$	22.68	$	16.97	$	25.30	$	19.84
Second Quarter	$	23.80	$	19.52	$	26.77	$	18.63
Third Quarter	$	25.72	$	19.16	$	25.40	$	19.56
Fourth Quarter	$	24.75	$	19.68	$	23.35	$	17.82

Holders

        As of February 25, 2008, Cubist had 198 stockholders of record. This figure does not reflect persons or entities that hold their stock in nominee or "street" name through various brokerage firms.

Dividends

        Cubist has never declared or paid cash dividends on its capital stock and does not anticipate paying any dividends in the foreseeable future. The Company intends to retain future earnings, if any, to operate and expand the business. Payment of any future dividends will be at the discretion of the board of directors after taking into account various factors, including the Company's financial condition, operating results, cash needs and growth plans.

Recent Sales of Unregistered Securities

        None.

41

Corporate Performance Graph

The following Performance Graph and related information shall not be deemed to be "soliciting material" or to be "filed" with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

        The following graph compares the performance of Cubist's common stock to the NASDAQ Stock Market (U.S.) and to the NASDAQ Pharmaceutical Index from December 31, 2002 through December 31, 2007. The comparison assumes $100 was invested on December 31, 2002 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. The points on the graph are as of December 31 of the year indicated.

	CBST	Nasdaq Stock Market (U.S.)	Nasdaq Pharmaceutical Index
12/31/2002	100	100	100
12/31/2003	148	150	147
12/31/2004	144	163	156
12/30/2005	258	166	172
12/29/2006	220	183	168
12/31/2007	249	198	177

42

ITEM 6.    SELECTED FINANCIAL DATA

        The selected financial data presented below for the years ended December 31, 2007, 2006, 2005, 2004, and 2003 are derived from our audited consolidated financial statements.

			Year Ended December 31,
			2007			2006			2005			2004			2003
			(in thousands, except share and per share data)
Statement of Operations Data:
U.S. product revenues, net			$	285,059		$	189,512		$	113,434		$	58,559		$	1,673
International product revenues				5,347			808			80			—			—
Other revenues				4,214			4,428			7,131			9,512			2,043
		Total revenues, net		294,620			194,748			120,645			68,071			3,716
Costs and expenses:
	Cost of product revenues			68,860			48,803			32,739			20,249			816
	Research and development			85,175	(1)		57,405			51,673			57,182			54,505
	Sales and marketing			67,662			56,879			42,331			35,019			21,090
	General and administrative			31,485			26,745			19,335			20,234			29,978	(2)
		Total costs and expenses		253,182			189,832			146,078			132,684			106,389
Interest income				18,036			10,589			3,292			1,767			2,182
Interest expense				(9,427	)		(15,893	)		(9,836	)		(13,607	)		(13,601	)
Other income (expense)				(20	)		12			125			(59	)		(911	)
Provision for income taxes				1,880			—			—			—			—
		Net income (loss)	$	48,147		$	(376	)	$	(31,852	)	$	(76,512	)	$	(115,003	)
Basic net income (loss) per common share			$	0.87		$	(0.01	)	$	(0.60	)	$	(1.86	)	$	(3.61	)
Diluted net income (loss) per common share			$	0.83		$	(0.01	)	$	(0.60	)	$	(1.86	)	$	(3.61	)
Shares used in calculating:
Basic net income (loss) per common share				55,591,775			54,490,376			53,053,307			41,228,275			31,872,555
Diluted net income (loss) per common share				68,822,996			54,490,376			53,053,307			41,228,275			31,872,555

(1)

In 2007, Cubist recorded an in-process research and development, or IPR&D charge of $14.4 million related to the acquisition of Illumigen.

(2)

In 2003, Cubist recorded a lease termination charge of $12.9 million related to the planned closure of its UK facility.

	Year Ended December 31,
	2007		2006		2005		2004		2003
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents and investments	$	398,184	$	309,169	$	101,748	$	128,417	$	142,429
Working capital		342,496		303,482		99,004		93,703		90,530
Total assets		534,515		439,035		218,065		215,908		222,558
Total debt		350,000		350,000		165,000		165,000		197,500
Long-term obligations		352,698		351,760		165,000		165,078		195,693
Stockholders' equity (deficit)		98,702		40,590		16,599		20,846		(18,216	)
Dividends		—		—		—		—		—

43

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

The following discussion should be read in conjunction with Cubist's financial statements and related notes appearing elsewhere in this annual report. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this annual report. See also "Forward-Looking Statements."

Overview

        Cubist is a biopharmaceutical company headquartered in Lexington, Massachusetts, focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. To date, we have concentrated exclusively on developing products for the anti-infective marketplace. We have one marketed product, CUBICIN, which was launched in the U.S. in November 2003. CUBICIN is currently the only marketed once-daily, bactericidal, intravenous (IV) antibiotic with activity against methicillin-resistant S. aureus, or MRSA. CUBICIN is approved in the U.S. for the treatment of cSSSI, caused by S. aureus and certain other Gram-positive bacteria, and for S. aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis, caused by methicillin-susceptible and methicillin-resistant isolates. In the EU, CUBICIN is approved for the treatment of complicated skin and soft tissue infections, or cSSTI, where the presence of susceptible Gram-positive bacteria is confirmed or suspected. In September 2007, the Marketing Authorization for the CUBICIN label in the EU was expanded to include right-sided infective endocarditis, or RIE, due to S. aureus bacteremia associated with RIE or cSSTI.

        Net product sales of CUBICIN for the twelve months ended December 31, 2007 were $290.4 million, as compared to $190.3 million in the twelve months ended December 31, 2006. Net income for the twelve months ended December 31, 2007 was $48.1 million or $0.87 and $0.83 per basic and diluted share, respectively, as compared to a net loss of $0.4 million or $0.01 per basic and diluted share for the twelve months ended December 31 2006.

        In December 2007, Cubist acquired Illumigen pursuant to its October 2007 option agreement. Per the merger agreement, Cubist agreed to pay $9.0 million, plus Illumigen's closing cash and less Illumigen's closing liability balances, in cash to Illumigen shareholders, and Illumigen became a wholly-owned subsidiary of Cubist. Illumigen's lead compound, IB657, is a protein therapeutic in late-stage pre-clinical development as an interferon-sparing agent for the treatment of HCV infections. Cubist has evaluated whether the Illumigen acquisition meets the criteria of a business as outlined in Emerging Issues Task Force, or EITF, 98-3, "Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business," and has concluded that the entity did not qualify as a business. Accordingly, we accounted for this transaction as an acquisition of assets. The total costs associated with the acquisition were $16.4 million and include the closing cash consideration paid to Illumigen shareholders, the option agreement payment of $4.7 million made in October 2007, transaction costs of $0.8 million, and $0.7 million of costs paid by Cubist during the option period related to an IND enabling study of IB657 and Illumigen's operating costs during the option period. The total consideration was allocated to net tangible assets acquired of $1.3 million, consisting primarily of cash, IPR&D of $14.4 million and research and development expense of $0.7 million. The IPR&D represents the value assigned to the IB657 compound, and is included in research and development expense for the year ended December 31, 2007. We expect to file an IND for IB657 in the second half of 2008. Cubist will make additional payments to the former Illumigen shareholders of up to $75.5 million if certain development and regulatory milestones are achieved during the development of IB657 as a therapy for HCV. In addition, if Cubist develops an Illumigen product for the treatment of viral infections other than HCV, additional development and regulatory milestone payments of up to

44

$117.0 million would apply. If Illumigen product(s) are commercialized, sales milestones of up to $140.0 million, as well as tiered royalties, would apply.

        In March 2007, we entered into a license agreement with Merck for the development and commercialization of CUBICIN in Japan, the last country outside the U.S. for which Cubist did not have a partner for the distribution of CUBICIN. Merck will develop and commercialize CUBICIN through its wholly-owned subsidiary, Banyu Pharmaceutical Co., Ltd., or Banyu. In exchange for the development and commercialization rights in Japan, Merck paid us $6.0 million cash upfront. This $6.0 million was recorded as deferred revenue, and will be recognized as revenue over the estimated performance period of the agreement. We may receive up to an additional $39.5 million in total milestone payments if Merck reaches certain regulatory and sales milestones. In addition, Merck will purchase finished but unlabeled vials of CUBICIN from us in exchange for a transfer price.

        In July 2007, Kuhnil Pharmaceutical Corp., or Kuhnil, our CUBICIN marketing partner for South Korea, and TTY BioPharm Company, Ltd., our CUBICIN marketing partner for Taiwan, received approvals for S. aureus bacteremia, including RIE, in both South Korea and Taiwan, respectively. The approval in South Korea includes both cSSSI and S. aureus bacteremia, including RIE. CUBICIN was previously approved in Taiwan for cSSSI caused by Gram-positive bacteria. In September 2007, Oryx Pharmaceuticals, Inc., our CUBICIN marketing partner in Canada, received approval for cSSSI and S. aureus bacteremia. Oryx formally launched CUBICIN in Canada in January 2008.

        We continue to sell CUBICIN in the U.S. in accordance with our drop-ship program under which orders are processed through wholesalers but shipments are sent directly to our end-users. This provides us with greater visibility into end-user ordering and reordering trends. We outsource many of our supply chain activities, including: (i) manufacturing and supplying CUBICIN API; (ii) converting CUBICIN API into its finished, vialed and packaged formulation; (iii) managing warehousing and distribution of CUBICIN to our customers; and (iv) performing the order processing, order fulfillment, shipping, collection and invoicing services related to our CUBICIN product sales.

        We have focused our pipeline building efforts on opportunities that leverage our anti-infective and acute-care discovery, development, regulatory, and commercialization expertise. Currently, we have multiple anti-infective programs approaching the IND filing stage preparatory to clinical trials.

        Since our inception, we have incurred net losses in every fiscal period until the third quarter of 2006 principally as a result of research and development efforts, preclinical testing, clinical trials, and administrative costs. As of December 31, 2007, we had an accumulated deficit of $436.0 million.

Results of Operations

Years Ended December 31, 2007 and 2006

Revenues

        The following table sets forth revenues for the years ended December 31, 2007 and 2006:

		December 31,
						% Change
		2007		2006
		(in millions)
U.S. product revenues, net		$	285.1	$	189.5	50	%
International product revenues			5.3		0.8	562	%
Other revenues			4.2		4.4	-5	%
	Total revenues, net	$	294.6	$	194.7	51	%

45

Product Revenues, net

        Net sales of CUBICIN were $290.4 million in 2007 and $190.3 million in 2006. Gross sales of CUBICIN totaled $306.7 million and $199.8 million for the years ended December 31, 2007 and 2006, respectively, and are offset by $16.3 million and $9.5 million of allowances for sales returns, Medicaid and customer rebates, chargebacks, prompt-pay discounts and wholesaler management fees. The increase in product revenues was primarily due to increased U.S. customer volume, as well as a 6.2% price increase in January 2007. International revenues for the years ended December 31, 2007 and 2006 consisted primarily of product sales to Novartis.

        We generally 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. Certain wholesalers seek various fees for data supply and administration services. Net product revenues are reduced by any such fees paid to the wholesalers.

Other Revenues

        Other revenues for the year ended December 31, 2007 were $4.2 million as compared to $4.4 million for the year ended December 31, 2006, a decrease of $0.2 million or 5%. Included in other revenues for the year ended December 31, 2007 is revenue related to payments totaling $3.0 million under our license agreement with Novartis. The payments were received as a result of regulatory approvals for an expanded CUBICIN label in the EU. Also included in other revenues for the year ended December 31, 2007 is the amortization of license fees received from AstraZeneca, Merck and TTY. Included in other revenues for the year ended December 31, 2006 is revenue related to payments totaling $4.0 million under our license agreement with Novartis. The payments were received as a result of regulatory and pricing approvals for CUBICIN in Europe. Also included in other revenues for the year ended December 31, 2006 is $0.3 million of Small Business Innovation Research, or SBIR, grant revenue.

Costs and Expenses

        The following table sets forth costs and expenses for the years ended December 31, 2007 and 2006:

		December 31,
						% Change
		2007		2006
		(in millions)
Cost of product revenues		$	68.9	$	48.8	41	%
Research and development			85.2		57.4	48	%
Sales and marketing			67.7		56.9	19	%
General and administrative			31.5		26.7	18	%
	Total costs and expenses	$	253.3	$	189.8	33	%

Cost of Product Revenues

        Cost of product revenues were $68.9 million and $48.8 million in the years ended December 31, 2007 and 2006, respectively. Our gross margin for the year ended December 31, 2007, was 76% as compared to 74% for the year ended December 31, 2006. The increase in our gross margin is primarily due to reduced overall pricing from our manufacturing vendors as well as higher volume resulting in lower cost per unit sold. 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. In March of 2005, we issued to Eli Lilly $20.0 million of our common stock in exchange for a 2% reduction in the royalties payable to Eli Lilly. In 2003, we issued to Eli Lilly $8.0 million of our common stock in exchange for a 1% reduction in the

46

royalties payable to Eli Lilly. We also issued 38,922 shares of our common stock valued at $0.5 million in 2003 as a milestone payment to Eli Lilly. These amounts have been capitalized on our balance sheet as intangible assets and are amortized to cost of product revenues over the remaining life of our license agreement with Eli Lilly. Amortization included in cost of product revenues related to these items was $2.5 million for the years ended December 31, 2007 and 2006.

        As our production volumes increase, there is the potential for our gross margin to increase as we work to develop manufacturing process improvements. Whether that potential can be realized and the extent to which such potential can be realized are uncertain.

Research and Development Expense

        Total research and development expense in the year ended December 31, 2007 was $85.2 million as compared to $57.4 million in the year ended December 31, 2006, an increase of $27.8 million or 48%. The increase in research and development expenses was due primarily to (i) the IPR&D charge of $14.4 million and other related expense of $0.7 million related to the acquisition of Illumigen in December 2007; (ii) an increase of $4.5 million in payroll, benefits, travel and other employee related expenses; (iii) an increase of $4.2 million in clinical and non-clinical study costs; (iv) an increase of $2.3 million in collaboration expense; (v) an increase of $0.7 million in professional services expense; (vi) an increase of $0.6 million in research grant expense; (vii) an increase of $0.4 million in information technology expense; and (vii) an increase of $0.4 million in laboratory supplies and equipment expense.

        We expect to continue incurring substantial research and development expenses related to: (i) Phase 2 and Phase 4 clinical trials for CUBICIN; (ii) pre-clinical and clinical testing of other products under development, such as our HCV and CDAD preclinical compounds and our resistant Gram-positive and Gram-negative programs; (iii) regulatory matters; and (iv) medical affairs activities.

Sales and Marketing Expense

        Sales and marketing expense in the year ended December 31, 2007 was $67.7 million as compared to $56.9 million in the year ended December 31, 2006, an increase of $10.8 million or 19%. The increase in sales and marketing expense is primarily due to (i) an increase of $5.3 million in payroll, benefits, travel and other employee related expenses; (ii) an increase of $4.7 million in marketing, promotional programs and trade show expense; and (iii) an increase of $0.5 million in information technology expense. Sales and marketing expense are expected to increase in 2008 as we continue our commercialization efforts related to CUBICIN in the U.S. and work towards achieving our goal of increasing the number of CBMs in the U.S. from 135 to 164 by April 1, 2008.

General and Administrative Expense

        General and administrative expense in the year ended December 31, 2007, was $31.5 million as compared to $26.7 million in the year ended December 31, 2006, an increase of $4.7 million or 18%. This increase is primarily due to (i) an increase of $1.9 million in payroll, benefits and other employee related expenses; and (ii) an increase of $3.0 million in professional services.

47

Other Income (Expense), net

        The following table sets forth other income (expense); net for the years ended December 31, 2007 and 2006:

		December 31,
								% Change
		2007			2006
		(in millions)
Interest income		$	18.0		$	10.6		70	%
Interest expense			(9.4	)		(15.9	)	-41	%
Other income			—			—		-267	%
	Total other income (expense), net	$	8.6		$	(5.3	)	-262	%

Interest Income and Expense

        Interest income in the year ended December 31, 2007 was $18.0 million as compared to $10.6 million in the year ended December 31, 2006, an increase of $7.4 million or 70%. The increase in interest income is due primarily to a higher average cash balance during 2007 as compared to 2006 as well as higher rates of return on our investments. The higher average cash balance is due to increased cash from operations as well as the net proceeds of $339.1 million resulting from the closing of our $350.0 million aggregate principal amount of 2.25% convertible subordinated notes offering on June 6, 2006, offset by the repayment of the principal and outstanding interest of our $165.0 million aggregate principal amount of 5.5% convertible subordinated notes, plus a prepayment penalty.

        Interest expense in the year ended December 31, 2007 was $9.4 million as compared to $15.9 million in the year ended December 31, 2006, a decrease $6.5 million or 41%. The decrease in interest expense is primarily due to the early repayment of our $165.0 million aggregate principal amount of 5.5% convertible subordinated notes due in November 2008 on June 28, 2006. We used a portion of the proceeds from the June 2006 $350.0 million 2.25% convertible subordinated notes offering to repay the principal and outstanding interest of the $165.0 million aggregate principal amount of 5.5% convertible subordinated notes. This early prepayment in 2006 resulted in one time charges to interest expense of the prepayment penalty of $3.9 million as well as the write-off of the remaining unamortized balance of related debt issuance costs of $1.8 million.

Provision for Income Taxes

        Cubist's effective tax rate for the years ended December 31, 2007 and 2006 were 3.7% and 0%, respectively. The effective tax rate for the year ended December 31, 2007 relates to federal alternative minimum tax expense and state tax expense. The Company and its subsidiaries file income tax returns with the U.S. federal government and with multiple state and local jurisdictions in the U.S. All of our deferred tax assets have a full valuation allowance recorded against them. We continue to monitor the available information in determining whether there is sufficient positive evidence to consider releasing the valuation allowance on the deferred tax assets. Should we determine the valuation allowance is no longer required, a tax benefit would be recorded in the financial period of the change in determination.

48

Years Ended December 31, 2006 and 2005

Revenues

        The following table sets forth revenues for the year ended December 31, 2006 and 2005:

		December 31,
						% Change
		2006		2005
		(in millions)
U.S. product revenues, net		$	189.5	$	113.4	67	%
International product revenues			0.8		0.1	910	%
Other revenues			4.4		7.1	-38	%
	Total revenues, net	$	194.7	$	120.6	61	%

Product Revenues, net

        Net sales of CUBICIN were $190.3 million and $113.5 million in 2006 and 2005, respectively. Gross sales of CUBICIN totaled $199.8 million and $118.6 million for the years ended December 31, 2006 and 2005, respectively, and are offset by $9.5 million and $5.1 million of allowances for sales returns, Medicaid and customer rebates, chargebacks, prompt-pay discounts and wholesaler management fees. The increase in revenues was primarily due to increased customer volume. Also impacting net product revenues was a 6.6% price increase in October 2005 and an additional 6.5% price increase in May 2006. Included in net product revenues for the year ended December 31, 2006 is $0.8 million of international sales.

        We generally 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. Certain wholesalers seek various fees for data supply and administration services. Net product revenue is reduced by any such fees paid to the wholesalers.

Other Revenues

        Other revenues for the year ended December 31, 2006 were $4.4 million as compared to $7.1 million for the year ended December 31, 2005, a decrease of $2.7 million or 38%. The decrease in other revenues is primarily due to a decrease in revenue related to our 2003 license agreement with Novartis. Other revenues under this agreement totaled $4.0 million for the year ended December 31, 2006 compared to $6.5 million for the year ended December 31, 2005. Other revenues under this agreement recognized in the year ended December 31, 2006 consisted of payments received as a result of regulatory and pricing approvals for CUBICIN in Europe which were recognized as revenue upon their receipt. Other revenues under this agreement recognized in the year ended December 31, 2005 consisted of the recognition of $4.3 million of previously deferred upfront payments and $2.2 million of development revenue. The upfront payments totaled $11.3 million, and included a $3.3 million premium paid upon purchasing our common stock. This $11.3 million was recorded as deferred revenue and was amortized to license fee revenues over the estimated development period of the agreement of two years which was completed in September 2005. Also included in other revenues for the year ended December 31, 2006 and 2005 are Small Business Innovation Research, or SBIR, grant revenue of $0.3 million and $0.4 million, respectively.

49

Costs and Expenses

        The following table sets forth costs and expenses for the years ended December 31, 2006 and 2005:

		December 31,
						% Change
		2006		2005
		(in millions)
Cost of product revenues		$	48.8	$	32.7	49	%
Research and development			57.4		51.7	11	%
Sales and marketing			56.9		42.3	34	%
General and administrative			26.7		19.3	38	%
	Total costs and expenses	$	189.8	$	146.0	30	%

Cost of Product Revenues

        Cost of product revenues were $48.8 million and $32.7 million in the years ended December 31, 2006 and 2005, respectively. Our gross margin for the year ended December 31, 2006, was 74% as compared to 71% for the year ended December 31, 2005, primarily due to reduced overall pricing from our manufacturing vendors as well as higher volume resulting in lower cost per unit sold. 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. In March of 2005, we issued to Eli Lilly $20.0 million of our common stock in exchange for a 2% reduction in the royalties payable to Eli Lilly. In 2003, we issued to Eli Lilly $8.0 million of our common stock in exchange for a 1% reduction in the royalties payable to Eli Lilly. We also issued 38,922 shares of our common stock valued at $0.5 million in 2003 as a milestone payment to Eli Lilly. These amounts have been capitalized on our balance sheet as intangible assets and are amortized to cost of product revenues over the remaining life of our license agreement with Eli Lilly. Amortization included in cost of product revenues related to these expenses was $2.5 million and $1.9 million for the years ended December 31, 2006 and 2005, respectively.

Research and Development Expense

        Total research and development expense in the year ended December 31, 2006 was $57.4 million as compared to $51.7 million in the year ended December 31, 2005, an increase of $5.7 million or 11%. The increase in research and development expenses was due primarily to (i) an increase of $9.4 million in payroll, benefits, travel and other employee related expenses due to increased headcount as well as non-cash stock-based compensation charges associated with the implementation of FAS 123(R); (ii) an increase of $2.1 million in collaborations expense due primarily to costs associated with our Ilypsa collaboration which we entered into in the second quarter of 2006; (iii) an increase of $1.2 million in process development costs associated with the development of our lipopeptide program; (iv) an increase of $0.9 million in research grants; (v) an increase of $1.3 million in lab supplies, equipment, and services; (vi) an increase of $0.7 million in non-clinical studies; and (vii) an increase of $0.7 million in publications expense. These increases were offset by (i) a decrease of $6.2 million in clinical study costs due primarily to our decision to discontinue investment in our HepeX-B program as well as the completion of our clinical trial of CUBICIN in the treatment of bacteremia with known or suspected endocarditis caused by S. aureus; (ii) a $1.6 million decrease in medical education expense; and (iii) a $0.7 million decrease in process development costs related to HepeX-B. Additionally, $1.6 million of manufacturing development costs associated with our license agreement with Novartis, and $0.8 million of costs related to the establishment of a second API manufacturer and a second fill-finish manufacturer for our CUBICIN product were incurred in 2005 and were not repeated in 2006.

50

Sales and Marketing Expense

        Sales and marketing expense in the year ended December 31, 2006 was $56.9 million as compared to $42.3 million in the year ended December 31, 2005, an increase of $14.5 million or 34%. The increase in sales and marketing expense is primarily due to an increase of $12.4 million in payroll, benefits, travel and other employee related expenses due to our sales force expansion in the first quarter of 2006 and the non-cash stock-based compensation charges associated with the implementation of FAS 123(R). Also included in sales and marketing expense is an increase of $2.8 million in promotional programs.

General and Administrative Expense

        General and administrative expense in the year ended December 31, 2006 was $26.7 million as compared to $19.3 million in the year ended December 31, 2005, an increase of $7.4 million or 38%. This increase is primarily due to (i) an increase of $4.7 million in payroll, benefits and other employee related expenses due to headcount growth and the non-cash stock-based compensation charges associated with the implementation of FAS 123(R); (ii) an increase of $1.6 million in professional services; and (iii) an increase of $0.9 million in rent expense due to additional space we have leased at 55 Hayden Avenue in Lexington, MA.

Other Expense, net

        The following table sets forth other expense, net for the years ended December 31, 2006 and 2005:

		December 31,
								% Change
		2006			2005
		(in millions)
Interest income		$	10.6		$	3.3		222	%
Interest expense			(15.9	)		(9.8	)	62	%
Other income			—			0.1		-90	%
	Total other expense, net	$	(5.3	)	$	(6.4	)	(18	)%

Interest Income and Expense

        Interest income in the year ended December 31, 2006 was $10.6 million as compared to $3.3 million in the year ended December 31, 2005, an increase of $7.3 million or 222%. The increase in interest income was due to a higher average cash balance from June to December 2006 compared to the same period in 2005 as well as higher rates of return on our investments. The higher average cash balance is due to the net proceeds of $339.1 million resulting from the closing of our $350.0 million aggregate principal amount of 2.25% convertible subordinated notes offering on June 6, 2006, offset by the repayment of the principal and outstanding interest of our $165.0 million aggregate principal amount of 5.5% convertible subordinated notes, plus a prepayment penalty.

        Interest expense in the year ended December 31, 2006 was $15.9 million as compared to $9.8 million in the year ended December 31, 2005, an increase of $6.1 million or 62%. The increase in interest expense is primarily due to the early repayment of our $165.0 million aggregate principal amount of 5.5% convertible subordinated notes due in November 2008 on June 28, 2006. The early repayment of the $165.0 million aggregate principal amount of 5.5% convertible subordinated notes resulted in charges to interest expense of the prepayment penalty of $3.9 million as well as the write-off of the remaining unamortized balance of related debt issuance costs of $1.8 million.

51

Other Income

        Other income in the year ended December 31, 2006 was $0 as compared to $0.1 million in the year ended December 31, 2005. Other income for the year ended December 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 service, including principal, interest and capital lease obligations. We fund our cash requirements through the following methods:

•

sales of CUBICIN;



•

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



•

equity and debt financings; and



•

interest earned on invested capital.

        Net cash provided by operating activities was $100.8 million in 2007, compared to net cash provided by operating activities of $30.7 million in 2006 and to net cash used in operating activities of $30.6 million in 2005. Net cash provided by operating activities in 2007 includes our net income for the year of $48.1 million increased by non-cash charges of $37.8 million that primarily consists of $14.4 million of acquired IPR&D, $10.6 million of stock-based compensation expenses, $9.7 million of depreciation and amortization expense, $1.6 million of amortization of debt issuance costs and $2.1 million in expense associated with our 401(k) company match that is made in the form of common stock shares. Uses of cash consisted of an increase of $8.0 million in accounts receivable due to increased sales of CUBICIN, and an increase of $2.8 million (net of non-cash amortization expense related to manufacturing assets from our previous API supplier DSM Capua, S.p.A., or DSM) in inventory primarily due to increased purchases from our manufacturing vendors as we build a sufficient supply of CUBICIN to meet projected sales requirements. These uses of cash were offset by a $20.4 million increase in accounts payable and accrued liabilities due primarily to increased royalties paid to Eli Lilly related to increased sales of CUBICIN and a $6.0 million increase in deferred revenue, primarily due to the receipt of a $6.0 million upfront payment from Merck.

        Net cash provided by investing activities in 2007 was $226.2 million, compared to $227.8 million used in investing activities in 2006 and $32.9 million provided by investing activities in 2005. Cash provided by investing activities in 2007 represents cash inflows from the maturity of securities, offset by purchases of securities, as well as cash outflows for purchases of property and equipment and for the acquisition of Illumigen, net of cash acquired. Purchases of property and equipment during the year ended December 31, 2007, were $5.1 million compared to $7.4 million and $2.1 million in the years ended December 31, 2006 and 2005, respectively. Property and equipment additions in 2007 consisted primarily of expenses related to building out additional lease space at 45 and 55 Hayden Avenue, lab equipment and computer software. Property and equipment additions in 2006 consisted primarily of lab equipment, expenditures related to building out additional leased space at 55 Hayden Avenue, as well as various IT upgrades. Property and equipment additions in 2005 consisted primarily of computer hardware and software and lab equipment. Net cash used in investing activities may fluctuate significantly from period to period due to the timing of our capital expenditures and other investments. We anticipate that our capital expenditures for 2008 will increase to approximately $24.0 million, primarily driven by the construction of approximately 30,000 square feet of laboratory space at our main building in 65 Hayden Avenue, as well expenses related to building out additional leased space at 55 and 45 Hayden Avenue.

52

        Net cash of $11.8 million was provided by financing activities in the year ended December 31, 2007, as compared to $184.0 million and $6.2 million provided by financing activities in the years ended December 31, 2006 and 2005, respectively. Proceeds from financing activities in 2007 consisted primarily of $12.1 million from employees' exercise of stock options and purchases of common stock through our employee stock purchase plan.

        Auctions for $58.1 million of our investments in auction rate securities have failed repeatedly since August 2007. These auction rate notes consist of private placement, credit default swap structured securities which reference synthetic portfolios of corporate bonds. These securities have long-term nominal maturities for which the interest rates are reset through a monthly auction. These monthly auctions historically have provided a liquid market for these securities. Consistent with our investment policy guidelines, the auction rate securities held by us all had AAA credit ratings at the time of purchase. As a result of the auction failures, we have recorded temporary unrealized losses of $14.7 million in other comprehensive income as a reduction in shareholders' equity. All of the auction rate securities that failed are still AAA rated and none are backed by sub-prime mortgages. The failure resulted in the interest rate on these investments resetting at the default coupon rate per the terms of the certificate. Historically, given the liquidity created by the auctions, auction rate securities were presented as current assets under marketable securities on our balance sheet. Given the failed auctions, while we now earn a premium interest rate on the investments, the investments are not liquid. In the event that we need to access these funds, we will not be able to do so until a future auction on these investments is successful or until they reach their underlying maturity. Accordingly, the entire amount of these auction rate securities, net of unrealized losses of $14.7 million, has been classified from current to non-current assets on our balance sheet. The credit and capital markets have continued to deteriorate in 2008 and the bids on the auction rate notes we hold have since declined but there have been no sales at these lower bids. If a certain concentration, as defined in the auction rate documents, of the underlying reference portfolios default, or if the issuing bank fails to make the required interest payments or the final principal payment upon the ultimate maturity of the notes, or if the credit ratings on the underlying reference portfolios deteriorate significantly, the Company may be required to adjust the carrying value of these investments through an other-than- temporary impairment charge. Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and other sources of cash, we do not anticipate the lack of liquidity on these investments will affect our ability to execute our current business plan.

        In June 2006, we completed the public offering of $350.0 million aggregate principal amount of 2.25% convertible subordinated notes (less financing costs of $10.9 million). The notes are convertible at any time prior to maturity into common stock at an initial conversion rate of 32.4981 shares of common stock per $1,000 principal amount of convertible notes, subject to adjustment upon certain events, which equates to approximately $30.77 per share. Interest is payable on each June 15 and December 15, beginning December 15, 2006. In January 2008, we repurchased $50.0 million of the original principal amount of the 2.25% notes (see Note S.).

        In March 2005, we announced that we had entered into an agreement to purchase from Eli Lilly a 2% reduction in the royalty rate payable to Eli Lilly on net sales of CUBICIN. In exchange for this reduction, we 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 in March 2005. Our global royalty rate obligation payable to Eli Lilly on CUBICIN sales was reduced by two percentage points upon registration of the common stock on April 22, 2005. In July 2003, we entered into an amendment to the license agreement with Eli Lilly and issued to Eli Lilly 723,619 shares of common stock valued at $8.0 million, in consideration for a 1% reduction in the royalty rate payable to Eli Lilly on net sales of CUBICIN.

        In October 2001, we completed the private placement of $165.0 million aggregate principal amount of 5¹/2% convertible subordinated notes (less financing costs of $5.3 million). The notes were

53

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. Interest was payable on each November 1 and May 1, beginning May 1, 2002. Cubist paid $9.1 million in interest on these notes during 2005 and 2004. We used a portion of the proceeds from the June 2006 $350.0 million 2.25% convertible subordinated notes offering to repay the principal and outstanding interest of our $165.0 million aggregate principal amount of 5.5% convertible subordinated notes, plus a prepayment penalty. This repayment resulted in charges of $5.7 million related to the prepayment penalty and the write-off of debt issuance costs associated with the debt.

        From time to time, our board of directors may consider authorizing Cubist to repurchase shares of our common stock or our outstanding convertible subordinated notes in privately negotiated transactions, or publicly announced programs. If and when our board of directors should determine to authorize any such action, it would be on terms and under market conditions the board determines are in the best interest of our company. Any such repurchases could deplete some of our cash resources.

Contractual Obligations

        Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent liabilities, such as royalties on future sales above the contractual minimums or known accrued royalty balance, for which we cannot reasonably predict future payment. The following summarizes our significant contractual obligations at December 31, 2007, 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		$	—	$	—	$	—	$	350.0	$	350.0
Interest on subordinated convertible notes			7.9		15.7		15.7		3.9		43.2
Operating leases, net of sublease income			2.7		6.9		7.1		13.0		29.7
Inventory purchase obligations			17.7		21.6		23.3		28.1		90.7
Capital purchase obligations			3.0								3.0
Royalty payments due			23.7		—		—		—		23.7
Other purchase obligations			5.6								5.6
	Total contractual cash obligations	$	60.6	$	44.2	$	46.1	$	395.0	$	545.9

        The subordinated convertible notes consist of $350.0 million aggregate principal amount of our 2.25% convertible subordinated notes, due in June 2013. These notes require semi-annual interest payments through maturity. In January 2008, we repurchased $50.0 million of the original principal amount of the 2.25% notes (see Note S.).

        Our operating leases consist of approximately 121,000 square feet of office and data center space at 45 and 55 Hayden Avenue in Lexington, Massachusetts, pursuant to a term lease that expires in April 2016, 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 capital purchase obligations listed above represent capital purchase commitments related to building out additional leased space at 55 and 45 Hayden

54

Avenue. The royalty payments listed above represent amounts owed to Eli Lilly on sales of CUBICIN product. The other purchase obligations listed above represent payments related to the development of IB657.

Critical Accounting Policies and Estimates

        Cubist prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The Company is required to make certain estimates, judgments and assumptions that affect certain reported amounts and disclosures; actual amounts may differ.

        We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements:

•

Revenue recognition;



•

Inventories;



•

Accrued clinical research costs;



•

Investments;



•

Long-lived assets;



•

Income taxes; and



•

Stock-based compensation.

I. Revenue recognition

        We recognize 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. Principal sources of revenue are sales of CUBICIN and license fees and milestone payments that are derived from collaborative agreements with other biopharmaceutical companies and distribution agreements. We have followed the following principles in recognizing revenue:

Product Revenues, net

        We recognize 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 we have no further performance obligations. All revenues from product sales are recorded net of applicable provisions for returns, chargebacks, discounts, wholesaler management fees and rebates in the same period the related sales are recorded.

        Since the launch of CUBICIN in November 2003, we generally have not allowed wholesalers to stock CUBICIN. Instead, we instituted a drop-ship program that we have continued to maintain. Under our drop-ship program, orders are processed through wholesalers, but shipments are sent directly to our end-users, who are generally hospitals and acute care settings. This results in sales trends closely tracking actual hospital and acute care settings purchases of our product, and also prevents unusual purchasing patterns since it closely tracks end-user demand.

        We maintain a return policy that allows our customers to return product within a specified period prior to and subsequent to the expiration date. Our estimate of the provision for returns is analyzed quarterly and is based upon many factors, including industry data of product return rates, historical experience of actual returns, analysis of level inventory in the distribution channel, if any, and reorder rates of end-users. If the history of our product returns changes, the reserve will be adjusted appropriately. If we discontinue the drop ship program and allow wholesalers to stock CUBICIN, our

55

net product sales may be impacted by the timing of wholesaler inventory stocking and activity and provisions for returns which will be based on estimated product in the distribution channel that may not sell through to end-users.

        We analyze our estimates and assumptions for chargebacks and Medicaid rebate reserves quarterly. Our Medicaid and chargeback reserves have two components: (i) an estimate of outstanding claims for known end-user rebate eligible sales that have occurred, but for which related claim submissions have not been received; and (ii) an estimate of chargebacks and Medicaid rebates based on an analysis of customer sales mix data to determine which sales may flow through to a rebate or chargeback eligible customer. Because the second component is calculated based on the amount of inventory in the distribution channel, if any, our assessment of distribution channel inventory levels impacts our estimated reserve requirements. We accrue for the expected liability at the time we record the sale, however, the time lag between sale and payment of rebate can be lengthy. Due to the time lag, in any particular period our rebate adjustments may incorporate revisions of accruals for several periods.

        Reserves for Medicaid rebate programs are included in accrued liabilities and were $601,000 and $652,000 at December 31, 2007 and 2006, respectively. Reserves for returns, discounts, chargebacks, wholesaler management fees and customer rebates are offset against accounts receivable and were $3.9 million and $2.8 million at December 31, 2007 and 2006, respectively. In the year ended December 31, 2007, 2006 and 2005, provisions for sales returns, chargebacks, rebates, wholesaler management fees and prompt-pay discounts that were offset against product revenues totaled $16.3 million, $9.5 million and $5.1 million, respectively.

        We believe that the reserves we have established are reasonable and appropriate based upon current facts and circumstances. Applying different judgments to the same facts and circumstances would result in the estimated amounts for sales returns, chargebacks and Medicaid rebate reserves to vary. However, due to the drop-ship model that we currently operate under, and the low level of actual product returns, chargebacks and Medicaid rebate claims experienced to date, we do not expect that the differences would be material.

Multiple Element Arrangements

        We analyze our multiple element arrangements 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." We recognize up-front license payments as revenue if the license has standalone value and the fair value of the undelivered items can be determined. If the license is considered to have standalone value but the fair value on any of the undelivered items cannot be determined, the license payments are recognized as revenue over the period of performance for such undelivered items or services. Our assessment of our obligations and related performance periods require significant management judgement.

License Revenues

        Non-refundable license fees are recognized depending on 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 performance obligation only after both the license period has commenced and the technology has been delivered. If an agreement contains product development services, the relevant time period for the product development phase is based on management estimates and could vary depending on the outcome of clinical trials and the regulatory approval process. Such changes could materially impact the revenue recognized and as a result, management reviews the estimates related to the relevant time period of product development quarterly.

56

Milestones

        Revenues from milestone payments related to arrangements under which we have 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 we complete our performance obligations. Contingent payments under license agreements that do not involve substantial effort on the part of the Company are not considered substantive milestones. Such payments are recognized as revenue when the contingency is met only if there are no remaining performance obligations or any remaining performance obligations are priced at fair value. Otherwise, the contingent payment is recognized as the Company completes its performance obligations under the arrangement.

Research services

        Revenues from SBIR grants to conduct research and development are recognized as the eligible costs are incurred up to the granted funding limit.

II.    Inventories

        Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out, or FIFO, basis. Included in the cost of inventories are employee stock-based compensation costs capitalized under SFAS 123(R). On a quarterly basis, we analyze our inventory levels, and write-down inventory that is expected to expire prior to being sold, inventory that has a cost basis in excess of its expected net realizable value, inventory in excess of expected sales requirements, or inventory that fails to meet commercial sale specifications through a charge to cost of product revenues. Expired inventory is disposed of and the related costs are written off to cost of product revenues. Charges for inventory write-downs are not reversed if it is later determined that the product is saleable, therefore, any such inventory would be sold at zero cost. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

III.  Accrued clinical research costs

        We utilize external entities such as contract research organizations, independent clinical investigators, and other third-party service providers to assist us with the execution of our clinical studies. We record costs for clinical study activities based upon the estimated amount of services provided but not yet invoiced for each study, and include these costs in accrued liabilities in our Consolidated Balance Sheets and within research and development expense in our Consolidated Statements of Operations. Contracts and studies vary significantly in length, and are generally composed of a fixed management fee, variable indirect reimbursable costs that have a dollar limit cap, and amounts owed on a per patient enrollment basis. We monitor the activity levels and patient enrollment levels of the studies to the extent possible through communication with the service providers, detailed invoice and task completion review, analysis of actual expenses against budget, pre-approval of any changes in scope, and review of contractual terms. These estimates may or may not match the actual services performed by the service providers as determined by actual patient enrollment levels and other variable activity costs. Clinical trial expenses totaled $5.6 million, $2.6 million and $8.8 million for the years ended December 31, 2007, 2006 and 2005, respectively. The level of clinical study expense may vary from period to period based on the number of studies that are in process, the duration of the study, the required level of patient enrollment, and the number of sites involved in the study. Clinical trials that bear the greatest risk of change in estimates are typically those

57

with a significant number of sites, require a large number of patients, have complex patient screening requirements and that span multiple years. If we receive incomplete or inaccurate information from our third-party service providers, we may under or over estimate activity levels associated with various studies at a given point in time. In this event, we could record adjustments to prior period accruals that increase or reverse research and development expenses in future periods when the actual activity level becomes known.

IV.    Investments

        It is our intent to hold all investments to their effective maturity in accordance with our investment policy. However, if the circumstances regarding an investment were to change, such as a change in an investment's external credit rating, we would consider a sale of the related security to minimize any losses. The appropriateness of all investment classifications is reviewed at each reporting date. The amount of the unrealized loss on the auction rate notes is determined through a valuation analysis which includes an assessment of the risk related to the underlying corporate bond portfolio as well as the actual sales activity of these auction rate notes at current available market bids.

        Included in our investments are auction rate notes, which consist of private placement, credit default swap structured securities which reference synthetic portfolios of corporate bonds. These securities have long-term nominal maturities for which the interest rates are reset through a monthly auction. While the underlying securities of auction rate securities may have contractual maturities of more than ten years, the interest rates on such securities reset at intervals of 7, 28 or 35 days. Historically, auction rate securities have been priced and traded as short-term investments because of this reset feature and have been considered short-term available-for-sale investments. Given the repeated failure of auctions for $58.1 million of our investments in auction rate securities, we do not consider these investments to be liquid and classified them as long-term investments as of December 31, 2007. As a result of the auction failures, we have recorded temporary unrealized losses of $14.7 million in other comprehensive income as a reduction in shareholders' equity. The amount of the unrealized loss on the auction rate notes is determined through a valuation analysis which is based on bids from the broker who is the market maker for these instruments, corroborated through an analysis of the underlying instruments. We consider this loss to be temporary in nature. The credit and capital markets have continued to deteriorate in 2008 and the bids on the auction rate notes we hold have since declined. If a certain concentration, as defined in the auction rate documents, of the underlying reference portfolios default, or if the issuing bank fails to make the required interest payments or the final principal payment upon the ultimate maturity of the notes, or if the credit ratings on the underlying reference portfolios deteriorate significantly, we may be required to adjust the carrying value of these investments through an other-than-temporary impairment charge. Investment classification detail can be found in Note E., "Investments" in the Notes to the Consolidated Financial Statements.

V.     Long-lived assets

        In the ordinary course of our business, we incur substantial costs to purchase and construct property, plant and equipment. The treatment of costs to purchase or construct these assets depends on the nature of the costs and the stage of construction. We generally depreciate plant and equipment using the straight-line method over the asset's estimated economic life, which ranges from 3 years to 40 years. Determining the economic lives of plant and equipment requires us to make significant judgments that can materially impact our operating results. Property and equipment primarily consists of our corporate headquarters building.

        As of December 31, 2007, there were approximately $22.7 million of net other intangible assets on our consolidated balance sheet, which consisted of patents, intellectual property, acquired technology rights, manufacturing rights, and other intangibles. We amortize our intangible assets using the straight-line method over their estimated economic lives, which range from 5 years to 16 years.

58

Determining the economic lives of intangible assets requires us to make significant judgment and estimates, and can materially impact our operating results.

        Property and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Judgments regarding the existence of impairment indicators are based on historical and projected future operating results, changes in the manner of use of the acquired assets, overall business strategy, and market and economic trends. Future events could cause management to conclude that impairment indicators exist and that certain long-lived assets are impaired.

VI.   Income Taxes

        We record deferred tax assets and liabilities based on the net tax effects of tax credits, operating loss carry forwards, and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We then assess the likelihood that deferred tax assets will be recovered from future taxable income and, to the extent that we determine that recovery is not likely, a valuation allowance is established. The valuation allowance is based on estimates of taxable income by jurisdiction in which we operate and the period over which deferred tax assets will be recoverable. Through December 31, 2007, we believe it is more likely than not that all of our deferred tax assets will not be realized and, accordingly, have recorded a valuation allowance against all deferred tax assets. We continue to monitor the available information in determining whether there is sufficient positive evidence to consider releasing the valuation allowance on the deferred tax assets. Should we determine the valuation allowance is no longer required, a tax benefit would be recorded in the financial period of the change in determination.

VI.   Stock-Based Compensation

        Effective January 1, 2006, our accounting policy related to stock option accounting changed upon our adoption of SFAS 123(R). SFAS 123(R) requires us to expense the fair value of employee stock options and other forms of share-based compensation. Under the fair value recognition provisions of SFAS 123(R), share-based compensation cost is estimated at the grant date based on the value of the award and is recognized as expense ratably over the requisite service period of the award (generally the vesting period of the equity award). Determining the appropriate fair value model and calculating the fair value of share-based awards requires judgment, including estimating the expected life of the share-based award, the expected stock price volatility over the expected life of the share-based award and forfeiture rates.

        In order to determine the fair value of share-based awards on the date of grant, we use the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock price volatility, option life, risk-free interest rate and dividend yield. The risk-free interest rate is a less subjective assumption as it is based on factual data derived from public sources. We use a dividend yield of zero as we have never paid cash dividends and have no intention to pay cash dividends in the immediate future. The expected stock price volatility and option life assumptions require a greater level of judgment which makes them critical accounting estimates. Estimating forfeitures also requires significant judgment.

        Our expected stock-price volatility assumption is based on both current and historical volatilities of our stock which is obtained from public data sources. The expected life represents the weighted average period of time that share-based awards are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. We determine the expected life assumption based on the exercise behavior and post-vesting behavior that has been exhibited historically, adjusted for specific factors that may influence future exercise patterns. We estimate forfeitures based on our historical experience of share-based pre-vesting cancellations. We believe that our estimates are based

59

on outcomes that are reasonably likely to occur. To the extent actual forfeitures differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. During the years ended December 31, 2007 and 2006 we incurred $10.5 million and $10.6 million of compensation cost under SFAS 123(R), respectively.

Recent Accounting Pronouncements

        In February 2008, the FASB issued a FASB Staff Position, or FSP, to defer the effective date of FASB Statement No. 157, "Fair Value Measurements," or SFAS 157, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of the FSP. The delay is intended to provide the Board additional time to consider the effect of certain implementation issues that have arisen from the application of SFAS 157 to these assets and liabilities. SFAS 157 was issued on September 15, 2006, and as issued, was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early application was encouraged. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. The Statement codifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its results of operations and financial condition.

        In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations," or SFAS 141(R), which is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired in the business combination. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) will be applied prospectively. The Company is currently evaluating the effect that the adoption of SFAS 141(R) will have on its results of operations and financial condition.

        In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51," or SFAS 160. SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component of equity. The Statement also requires that entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 160 shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The Company is currently evaluating the effect that the adoption of SFAS 160 will have on its results of operations and financial condition.

        In June 2007, the EITF reached a consensus on EITF Issue No. 07-03, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities," or EITF 07-03. EITF 07-03 concludes that non-refundable advance payments for future research and development activities should be deferred and capitalized until the goods have been delivered or the related services have been performed. If an entity does not expect the goods to be

60

delivered or services to be rendered, the capitalized advance payment should be charged to expense. This consensus is effective for fiscal years beginning after December 15, 2007. The initial adjustment to reflect the effect of applying the consensus as a change in accounting principle would be accounted for as a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is currently evaluating the effect that the adoption of EITF 07-03 will have on its results of operations and financial condition.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," or SFAS 159, which is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, "Fair Value Measurements." SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company's choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The Company is currently evaluating the effect that the adoption of SFAS 159 will have on its results of operations and financial condition.

        The Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109", or FIN 48, on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." This interpretation requires that the Company determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN 48 did not have a material impact on the Company's financial statements. See Note P., "Income Taxes," for additional information.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We invest our cash in a variety of financial instruments; principally securities issued by the U.S. government and its agencies, investment grade corporate bonds and notes, auction rate securities, and money market instruments. These investments are denominated in U.S. dollars. All of our interest-bearing securities are subject to interest rate risk, and could decline in value if interest rates fluctuate.

        We currently own financial instruments that are sensitive to market risks as part of our investment portfolio. The investment portfolio is used to preserve capital until it is required to fund operations. None of these market-risk sensitive instruments are held for trading purposes. Included in our investments are auction rate notes, which consist of private placement, credit default swap structured securities which reference synthetic portfolios of corporate bonds. These securities have long-term nominal maturities for which the interest rates are reset through a monthly auction. These auctions historically have provided a liquid market for these securities. In August 2007, auctions for $58.1 million of our investments in auction rate securities failed and have failed repeatedly since then. As a result of the auction failures, we have recorded unrealized losses of $14.7 million in other comprehensive income as a reduction in shareholders' equity. All of the auction rate securities that failed are still AAA rated and none are backed by sub-prime mortgages. The failure resulted in the interest rate on these investments resetting at the default coupon rate per the terms of the certificate. Given the failed auctions, while we now earn a premium interest rate on the investments, the investments are not liquid. In the event that we need to access these funds, we will not be able to do so until a future auction on these investments is successful. The credit and capital markets have continued

61

to deteriorate in 2008 and the bids on the auction rate notes the Company holds have since declined. If a certain concentration, as defined in the auction rate documents, of the underlying reference portfolios default, or if the issuing bank fails to make the required interest payments or the final principal payment upon the ultimate maturity of the notes, or if the credit ratings on the underlying reference portfolios deteriorate significantly, the Company may be required to adjust the carrying value of these investments through an other-than-temporary impairment charge. Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and other sources of cash, we do not anticipate the lack of liquidity on these investments will affect our ability to execute our current business plan.

        As of December 31, 2007, the fair market value of our 2.25% convertible subordinated notes due in 2013 amounted to $331.0 million. The estimated fair value of long-term debt was determined using quoted market rates. The interest rates on the 2.25% convertible subordinated notes and capital lease obligation are fixed and are therefore not subject to interest rate risk.

62

ITEM 8.    FINANCIAL STATEMENTS

Cubist Pharmaceuticals, Inc.
Index to Consolidated Financial Statements and Schedule

Report of Independent Registered Public Accounting Firm	64
Consolidated Balance Sheets as of December 31, 2007 and 2006	66
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005	67
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005	68
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2007, 2006 and 2005	69
Notes to Consolidated Financial Statements	70
Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2007, 2006 and 2005	101

63

Report of Independent Registered Public Accounting Firm

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

        In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Cubist Pharmaceuticals, Inc. and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        As discussed in Note B to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in fiscal 2006.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

64

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/  PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
February 29, 2008

65

CUBIST PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

			December 31,
			2007			2006
			(in thousands, except share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	354,785		$	15,979
	Short-term investments			—			278,012
	Accounts receivable, net			29,075			21,070
	Inventory			18,733			18,111
	Prepaid expenses and other current assets			6,686			5,195
		Total current assets		409,279			338,367
Property and equipment, net				50,150			49,584
Intangible assets, net				22,698			25,639
Long-term investments, net				43,399			15,178
Other assets				8,989			10,267
		Total assets	$	534,515		$	439,035
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	6,564		$	3,602
	Accrued liabilities			58,735			31,038
	Short-term deferred revenue			1,484			—
	Current portion of capital lease obligations			—			245
		Total current liabilities		66,783			34,885
Long-term deferred revenue, net of current portion				16,332			11,800
Other long-term liabilities				2,698			1,760
Long-term debt				350,000			350,000
		Total liabilities		435,813			398,445
Commitments and contingencies (Notes C, D, M, N and P)
Stockholders' equity:
	Preferred stock, non-cumulative; convertible, $.001 par value; authorized 5,000,000 shares; no shares issued and outstanding			—			—
	Common stock, $.001 par value; authorized 150,000,000 shares; 56,142,105 and 55,001,058 shares issued and outstanding as of December 31, 2007 and 2006, respectively			56			55
Additional paid-in capital				549,391			524,726
Accumulated other comprehensive loss				(14,701	)		—
Accumulated deficit				(436,044	)		(484,191	)
		Total stockholders' equity		98,702			40,590
Total liabilities and stockholders' equity			$	534,515		$	439,035

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

66

CUBIST PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

			For the Years Ended December 31,
			2007			2006			2005
			(in thousands except share and per share amounts)
Revenues:
	U.S. product revenues, net		$	285,059		$	189,512		$	113,434
	International product revenues			5,347			808			80
	Other revenues			4,214			4,428			7,131
		Total revenues, net		294,620			194,748			120,645
Costs and expenses:
	Cost of product revenues			68,860			48,803			32,739
	Research and development			85,175			57,405			51,673
	Sales and marketing			67,662			56,879			42,331
	General and administrative			31,485			26,745			19,335
		Total costs and expenses		253,182			189,832			146,078
Operating income (loss)				41,438			4,916			(25,433	)
Other income (expense):
	Interest income			18,036			10,589			3,292
	Interest expense			(9,427	)		(15,893	)		(9,836	)
	Other income (expense)			(20	)		12			125
		Total other income (expense), net		8,589			(5,292	)		(6,419	)
Income (loss) before income taxes				50,027			(376	)		(31,852	)
Provision for income taxes				1,880			—			—
Net income (loss)			$	48,147		$	(376	)	$	(31,852	)
Basic net income (loss) per common share			$	0.87		$	(0.01	)	$	(0.60	)
Diluted net income (loss) per common share			$	0.83		$	(0.01	)	$	(0.60	)
Shares used in calculating:
	Basic net income (loss) per common share			55,591,775			54,490,376			53,053,307
	Diluted net income (loss) per common share			68,822,996			54,490,376			53,053,307

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

67

CUBIST PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

				For the Years Ended December 31,
				2007			2006			2005
				(in thousands)
Cash flows from operating activities:
	Net income (loss)			$	48,147		$	(376	)	$	(31,852	)
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities, net of assets and liabilities acquired:
	Depreciation and amortization				9,669			9,194			7,835
	Amortization and write-off of debt issuance costs				1,551			3,123			760
	Amortization of premium or discount on investments				(558	)		(144	)		251
	Stock-based compensation				10,605			11,105			438
	Charge for company 401(k) common stock match				2,109			1,825			1,394
	Other non-cash				(24	)		11			13
	Acquired IPR&D				14,433			—			—
	Changes in assets and liabilities, net of assets and liabilities acquired:
		Accounts receivable			(8,005	)		(6,369	)		(4,847	)
		Inventory			(2,774	)		(1,447	)		(8,681	)
		Prepaid expenses and other current assets			(1,468	)		434			(2,003	)
		Other assets			(271	)		273			162
		Accounts payable and accrued liabilities			20,401			718			9,639
		Deferred revenue			6,016			10,550			(3,700	)
		Other long-term liabilities			938			1,760			—
			Total adjustments		52,622			31,033			1,261
			Net cash provided by (used in) operating activities		100,769			30,657			(30,591	)
Cash flows from investing activities:
	Acquisition of Illumigen, net of cash acquired				(4,350	)		—			—
	Purchases of property and equipment				(5,133	)		(7,391	)		(2,052	)
	Purchases of investments				(3,407,532	)		(1,714,151	)		(696,142	)
	Maturities of investments				3,643,180			1,493,704			731,136
			Net cash provided by (used in) investing activities		226,165			(227,838	)		32,942
Cash flows from financing activities:
	Issuance of common stock, net				12,073			10,010			6,357
	Proceeds from sale of convertible subordinated debt				—			350,000			—
	Costs associated with sale of convertible subordinated debt				—			(10,925	)		—
	Repayments of long-term debt and capital lease obligations				(245	)		(165,078	)		(117	)
			Net cash provided by financing activities		11,828			184,007			6,240
Net increase (decrease) in cash and cash equivalents					338,762			(13,174	)		8,591
Effect of changes in foreign exchange rates on cash balances					44			4			(14	)
Cash and cash equivalents at beginning of year					15,979			29,149			20,572
Cash and cash equivalents at end of year				$	354,785		$	15,979		$	29,149
Cash paid during the year for:
	Interest			$	7,875		$	8,672		$	9,075
	Cash paid for income taxes			$	1,413		$	—		$	—
Supplemental disclosures of cash flow information:
	Non-cash investing and financing activities:
		Acquisition obligation payable to former Illumigen shareholders		$	10,191		$	—		$	—
		Issuance of common stock to Eli Lilly		$	—		$	—		$	20,000
		Capital lease obligations incurred		$	—		$	245		$	—

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

68

CUBIST PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

			Number of Common Shares	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders Equity
			(in thousands, except share data)
Balance at December 31, 2004			51,153,827	$	51	$	472,758	$	—		$	(451,963	)	$	20,846
Comprehensive income (loss):
	Net loss		—		—		—		—			(31,852	)		(31,852	)
		Total comprehensive income (loss)	—		—		—		—			—			(31,852	)
Exercise of stock options			680,860		1		5,650		—			—			5,651
Shares issued in connection with employee stock purchase plan and 401(k) plan			160,724		—		1,737		—			—			1,737
Issuance of common stock related to business agreements			1,876,173		2		20,003		—			—			20,005
Stock-based compensation to employees and consultants			11,997		—		212		—			—			212
Balance at December 31, 2005			53,883,581		54		500,360		—			(483,815	)		16,599
Comprehensive income (loss):
	Net loss		—		—		—		—			(376	)		(376	)
		Total comprehensive income (loss)	—		—		—		—			—			(376	)
Exercise of stock options			892,790		1		8,871		—			—			8,872
Shares issued in connection with employee stock purchase plan and 401(k) plan			207,062		—		3,968		—			—			3,968
Stock-based compensation to employees and consultants			17,625		—		11,527		—			—			11,527
Balance at December 31, 2006			55,001,058		55		524,726		—			(484,191	)		40,590
Comprehensive income (loss):
	Net income		—		—		—		—			48,147			48,147
	Unrealized loss on investments		—		—		—		(14,701	)		—			(14,701	)
		Total comprehensive income	—		—		—		—			—			33,446
Exercise of stock options			965,538		1		10,945		—			—			10,946
Shares issued in connection with employee stock purchase plan and 401(k) plan			172,509		—		3,108		—			—			3,108
Stock-based compensation to employees and consultants			3,000		—		10,612		—			—			10,612
Balance at December 31, 2007			56,142,105	$	56	$	549,391	$	(14,701	)	$	(436,044	)	$	98,702

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

69

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. NATURE OF BUSINESS

        Cubist is a biopharmaceutical company headquartered in Lexington, Massachusetts, focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute-care environment. To date, Cubist has concentrated exclusively on developing products for the anti-infective marketplace. Cubist has one marketed product, CUBICIN (daptomycin for injection), which was launched in the U.S. in November 2003. CUBICIN is approved in the U.S. for the treatment of cSSSI, caused by S. aureus and certain other Gram-positive bacteria, and for S. aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis, caused by methicillin-susceptible and methicillin-resistant isolates. Since its U.S. launch, CUBICIN also has received similar regulatory approvals in many countries outside the U.S. The Company has focused its pipeline building efforts on opportunities that leverage its anti-infective and acute-care discovery, development, regulatory, and commercialization expertise. Currently, Cubist has multiple anti-infective programs approaching the IND filing stage preparatory to clinical trials. Cubist is subject to risks common to companies in the pharmaceutical industry including, but not limited to, risks related to the development by Cubist or its competitors of new technological innovations, the ability to market products or services, the Company's dependence on key personnel, the market acceptance of CUBICIN, the Company's dependence on key suppliers, protection of the Company's proprietary technology, the Company's ability to obtain additional financing, and the Company's compliance with governmental and other regulations.

B. ACCOUNTING POLICIES

Basis of Presentation and Consolidation

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

Use of Estimates

        The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions are employed in estimates used in determining values of inventories, long-lived assets, accrued clinical research costs, income taxes, stock-based compensation, sales rebate and return accruals, legal contingencies, as well as in estimates used in applying the revenue recognition policy. Actual results could differ from estimated results.

Fair Value of Financial Instruments

        The carrying amounts of Cubist's cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued expenses approximate their fair value due to the short-term maturities of these instruments. At December 31, 2007, long-term investments had a fair value of $43.4 million and a cost of $58.1 million. At December 31, 2006, long-term investments had a fair value of $15.0 million and a cost of $15.0 million. At December 31, 2006, the carrying amounts of long-term investments approximate their fair value. The fair market value of long-term debt at December 31, 2007, amounted to $331.0 million, and consisted of fixed-rate debt due in 2013. The estimated fair value of long-term debt was determined using quoted market rates.

70

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

B. ACCOUNTING POLICIES (Continued)

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

        Included in our investments are auction rate securities, which consist of private placement, credit default swap structured securities which reference synthetic portfolios of corporate bonds. These securities have long-term nominal maturities for which the interest rates are reset through a monthly auction While the underlying securities of auction rate securities may have contractual maturities of more than ten years, the interest rates on such securities reset at intervals of 7, 28 or 35 days. Historically, auction rate securities have been priced and traded as short-term investments because of this reset feature and have been considered available-for-sale investments. Given the repeated failure of auctions for $58.1 million of our investments in auction rate securities, we do not consider these investments to be liquid and classified them as long-term investments as of December 31, 2007. As a result of the auction failures, we have recorded temporary unrealized losses of $14.7 million in other comprehensive income as a reduction in shareholders' equity. The amount of the unrealized loss on the auction rate notes was determined through a valuation analysis which is based on bids from the broker who is the market maker for these instruments, corroborated through an analysis of the underlying instruments. The Company considers this loss to be temporary in nature. The credit and capital markets have continued to deteriorate in 2008 and the bids on the auction rate notes the Company holds have since declined.

Cash and Cash Equivalents

        Cash and cash equivalents consist of short-term interest-bearing instruments with initial maturities of three months or less at the date of purchase. These instruments are carried at cost, which approximates market value.

Investments

        Investments consisted of certificates of deposit, corporate bonds, government bonds and agencies, investment-grade commercial paper and auction rate securities at December 31, 2007 and 2006. Investments which are considered held-to-maturity are stated at amortized cost plus accrued interest, which approximates market value. Investments which are considered available-for-sale are carried at fair market value plus accrued interest. Unrealized gains and losses are included in accumulated other comprehensive income (loss) as a separate component of stockholders' equity. Realized gains and losses, dividends and interest income, including amortization of the premium and discount arising at purchase, are included in interest and investment income. While the underlying securities of auction rate securities may have underlying maturities of more than ten years, the interest rates on such securities reset at intervals of 7, 28 or 35 days. Historically, auction rate securities have been priced and traded as short-term investments because of this rate reset feature and have been considered available-for-sale investments. Given the repeated failure of auctions for $58.1 million of the Company's investments in auction rate securities, these investments are not considered liquid and have been reclassified as of December 31, 2007 as long-term investments. Investment classification detail can be found in Note E., "Investments" in the Notes to the Consolidated Financial Statements.

71

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

B. ACCOUNTING POLICIES (Continued)

Concentration of Risk

        Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, investments and accounts receivable. Cash, cash equivalents, certificates of deposit and investments consist of commercial paper, corporate bonds, U.S. Government securities, money market funds and auction rate securities all held with financial institutions. Approximately 80% and 87% of the accounts receivable balances represent amounts due from three wholesalers at December 31, 2007 and 2006, respectively.

        Revenues from Cardinal accounted for approximately 32%, 33% and 32% of all revenues for the years ended December 31, 2007, 2006 and 2005, respectively. Revenues from Amerisource Bergen Drug Corporation accounted for approximately 30%, 32% and 31% of all revenues for the years ended December 31, 2007, 2006 and 2005, respectively. Revenues from McKesson Corporation accounted for approximately 20%, 21% and 21% of all revenues for the years ended December 31, 2007, 2006 and 2005, respectively.

Inventory

        Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out, or FIFO, basis. 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, inventory in excess of expected sales requirements or inventory that fails to meet commercial sale specifications 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 December 31:

	2007		2006
	(in thousands)
Raw materials	$	9,432	$	8,240
Work in process		2,858		3,616
Finished goods		6,443		6,255
	$	18,733	$	18,111

72

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

B. ACCOUNTING POLICIES (Continued)

Property and Equipment

        Property and equipment, including leasehold improvements, are recorded at cost and are depreciated when placed into service using the straight-line method, based on their estimated useful lives as follows:

Asset Description	Estimated Useful Life (Years)
Building	40
Fermentation equipment	15
Lab equipment	5
Furniture and fixtures	5
Computer hardware and software	3

        Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term. Costs for capital assets not yet placed into service have been capitalized as construction in progress and will be depreciated in accordance with the above guidelines once placed into service. Costs for repairs and maintenance are expensed as incurred, while major betterments are capitalized. When assets are retired or otherwise disposed of, the assets and related allowances for depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in operating costs and expenses.

Capital Leases

        Assets acquired under capital lease agreements are recorded at the present value of the future minimum rental payments using interest rates appropriate at the inception of the lease. Property and equipment subject to capital lease agreements are amortized over the shorter of the life of the lease or the estimated useful life of the asset unless the lease transfers ownership or contains a bargain purchase option, in which case the leased asset is amortized over the estimated useful life of such asset. There are no outstanding capital leases at December 31, 2007.

Intangible Assets

        Cubist's intangible assets consist of acquired intellectual property, processes, patents and technology rights. These assets are amortized on a straight-line basis over their estimated useful life of four to seventeen years. The fair value of patents obtained through an acquisition transaction are capitalized and amortized over the lesser of the patent's remaining legal life or its useful life. Costs to obtain, maintain and defend the Company's patents are expensed as incurred.

Impairment of Long-Lived Assets

        In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," Cubist reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset

73

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

B. ACCOUNTING POLICIES (Continued)

is written down by the amount by which the carrying value of the asset exceeds the related fair value of the asset.

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. Principal sources of revenue are sales of CUBICIN, license fees and milestone payments that are derived from collaborative agreements with other biotechnology companies and distribution agreements. The Company has followed the following principles in recognizing revenue:

Multiple Element Arrangements

        Cubist analyzes its multiple element arrangements 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. If an element is considered to have standalone value but the fair value of any of the undelivered items cannot be determined, all elements of the arrangement are recognized as revenue over the period of performance for such undelivered items or services.

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, wholesaler management fees and discounts in the same period the related sales are recorded.

        Certain product sales qualify for rebates or discounts from standard list pricing due to government sponsored programs or other contractual agreements. Reserves for rebate programs are included in accrued liabilities and were $601,000 and $652,000 at December 31, 2007 and 2006, 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 of product return rates, historical experience of actual returns, analysis of the level of inventory in the distribution channel and reorder rates of end-users. Reserves for returns, discounts, chargebacks, customer rebates and wholesaler management fees are offset against accounts receivable and were $3.9 million and $2.8 million at December 31, 2007 and 2006, respectively. In the year ended December 31, 2007, 2006 and 2005, provisions for sales returns, chargebacks, rebates, wholesaler management fees and prompt-pay discounts that were offset against product revenues totaled $16.3 million, $9.5 million and $5.1 million, respectively.

Product Revenues from International Distribution Partners

        Under agreements with international distribution partners, Cubist sells its product to international distribution partners based upon a transfer price arrangement. The transfer price is generally

74

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

B. ACCOUNTING POLICIES (Continued)

established annually. Once Cubist's distribution partner sells the product to a third party, Cubist is owed an additional payment based on a percentage of the net selling price to the third party, less the transfer price previously paid on such product. Under no circumstances would the subsequent royalty adjustment result in a refund to the distribution. Cubist recognizes revenue related to product shipped to international distribution partners when persuasive evidence of an arrangement exists, title to product and associated risk of loss has passed to the distribution partner, the price is fixed or determinable, collection from the distribution partner is reasonably assured and the Company has no further performance obligations.

License Revenues

        Non-refundable license fees are recognized depending on 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 performance obligation only after both the license period has commenced and the technology has been delivered.

Research services

        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. Contingent payments under license agreements that do not involve substantial effort on the part of the Company are not considered substantive milestones. Such payments are recognized as revenue when the contingency is met only if there are no remaining performance obligations or any remaining performance obligations are priced at fair value. Otherwise, the contingent payment is recognized as the Company completes its performance obligations under the arrangement.

Research and Development

        All research and development costs, including upfront fees and milestones paid to collaborators, are expensed as incurred if no planned alternative future use exists for the technology. When the Company is reimbursed by a collaborative partner for work it performs it records the costs incurred as research and development expenses and the related reimbursement as other revenues in its Consolidated Statement of Operations. Research and development expenses consist of internal labor, clinical and non-clinical studies, materials and supplies, facilities, depreciation, third party costs for contracted services, manufacturing process improvement and testing costs, and other research and development related costs.

75

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

B. ACCOUNTING POLICIES (Continued)

Advertising Costs

        Advertising costs are expensed as incurred and are included in sales and marketing expense within the Consolidated Statements of Operations. Advertising costs, which include promotional expenses and trade shows, were approximately $9.6 million, $6.0 million and $6.6 million at December 31, 2007, 2006 and 2005, respectively.

Income Taxes

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

Foreign Currency Translation

        The functional currency of Cubist's U.K. subsidiary is the U.S. dollar. Accordingly, the remeasurement method is used to convert the foreign currency balances from the local currency into the U.S. dollar.

Comprehensive Income (Loss)

        For the year ended December 31, 2007, comprehensive income is comprised of net income for the year and unrealized losses recognized on available-for-sale marketable securities. Total comprehensive income for the year ended December 31, 2007 was $33.4 million. For the years ended December 31, 2006 and 2005, total comprehensive income (loss) is comprised of only net loss, as there was no other comprehensive income (loss) for the years ended December 31, 2006 and 2005.

Basic and Diluted Net Income (Loss) Per Common Share

        Basic net income (loss) per share has been computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Except where the result would be antidilutive to income from continuing operations, diluted net income (loss) per share has been computed assuming the conversion of convertible obligations and the elimination of the related interest expense, and the exercise of stock options, as well as their related income tax effects.

76

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

B. ACCOUNTING POLICIES (Continued)

        The following table sets forth the computation of basic and diluted net income (loss) per share for the years ended December 31, 2007, 2006 and 2005 (amounts in thousands, except share and per share amounts):

		December 31,
		2007		2006			2005
Net income (loss) basic		$	48,147	$	(376	)	$	(31,852	)
Effect of dilutive securities:
	Interest on 2.25% convertible subordinated notes, net of tax		7,586		—			—
	Debt issuance costs, net of tax		1,494		—			—
Net income (loss) diluted		$	57,227	$	(376	)	$	(31,852	)
Shares used in calculating basic net income (loss) per common share			55,591,775		54,490,376			53,053,307
Effect of dilutive securities:
	Options to purchase shares of common stock		1,856,886		—			—
	Notes payable convertible into shares of common stock		11,374,335		—			—
Shares used in calculating diluted net income (loss) per common share			68,822,996		54,490,376			53,053,307
	Net income (loss) per share, basic	$	0.87	$	(0.01	)	$	(0.60	)
	Net income (loss) per share, diluted	$	0.83	$	(0.01	)	$	(0.60	)

77

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

B. ACCOUNTING POLICIES (Continued)

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

	2007	2006	2005
Options to purchase shares of common stock	3,183,803	7,271,450	6,836,077
Convertible debt and notes payable convertible into shares of common stock	—	11,374,335	3,495,763

Stock Based Compensation

        In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123 (revised 2004), "Share-Based Payment," or SFAS 123(R), which requires all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value. SFAS 123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95, "Statement of Cash Flows." In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). SFAS 123(R) 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 requisite service period. The Company elected to adopt the modified prospective application method as provided by SFAS 123(R). As a result, the Company recognized compensation expense associated with awards granted after January 1, 2006, and the unvested portion of previously granted awards that remained outstanding as of January 1, 2006. See Note L. for additional information.

Recent Accounting Pronouncements

        In February 2008, the FASB issued a FASB Staff Position, or FSP, to defer the effective date of FASB Statement No. 157, "Fair Value Measurements, " or SFAS 157, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of the FSP. The delay is intended to provide the Board additional time to consider the effect of certain implementation issues that have arisen from the application of SFAS 157 to these assets and liabilities. SFAS 157 was issued on September 15, 2006, and as issued, was effective for financial statements issues for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early application was encouraged. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. The Statement codifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its results of operations and financial condition.

78

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

B. ACCOUNTING POLICIES (Continued)

        In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations," or SFAS 141(R), which is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired in the business combination. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) will be applied prospectively. The Company is currently evaluating the effect that the adoption of SFAS 141(R) will have on its results of operations and financial condition.

        In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51," or SFAS 160. SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component of equity. The Statement also requires that entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 160 shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The Company is currently evaluating the effect that the adoption of SFAS 160 will have on its results of operations and financial condition.

        In June 2007, the EITF reached a consensus on EITF Issue No. 07-03, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities," or EITF 07-03. EITF 07-03 concludes that non-refundable advance payments for future research and development activities should be deferred and capitalized until the goods have been delivered or the related services have been performed. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. This consensus is effective for fiscal years beginning after December 15, 2007. The initial adjustment to reflect the effect of applying the consensus as a change in accounting principle would be accounted for as a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is currently evaluating the effect that the adoption of EITF 07-03 will have on its results of operations and financial condition.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," or SFAS 159, which is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, "Fair Value Measurements." SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company's choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use

79

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

B. ACCOUNTING POLICIES (Continued)

fair value on the face of the balance sheet. The Company is currently evaluating the effect that the adoption of SFAS 159 will have on its results of operations and financial condition.

        The Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109", or FIN 48, on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." This interpretation requires that the Company determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN 48 did not have a material impact on the Company's financial statements. See Note P., "Income Taxes," for additional information.

C. BUSINESS AGREEMENTS

Licensing Agreements

        In November 1997, Cubist entered into a license agreement with Eli Lilly that was amended and restated in October 2000, and pursuant to which Cubist acquired exclusive worldwide rights to develop, manufacture and market CUBICIN. In exchange for such license, Cubist paid an upfront license fee in cash and, if certain drug development milestones were achieved, agreed to pay milestone payments by issuing shares of common stock to Eli Lilly. In addition, Cubist is required to pay royalties to Eli Lilly on worldwide sales of CUBICIN. In July 2003, Cubist entered into an amendment to the restated license agreement with Eli Lilly and issued to Eli Lilly 723,619 shares of common stock valued at $8.0 million, in consideration for a 1% reduction in the royalty rates under the original license agreement. The $8.0 million was recorded as an intangible asset within the Consolidated Balance Sheet and is being amortized over approximately 13 years, which was the estimated remaining life of the license agreement with Eli Lilly on the date of the transaction. In September 2003, Cubist issued 38,922 shares of common stock valued at $0.5 million as a milestone payment to Eli Lilly upon Cubist receiving FDA approval for the commercial sale of CUBICIN. The $0.5 million was recorded as an intangible asset within the Consolidated Balance Sheet and is being amortized over approximately 13 years, which was the remaining life of the license agreement with Eli Lilly on the date of the transaction. In March 2005, Cubist entered into a second amendment to the license agreement with Eli Lilly and issued to Eli Lilly 1,876,173 shares of common stock valued at $20.0 million, in consideration for a 2% reduction in the royalty rates under the original license agreement. The $20.0 million was recorded as an intangible asset within the Consolidated Balance Sheet and is being amortized over approximately 11 years, which was the remaining life of the license agreement with Eli Lilly on the date of the transaction. The amortization of these intangibles is included in the cost of product revenues.

Commercialization Agreements

        In March 2007, Cubist entered into a license agreement with Merck for the development and commercialization of CUBICIN in Japan, the last country outside the U.S. for which Cubist did not have a partner for the distribution of CUBICIN. Merck will develop and commercialize CUBICIN through its wholly-owned subsidiary, Banyu. In exchange for the development and commercialization rights in Japan, Merck paid Cubist an upfront fee of $6.0 million. This $6.0 million was recorded as deferred revenue and will be recognized over the estimated performance period. Cubist will receive up

80

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

C. BUSINESS AGREEMENTS (Continued)

to $39.5 million in additional payments if Merck reaches certain regulatory and sales milestones. In addition, Merck will purchase finished but unlabeled vials from Cubist in exchange for a transfer price.

        In December 2006, Cubist entered into a license agreement with AstraZeneca, for the development and commercialization of CUBICIN in China and certain other countries in Asia, the Middle East and Africa not yet covered by existing CUBICIN international partnering agreements. In exchange for development and commercialization rights, AstraZeneca paid Cubist an up-front fee of $10.3 million. This $10.3 million was recorded as deferred revenue and will be recognized over the estimated performance period. Additionally, Cubist will receive payments upon AstraZeneca reaching regulatory and sales milestones. AstraZeneca will pay Cubist a transfer price for their purchases of CUBICIN. Cubist may receive payments for the achievement of the aforementioned milestones of up to $24.3 million under the agreement.

        In July 2005, Cubist entered into a Distribution Agreement with Kuhnil Pharmaceuticals, Inc., or Kuhnil. Under the agreement, Kuhnil will commercialize CUBICIN in the Republic of Korea, or Korea, CUBICIN on an exclusive basis. In exchange for exclusive rights to commercialize CUBICIN in Korea, Kuhnil paid Cubist an up-front fee of $0.6 million, which was recorded as deferred revenue and will be recognized as revenue over the manufacturing and supply period commencing on first shipment of product in Korea. Kuhnil will pay Cubist a transfer price for their purchases of CUBICIN. Cubist may earn milestones of up to $0.9 million under the agreement.

        In December 2003, Cubist entered into a Distribution Agreement with TTY Biopharm Company Limited, or TTY. Under the agreement, TTY will commercialize CUBICIN in Taiwan on an exclusive basis. In exchange for exclusive rights to commercialize CUBICIN in Taiwan, TTY paid Cubist an up-front fee of $0.5 million, which was recorded as deferred revenue and will be recognized as revenue over the manufacturing and supply period commencing on first shipment of product in Taiwan. In December 2003, Cubist also received $0.2 million from TTY for the achievement of a milestone under this agreement, which was also recorded to deferred revenue and will be recognized over the manufacturing and supply period commencing on first shipment of product in Taiwan. TTY will pay Cubist a transfer price for their purchases of CUBICIN. Cubist may earn additional milestones of up to $0.8 million under the agreement.

        In October 2003, Cubist signed a License Agreement and a Manufacturing and Supply Agreement with a predecessor-in-interest to Novartis for the development and commercialization of CUBICIN in Western and Eastern Europe, Australia, New Zealand, India and certain Central American, South American and Middle Eastern countries. Novartis' predecessor paid Cubist an up-front licensing fee of $8.0 million, which was recorded as deferred revenue and was amortized to revenue over the estimated development period of two years, which completed in September 2005. Per the License Agreement, Cubist is entitled to receive from Novartis additional cash payments of up to $32.0 million upon achievement of certain development and sales milestones. Per the Manufacturing and Supply Agreement, Novartis shall pay Cubist a transfer price for CUBICIN and per the License Agreement, Novartis will owe Cubist royalty payments based on Novartis's sales of CUBICIN.

        In October 2003, Cubist also entered into a Stock Purchase Agreement with Novartis' predecessor pursuant to which Novartis' predecessor purchased 529,942 shares of Cubist common stock for $10.0 million, at a 50% premium to the fair value of the Company's common stock. The premium paid

81

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

C. BUSINESS AGREEMENTS (Continued)

was allocated to the License Agreement and was accounted for as part of the up-front payment and amortized over the estimated development period of two years, which completed in September 2005.

D. ACQUISITION OF ILLUMIGEN

        In October 2007, Cubist and Illumigen entered into an agreement under which Cubist purchased an exclusive option to acquire Illumigen. In December 2007, Cubist exercised its option and acquired Illumigen pursuant to a definitive agreement and plan of merger. Per the merger agreement, Cubist agreed to pay $9.0 million, plus Illumigen's closing cash and less Illumigen's closing liability balances, in cash to Illumigen shareholders, and Illumigen became a wholly-owned subsidiary of Cubist. Illumigen's lead compound, IB657, is a protein therapeutic in late-stage pre-clinical development as an interferon-sparing agent for the treatment of HCV infections. The results of operation of Illumigen have been included in the Company's financial statement from the acquisition date. The acquisition was accounted for under the purchase method of accounting.

        Cubist has evaluated whether the Illumigen acquisition meets the criteria of a business as outlined in EITF 98-3, "Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business," and has concluded that the entity did not qualify as a business. Accordingly, the Company appropriately accounted for this transaction as an acquisition of assets. The costs associated with the acquisition were $16.4 million and include the closing cash consideration paid to Illumigen shareholders of $10.2 million, the option agreement payment of $4.7 million made in October 2007, transaction costs of $0.8 million and $0.7 million of costs paid by Cubist during the option period related to an IND enabling study of IB657 and Illumigen's operating costs. The total consideration was allocated to net tangible assets acquired of $1.3 million, consisting primarily of cash, and in-process research and development, or IPR&D, of $14.4 million and research and development expense of $0.7 million. The IPR&D represents the value assigned to the IB657 compound. At the date of the acquisition, IB657 had not yet reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, the full value of the IPR&D of $14.4 million is included in research and development expense for the year ended December 31, 2007. This charge is not deductible for tax purposes.

        IB657 is a protein therapeutic in pre-clinical development for the treatment of HCV infections. If the pre-clinical development goes as planned, Cubist expects that an IND for IB657 will be filed in the second half of 2008. Cubist will make payments to Illumigen's former shareholders during the development of IB657 as a therapy for HCV infections of up to $75.5 million upon achieving certain development and regulatory milestones. If Cubist develops Illumigen products for the treatment of viruses other than HCV, development and regulatory milestone payments of up to $117.0 million could apply. Assuming that HCV or other Illumigen antiviral products are commercialized, additional milestone payments of up to $140.0 million, as well as tiered royalties, could apply.

E. INVESTMENTS

        Investments classified as held-to-maturity are carried in Cubist's Consolidated Balance Sheets at amortized cost plus interest receivable. Investments classified as available-for-sale are carried at fair value plus interest receivable. Interest receivable related to short-term investments $0.7 million at 2006. Interest receivable related to long-term investments was $0.1 million at December 31, 2007 and 2006, respectively.

82

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

E. INVESTMENTS (Continued)

        Included in long-term investments at December 31, 2007 are auction rate securities. Historically, given the liquidity created by the auctions, auction rate securities have been priced and traded as short-term investments and have been considered short-term available-for-sale investments because of this interest rate reset feature. Given the repeated failure of auctions for $58.1 million of the Company's investments in auction rate securities, these investments are not considered liquid and have been classified as of December 31, 2007 as long-term investments. The cost basis, gross unrealized gains and losses and fair value for these securities as of December 31, 2007 and 2006 are as follows:

		December 31, 2007									December 31, 2006
		Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
		(in thousands)									(in thousands)
Auction rate securities		$	58,100	$	—	$	(14,701	)	$	43,399	$	256,950	$	—	$	—	$	256,950
	Total	$	58,100	$	—	$	(14,701	)	$	43,399	$	256,950	$	—	$	—	$	256,950

        The amount of the unrealized loss on the auction rate notes was determined through a valuation analysis which is based on bids from the broker who is the market maker for these instruments, corroborated through analysis of the underlying instruments. The Company considers this loss to be temporary in nature. The credit and capital markets have continued to deteriorate in 2008 and the bids on the auction rate notes the Company holds have since declined. If a certain concentration, as defined in the auction rate documents, of the underlying reference portfolios default, or if the issuing bank fails to make the required interest payments or the final principal payment upon the ultimate maturity of the notes, or if the credit ratings on the underlying reference portfolios deteriorate significantly, the Company may be required to adjust the carrying value of these investments through an other-than-temporary impairment charge.

        There were no held-to-maturity investments at December 31, 2007. The cost basis, gross unrealized gains and losses and fair value of held-to-maturity securities at December 31, 2006 were as follows:

		December 31, 2006
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
		(in thousands)
Short-Term:
Corporate bonds		$	13,360	$	2	$	—		$	13,362
Government bonds			7,000		—		(16	)		6,984
	Total	$	20,360	$	2	$	(16	)	$	20,346
Long-Term:
Corporate bonds		$	—	$	—	$	—		$	—
Government bonds			15,038		—		(32	)		15,006
	Total	$	15,038	$	—	$	(32	)	$	15,006

83

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

E. INVESTMENTS (Continued)

        The following is a summary of the cost basis and estimated fair value of investments at December 31, 2007 by contractual maturity:

		Available-for-Sale				Held-to-Maturity
		Cost Basis		Fair Value		Cost Basis		Fair Value
		(in thousands)				(in thousands)
Due within one year		$	—	$	—	$	—	$	—
Due after five years through ten years			58,100		43,399		—		—
	Total	$	58,100	$	43,399	$	—	$	—

        Included in the table above are auction rate securities, which typically reset to current interest rates every 7 to 35 days, but are included in the table above based on the stated maturities of the underlying investments.

F. ACCOUNTS RECEIVABLE

        Cubist's trade receivables in 2007 and 2006 primarily represent amounts due to the Company from wholesalers and distributors of its pharmaceutical product. Cubist performs ongoing credit evaluations of its customers and generally does not require collateral.

G. PROPERTY AND EQUIPMENT

        Property and equipment consisted of the following at December 31,

	2007			2006
	(in thousands)
Building	$	43,385		$	43,069
Leasehold improvements		10,042			9,473
Laboratory equipment		15,251			12,988
Furniture and fixtures		1,500			1,482
Computer equipment		11,060			8,812
Construction in progress		1,194			1,474
		82,432			77,298
Less accumulated depreciation and amortization		(32,282	)		(27,714	)
Property and equipment, net	$	50,150		$	49,584

        Depreciation and amortization expense was $4.6 million, $4.1 million and $4.0 million in 2007, 2006 and 2005, respectively.

84

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

H. INTANGIBLE ASSETS

        Intangible assets consisted of the following at:

		December 31,
		2007			2006
		(in thousands)
Patents		$	2,673		$	2,673
Manufacturing rights			2,500			2,500
Acquired technology rights			28,500			28,500
Intellectual property and processes and other intangibles			5,388			5,388
			39,061			39,061
Less:	accumulated amortization—patents		(2,128	)		(2,063	)
	accumulated amortization—manufacturing rights		(1,250	)		(833	)
	accumulated amortization—acquired technology rights		(7,610	)		(5,152	)
	accumulated amortization—intellectual property		(5,375	)		(5,374	)
Intangible assets, net		$	22,698		$	25,639

        There were no additions to intangible assets during the twelve months ended December 31, 2007 and 2006. Additions to intangible assets during 2005 resulted from $20.0 million of payments made to Eli Lilly, in the form of common stock in exchange for a 2% reduction in the royalty rate payable to Eli Lilly on net sales of CUBICIN pursuant to the Company's license agreement with Eli Lilly. Cubist is amortizing the $20.0 million over approximately eleven years, which was the remaining life of the license agreement with Eli Lilly on the date of the transaction. In 2003, Cubist issued to Eli Lilly $8.0 million of common stock in exchange for a 1% reduction in the royalties payable to Eli Lilly. The Company also issued 38,922 shares of common stock valued at $0.5 million in 2003 as a milestone payment to Eli Lilly. This $8.5 million payment is being amortized over approximately thirteen years, which was the estimated remaining life of the license agreement with Eli Lilly on the dates of the transactions. The amortization of the Eli Lilly intangible assets are included in cost of product revenues.

        In November 2005, Cubist announced that it selected ACS as the single source supplier of API for CUBICIN. Cubist provided notice to DSM in accordance with contract agreement terms to terminate its manufacturing and supply agreement with DSM for API. The useful life of the DSM manufacturing rights was adjusted to coincide with the revised termination date of May 2006. As Cubist received no future benefit from the DSM manufacturing rights, their gross asset value and related allowance for amortization expense were eliminated from the manufacturing rights accounts in 2006 with no resulting gain or loss. The remaining balance of these assets was allocated to inventory and was expensed to cost of product revenues as the related inventory lots were sold. The DSM assets have been expensed as of December 31, 2007. The manufacturing rights associated with the ACS agreement are being amortized to inventory over the contractual term of six years and expensed to cost of product revenues as the related inventory lots are sold.

        Amortization expense, including amounts relating to the DSM manufacturing rights, was $5.1 million, $4.9 million and $7.0 million in 2007, 2006 and 2005 respectively. The estimated aggregate

85

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

H. INTANGIBLE ASSETS (Continued)

amortization of intangible assets as of December 31, 2007, for each of the five succeeding years is as follows:

	(in thousands)
2008	$	2,941
2009		2,941
2010		2,941
2011		2,524
2012		2,524
2013 and thereafter		8,827
	$	22,698

I. ACCRUED LIABILITIES

        Accrued liabilities consisted of the following at:

		December 31,
		2007		2006
		(in thousands)
Accrued payroll		$	1,115	$	590
Accrued incentive compensation			4,424		2,353
Accrued bonus			5,645		4,458
Accrued benefit costs			2,056		1,879
Accrued clinical trials			193		494
Accrued interest			350		350
Accrued Illumigen acquisition costs			10,191		—
Accrued manufacturing costs			2,672		1,804
Accrued royalty			23,729		12,905
Other accrued costs			8,360		6,205
	Total	$	58,735	$	31,038

J. ACCRUED CLINICAL TRIAL EXPENSE

        Accrued clinical trial expenses are comprised of amounts owed to third party contract research organizations, or CROs, for research and development work performed on behalf of Cubist. At each period end, the Company evaluates the accrued clinical trial expense balance based upon information received from each CRO, and ensures that the balance is appropriately stated based upon work performed to date. The accrued clinical trial expense balance of $193,000 and $494,000 at December 31, 2007 and 2006, respectively, represents the Company's best estimate of amounts owed for clinical trial services performed through those periods based on all information available. Such estimates are subject to change as additional information becomes available.

86

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

K. STOCKHOLDERS' EQUITY

Stock Issuances

        In March 2005, Cubist announced that it entered into an agreement to purchase from Eli Lilly a 2% reduction in the royalty rate 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 in March 2005. Cubist's global royalty rate obligation to Eli Lilly on CUBICIN sales was reduced by two percentage points upon registration of the common stock on April 22, 2005.

L. EMPLOYEE STOCK BENEFIT PLANS

Summary of Stock Option Plans

        Cubist has several stock-based compensation plans. Under the Cubist Amended and Restated 1993 Stock Option Plan, options to purchase 5,837,946 shares of common stock were available for grant to employees, directors, officers or consultants. The options were generally granted at fair market value on the grant date, vested ratably over a four-year period and expired ten years from the grant date. There are no shares available for future grant under this plan as it expired in accordance with its terms in 2003.

        Under the Cubist Amended and Restated 2000 Equity Incentive Plan, or the 2000 Equity Incentive Plan, 11,535,764 shares of common stock may be issued to employees, directors, officers or consultants. Options under this plan are generally granted with exercise prices equal to the fair market value on the grant date, vest ratably over a four-year period and expire ten years from the date of grant. At December 31, 2007, there were 4,056,161 shares available for future grant under this plan.

        Under the Cubist Amended and Restated 2002 Directors Equity Incentive Plan, 975,000 shares of common stock may be issued to members of the Board of Directors. Options under this plan are granted at fair market value on the grant date, vest ratably over a one-year or a three-year period and expire ten years from the grant date. At December 31, 2007, there were 501,250 shares available for future grant under this plan.

        Cubist does not currently hold any treasury shares. Upon share option exercise, the Company issues new shares and delivers them to the participant. In line with its current business plan, Cubist does not intend to repurchase shares in the foreseeable future.

Summary of Employee Stock Purchase Plan

        Qualifying employees are eligible to participate in an employee stock purchase plan sponsored by the Company. Under this program, participants may purchase Cubist common stock, after a pre-determined six-month period, at 85% of the lower of the fair market value at the beginning or end of the purchase period. Shares are purchased through payroll deductions of up to 15% of each participating employee's annual compensation, subject to certain limitations. The current plan allows for the issuance of 750,000 shares of common stock to eligible employees. During 2007, 2006 and 2005 Cubist issued 75,303, 79,558 and 73,224 shares of common stock, respectively, pursuant to this plan. At December 31, 2007 there were 342,739 shares available for future issuance under this plan.

87

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

L. EMPLOYEE STOCK BENEFIT PLANS (Continued)

Stock Compensation Expense Prior to the Adoption of SFAS 123(R)

        Prior to the adoption of SFAS 123(R), the Company provided the disclosures required under SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosures." No significant employee stock-based compensation was reflected in net loss for the year ended December 31, 2005 related to employee option grants, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The pro-forma information for the year ended December 31, 2005 was as follows (in thousands, except per share data):

			Year Ended December 31, 2005
Net loss, as reported			$	(31,852	)
Add: Stock-based employee compensation recorded in net loss, as reported				77
Deducted: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects				(12,962	)
	Pro forma net loss		$	(44,737	)
	Loss per share:
		Basic and diluted—as reported	$	(0.60	)
		Basic and diluted—pro forma	$	(0.84	)

Summary of SFAS 123(R) Expense

        The effect of recording stock-based compensation in the Consolidated Statement of Operations for the years ended December 31, 2007 and 2006 was as follows:

		December 31,
		2007		2006
		(in thousands except per share data)
Stock-based compensation expense by type of award:
Employee stock options		$	10,215	$	10,214
Employee stock purchase plan			324		409
	Total stock-based compensation	$	10,539	$	10,623
Effect on earnings per share:
	Basic	$	0.19	$	0.19
	Diluted	$	0.15	$	0.19

        The carrying value of inventory in the Consolidated Balance Sheet for the years ended December 31, 2007 and 2006 includes employee stock-based compensation costs of $0.2 million.

88

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

L. EMPLOYEE STOCK BENEFIT PLANS (Continued)

Valuation Assumptions

        The fair value of each share-based award was estimated on the date of grant using the Black-Scholes option-pricing model and expensed under the accelerated method for option grants prior to the first quarter of 2006 and under the straight-line method for option grants commencing in the first quarter of 2006. The following weighted-average assumptions were used:

	2007	2006	2005
Stock option plans:
Expected stock price volatility	47%	52%	72%
Risk free interest rate	4.6%	4.7%	3.9%
Expected annual dividend yield per share	0%	0%	0%
Expected life of options	4.3 years	4.3 years	5 years
Stock purchase plan:
Expected stock price volatility	30%	30%	—
Risk free interest rate	4.8%	4.8%	—
Expected annual dividend yield per share	0%	0%	—
Expected life of options	6 months	6 months	—

        Cubist's expected stock price volatility assumption is based on both current and historical volatilities of the Company's stock which is obtained from public data sources. The expected stock price volatility is determined based on the instrument's expected term. Since the employee stock purchase plan has a shorter term than the stock option plans, volatility for this plan is estimated over a shorter period. The risk-free interest rate is a less subjective assumption as it is based on factual data derived from public sources. Cubist uses a dividend yield of zero as it has never paid cash dividends and has no intention of paying cash dividends in the foreseeable future. The expected life represents the weighted average period of time that share-based awards are expected to be outstanding giving consideration to vesting schedules and the Company's historical exercise patterns. Cubist determines the expected life assumption based on the exercise behavior and post vesting cancellations that has been exhibited historically, adjusted for specific factors that may influence future exercise patterns. The Company estimates forfeitures based on its historical experience of share-based pre-vesting cancellations. The Company believes that its estimates are based on outcomes that are reasonably likely to occur. To the extent actual forfeitures differ from its estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.

89

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

L. EMPLOYEE STOCK BENEFIT PLANS (Continued)

General Option Information

        A summary of the status of Cubist's stock option plans, as of December 31, 2007 and changes during the year then ended, is presented below:

	2007
	Number		Weighted Average Exercise Price
Balance at January 1	7,276,450		$	16.49
Granted	2,012,575		$	20.88
Exercised	(965,538	)	$	11.34
Canceled	(687,076	)	$	19.22
Balance at December 31	7,636,411		$	18.05
Options vested and exercisable as of December 31,	4,395,312		$	17.11

        The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005 was $10.5 million, $11.6 million and $5.2 million, respectively. The aggregate intrinsic value of options outstanding as of December 31, 2007 was $18.8 million. These options have a weighted average remaining contractual life of 7.1 years.

        As of December 31, 2007, there was $19.6 million of total unrecognized compensation cost related to nonvested options granted under the Plans. That cost is expected to be recognized over the weighted-average period of 1.4 years. The aggregate intrinsic value of options fully vested and exercisable as of December 31, 2007 was $14.9 million. These options have a weighted average remaining contractual life of 6.0 years.

        The weighted average grant-date fair value of options granted during the years ended December 31, 2007, 2006 and 2005 was $9.15, $10.40 and $7.20, respectively. The weighted-average grant-date fair value of options vested as of December 31, 2007, 2006 and 2005 was $11.32, $11.61 and $13.13, respectively.

90

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

L. EMPLOYEE STOCK BENEFIT PLANS (Continued)

        The following table summarizes information about stock options outstanding at December 31, 2007:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Remaining Contractual Life	Weighted-Average Exercise Price		Number Exercisable	Weighted-Average Exercise Price
$0.42  —$6.34	98,149	1.1	$	3.14	98,149	$	3.14
$6.35  —$12.68	2,792,249	6.2		10.27	2,227,265		10.19
$12.69—$19.01	427,495	6.7		14.67	313,226		14.07
$19.02—$25.35	3,553,708	8.8		21.49	991,862		21.73
$25.36—$31.69	226,005	3.0		29.33	226,005		29.33
$31.70—$38.03	513,051	3.9		35.14	513,051		35.14
$50.70—$57.04	1,254	1.3		53.08	1,254		53.08
$57.05—$63.38	24,500	2.3		61.71	24,500		61.71
	7,636,411	7.1	$	18.05	4,395,312	$	17.11

M. COMMITMENTS AND CONTINGENCIES

Leases

        Cubist leases various facilities and equipment under leases that expire at varying dates through 2016. Certain of these leases contain renewal options and provisions that adjust the rent payment based upon changes in the consumer price index and require Cubist to pay operating costs, including property taxes, insurance and maintenance.

        At December 31, 2007, future minimum lease payments under all non-cancelable leases net of sublease income are as follows (in thousands):

		Operating
2008		$	2,711
2009			3,338
2010			3,511
2011			3,514
2012			3,631
Thereafter			13,035
	Total minimum lease payments	$	29,740

        Rental expense for operating leases was $4.1 million, $3.6 million and $2.7 million in the years ended December 31, 2007, 2006 and 2005, respectively. Sublease income, which is recorded as a reduction of rent expense, was $2.6 million, $2.5 million and $2.4 million in the years ended December 31, 2007, 2006 and 2005, respectively.

91

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

M. COMMITMENTS AND CONTINGENCIES (Continued)

Foreign currency

        Cubist operates internationally, which gives rise to a risk that earnings and cash flows may be negatively impacted by fluctuations in interest and foreign exchange rates. During 2007, 2006 and 2005, Cubist entered into limited foreign currency transactions between the U.S. dollar, the European Euro and the British pound.

Guarantees and Indemnification Obligations

        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 defaults on their payments related to 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.

Other

        We have minimum volume purchase commitments with third party contract manufacturers with scheduled payments over the next five years that total $90.7 million at December 31, 2007.

N. DEBT

        Cubist's outstanding debt at December 31, 2007 and 2006 consists of $350.0 million aggregate principal amount of 2.25% convertible subordinated notes due June 2013. Cubist's outstanding debt at December 31, 2005 consisted of $165.0 million aggregate principal amount of 5¹/2% convertible subordinated notes due November 2008.

        In June 2006, Cubist completed the public offering of $350.0 million aggregate principal amount of 2.25% convertible subordinated notes (the "2.25% Notes"). The 2.25% Notes are convertible at any time prior to maturity into common stock at an initial conversion rate of 32.4981 shares of common stock per $1,000 principal amount of convertible notes, subject to adjustment upon certain events, which equates to approximately $30.77 per share of common stock. Cubist may deliver cash or a combination of cash and common stock in lieu of shares of common stock. Interest is payable on each June 15 and December 15, beginning December 15, 2006. The 2.25% Notes mature on June 15, 2013. Cubist retains the right to redeem the 2.25% Notes at 100% of the principal amount to be redeemed plus accrued and unpaid interest commencing in June 2011 if Cubist's common stock closing price exceeded the conversion price for a period of time as defined in the 2.25% Notes agreement. The deferred financing costs associated with the sale of the 2.25% Notes were $10.9 million. These costs are amortized ratably over the life of the note. See Note S. for additional information related to the 2.25% Notes.

        In 2001, Cubist completed the private placement of $165.0 million aggregate principal amount of 5.5% convertible subordinated notes (the "5.5% Notes"). The offering was made through initial purchasers to qualified institutional buyers under Rule 144A of the Securities Act. The 5.5% Notes were 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. Interest was payable on each November 1 and May 1,

92

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

N. DEBT (Continued)

beginning May 1, 2002. The 5.5% Notes had a maturity date of November 1, 2008. Cubist retained the right to redeem the 5.5% Notes prior to November 2004 if Cubist's common stock closing price exceeded the conversion price for a period of time as defined in the 5.5% Notes agreement. The deferred financing costs associated with the sale of the 5.5% Notes were $5.3 million. In June 2006, Cubist repaid the outstanding principal and accrued interest on the 5.5% Notes, plus a prepayment penalty of $3.9 million that was recorded to interest expense. The remaining unamortized balance of the debt issuance costs, totaling $1.8 million, associated with the 5.5% Notes was written off to interest expense at the time of the repayment.

        At December 31, 2007, future payments of principal and interest on existing debt are due as follows:

Fiscal year ending December 31,

		Principal		Interest		Total
		(in thousands)
2008		$	—	$	7,875	$	7,875
2009			—		7,875		7,875
2010			—		7,875		7,875
2011			—		7,875		7,875
2012			—		7,875		7,875
2013			350,000		3,938		353,938
Total payments		$	350,000	$	43,313	$	393,313
Less current portion			—
	Total long term debt	$	350,000

O. EMPLOYEE BENEFITS

401(k) Savings Plan

        Cubist maintains a 401(k) savings plan in which substantially all of its permanent employees in the U.S. are eligible to participate. Participants may contribute up to 100% of their annual compensation to the plan, subject to certain limitations. Cubist matches each employee's contribution in Cubist common stock up to 4% of a participant's total compensation. Employer common stock matches have immediate vesting. Cubist issued 97,206, 127,504 and 87,500 shares of common stock in 2007, 2006 and 2005, respectively, pursuant to this plan.

P. INCOME TAXES

Effective Tax Rate

        For each of the years ended December 31, 2007, 2006 and 2005, Cubist's statutory tax rate was 35%, 34% and 34%, respectively. During 2007, the Company revised its estimate concerning the future reversal of temporary differences and concluded that the reversal is likely to occur when the U.S. federal incremental tax rate is 35% versus the 34% used previously. The effective tax rate for the years ended December 31, 2007, 2006 and 2005 was 3.7%, 0% and 0%, respectively. The effective tax rate

93

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

P. INCOME TAXES (Continued)

for the year ended December 31, 2007 relates to federal alternative minimum tax expense and state tax expense. The Company and its subsidiaries file income tax returns with the U.S. federal government and with multiple state and local jurisdictions in the U.S.

        The effective rate differs from the statutory rate of 35% and 34% due to the following:

	2007		2006		2005
Federal	35.0	%	34.0	%	34.0	%
State	6.4	%	-49.8	%	6.5	%
Federal and state credits	-3.3	%	600.9	%	8.9	%
Valuation allowance	-47.2	%	-345.2	%	-47.6	%
In-process research & development	10.6	%	0	%	0	%
Other	2.2	%	-239.9	%	-1.8	%
Effective tax rate	3.7	%	0.0	%	0.0	%

        Changes in the effective tax rates from period to period may be significant as they depend on many factors including, but not limited to, changes in circumstances surrounding the need for a valuation allowance, size of the Company's income or loss, or one time activities occurring during the period.

Deferred Taxes and Valuation Allowance

        All of the Company's deferred tax assets have a full valuation allowance recorded against them. Based on management's review of the Company's historical tax position and operational results, realization of Cubist's deferred tax assets does not meet the "more likely than not" criteria under SFAS No. 109. Management will continue to monitor the available information in determining whether there is sufficient positive evidence to consider releasing the valuation allowance on the deferred tax assets. Should management determine the valuation allowance is no longer required, a tax benefit would be recorded in the financial period of the change in determination. The components of the tax affected net deferred tax assets and the related valuation allowance are as follows:

	December 31,
	2007			2006
	(in thousands)
Deferred income tax assets:
Net operating loss carryforwards	$	122,212		$	142,309
Research and development costs		23,914			31,012
Tax credit carryforwards		17,754			16,923
Impairment charge		672			738
Deferred revenues		4,208			490
Other, net		4,965			4,960
Total deferred tax assets		173,725			196,432
Valuation allowance		(173,725	)		(196,432	)
Net deferred tax assets	$	—		$	—

94

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

P. INCOME TAXES (Continued)

        At December 31, 2007, Cubist has gross federal net operating loss carryforwards of approximately $338.5 million, which begin to expire in 2022, and gross state net operating loss carryforwards of $183.2 million, which begin to expire in 2008. State net operating loss carryforwards of $5.3 million and $27.8 million expired in 2007 and 2006, respectively. Of the $173.7 million valuation allowance at December 31, 2007, $7.9 million relates to the tax benefit of the exercise of stock options. This amount will result in an increase in Additional Paid in Capital upon realization of these losses. Cubist also has federal and state credit carryforwards of $13.6 million and $6.5 million respectively, which begin to expire in 2008 and 2011, respectively.

        The Company has excluded the benefit of $7.7 million ($19.7 million pre-tax) of U.S. federal and state net operating loss carryforwards from the deferred tax asset balance at December 31, 2007. This amount represents an "excess tax benefit", as the term is defined in SFAS No. 123(R), which will be recognized as a reduction to the Company's accrued income taxes and an addition to its additional paid-in capital when it is realized in the Company's tax returns.

        As stated in Note D., Cubist acquired Illumigen in December 2007. Illumigen had approximately $17.9 million of gross net operating loss carryforwards available, resulting in a net deferred tax asset of $7.1 million, which, consistent with the Company's other deferred tax assets, is fully offset by a valuation allowance. Due to the timing of the acquisition, the Company has not as yet completed a Section 382 study to assess whether past changes in ownership may limit or restrict the Company's ability to utilize these net operating loss carryforwards. Since a full valuation allowance has been provided against these net operating loss carryforwards, any adjustment to the net operating loss carryforward amount required upon completion of a Section 382 study would be offset by a corresponding reduction to the valuation allowance. Thus, there would be no impact to the consolidated balance sheet or statement of operations if an adjustment were required.

        Ownership changes resulting from the issuance of capital stock may limit the amount of net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income. The amount of the annual limitation is determined based on Cubist's value immediately prior to the ownership change. The Company has analyzed its historical changes in ownership and does not believe there are any limitations to the usage of its net operating losses. Subsequent significant changes in ownership could affect the limitation in future years.

FIN 48—Uncertain Tax Positions

        On January 1, 2007, the Company adopted the provisions of FIN 48, "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109." There were no adjustments to retained earnings as a result of the implementation of FIN 48. The Company's only adjustment upon adoption of FIN 48 related to a $2.0 million adjustment to research and development tax credit carryforwards, relating to issues that were identified in the context of a recently concluded state tax examination. This adjustment to the credit carryforwards did not impact retained earnings or the statement of operations, as there is a full valuation allowance recorded against the deferred tax asset. The Company is in the process of conducting a study of its research and development credit carryforwards. This study may result in additional changes to the Company's research and development credit carryforwards. Since a full valuation allowance has been provided against these carryforwards, any adjustment to the credit carryforwards upon completion of the R&D Credit study would be offset by a corresponding reduction

95

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

P. INCOME TAXES (Continued)

to the valuation allowance. Thus, there would be no impact to the consolidated balance sheet or statement of operations.

        A reconciliation of the Company's changes in uncertain tax positions from January 1, 2007 to December 31, 2007 is as follows (in thousands):

Uncertain tax positions January 1, 2007	$	2,000
Additions based on tax positions related to the current year		—
Additions for tax positions of prior years		—
Reductions for tax positions of prior years		—
Settlements		—
Balance at December 31, 2007	$	2,000

        Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying consolidated statements of operations. At January 1, 2007 and December 31, 2007 the Company did not have any interest or penalties accrued related to uncertain tax positions.

        In many cases the Company's uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. Since the Company is in a loss carryforward position, the Company is generally subject to U.S. federal, state and local income tax examinations by tax authorities for all years for which a loss carryforward is available.

Q. BUSINESS SEGMENTS

        Cubist operates in one business segment, the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. To date, the Company has concentrated exclusively on developing products for the anti-infective marketplace. 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.

R. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

        The following table contains quarterly financial information for fiscal years 2007 and 2006. Cubist believes that the following information reflects all normal recurring adjustments necessary for a fair

96

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

R. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)

presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.

	First Quarter			Second Quarter			Third Quarter		Fourth Quarter
	(in thousands, except per share data)
2007
Total revenues, net	$	59,479		$	69,764		$	79,796	$	85,581
Product revenues, net	$	59,435		$	69,525		$	76,326	$	85,120
Cost of product revenues	$	16,738		$	15,834		$	17,153	$	19,135
Net income	$	5,601		$	14,490		$	20,023	$	8,033	(1)
Basic net income per share	$	0.10		$	0.26		$	0.36	$	0.14	(1)
Diluted net income per share	$	0.10		$	0.24		$	0.32	$	0.14	(1)
2006
Total revenues, net	$	40,055		$	47,794		$	50,419	$	56,480
Product revenues, net	$	37,941		$	45,681		$	50,318	$	56,380
Cost of product revenues	$	10,132		$	11,790		$	12,742	$	14,139
Net income (loss)	$	(5,880	)	$	(5,073	)	$	5,184	$	5,393
Basic net income (loss) per share	$	(0.11	)	$	(0.09	)	$	0.09	$	0.10
Diluted net income (loss) per share	$	(0.11	)	$	(0.09	)	$	0.09	$	0.09

(1)

In the fourth quarter of 2007, Cubist recorded an IPR&D charge of $14.4 million related to the acquisition of Illumigen (See Note D.).

S. SUBSEQUENT EVENT

        On February 7, 2008, Cubist announced that it repurchased, in privately negotiated transactions, $50.0 million in original principal amount of its 2.25% Notes due June 15, 2013 at an average price of approximately $93.69 per $100 of debt. Following these repurchases, $300.0 million principal amount of the 2.25% Notes remain outstanding. These repurchases will reduce Cubist fully-diluted shares of common stock outstanding by approximately 1,624,905 shares. Cubist repurchased the outstanding principal and accrued interest on the 2.25% Notes of $46.8 million and incurred transaction fees of $0.2 million. Debt issuance costs of $1.2 million were also written off as a non-cash charge to interest expense at the time of the repurchase. The transaction was funded out of the Company's working capital.

97

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

        None.

ITEM 9A.    CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

        Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Management's Report on Internal Control Over Financial Reporting

        Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.

        PricewaterhouseCoopers LLP, our independent registered public accounting firm which audited our financial statements for the fiscal year ended December 31, 2007 has issued an attestation report on our internal control over financial reporting, as stated in its report which is included herein.

        There have not been any changes in the Company's internal control over financial reporting during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

        None.

98

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

        Certain information with respect to our executive officers and directors may be found under the section captioned "Our Executive Officers and Directors" in Part I of this Annual Report on Form 10-K. Other information required by Item 10 of Form 10-K may be found in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 10, 2008. Such information is incorporated herein by reference.

        Our board of directors adopted a Code of Conduct and Ethics applicable to the board of directors, our Chief Executive Officer, Chief Financial Officer, other officers of Cubist and all other employees of Cubist. The Code of Conduct and Ethics is available on our web site, www.cubist.com and in our filings with the SEC.

ITEM 11.    EXECUTIVE COMPENSATION

        The information required with respect to this item may be found in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 10, 2008. Such information is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

        The information required with respect to this item may be found in the definitive Proxy Statement to be delivered to Stockholders in connection with the Annual Meeting of Stockholders to be held on June 10, 2008. Such information is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

        The information required with respect to this item may be found in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 10, 2008. Such information is incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information required with respect to this item may be found in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 10, 2008. Such information is incorporated herein by reference.

99

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A)

Documents Filed As Part Of Form 10-K:

1. Financial Statements

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

•

Report of Independent Registered Public Accounting Firm



•

Balance Sheets as of December 31, 2007 and 2006



•

Statements of Operations for the years ended December 31, 2007, 2006 and 2005



•

Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005



•

Statements of Stockholders' Equity for the years ended December 31, 2007, 2006 and 2005



•

Notes to Financial Statements

2. Financial Statement Schedule

        The following financial statement schedule is filed as part of this Annual Report on Form 10-K. Schedules not listed below have been omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.

100

SCHEDULE II

Cubist Pharmaceuticals, Inc.

Valuation and Qualifying Accounts and Reserves

Years Ended December 31, 2007, 2006 and 2005

Description	Balance at Beginning of Year		Additions	Deductions		Balance at End of Year
	(in thousands)
Sales Returns & Allowances, Chargebacks, Prompt Pay Discounts, Wholesaler Fees and Rebates (1)
Year Ended December 31, 2007	$	3,418	14,055	(12,989	)	$	4,484
Year Ended December 31, 2006	$	1,554	9,140	(7,276	)	$	3,418
Year Ended December 31, 2005	$	775	4,297	(3,518	)	$	1,554

(1)

Additions to sales returns and allowances, chargebacks, prompt pay discounts, wholesaler fees and rebates are recorded as a reduction of revenue.

101

3. List of Exhibits

3.1	Amended and Restated Certificate of Incorporation (Exhibit 3.1, Cubist's Quarterly Report on Form 10-Q, filed on August 6, 2004, File No. 000-21379)
3.2	Certificate of Amendment to the Amended and Restated Certificate of Incorporation (Exhibit 3.1, Quarterly Report on Form 10-Q, filed on August 3, 2007, File No. 000-21379)
3.3	Amended and Restated By-Laws of Cubist, as amended to date (Exhibit 3.1, Current Report on Form 8-K, filed December 26, 2007, File No. 000-21379)
4.1	Specimen certificate for shares of Common Stock (Exhibit 4.1, Annual Report on Form 10-K, filed on March 1, 2006, File No. 000-21379)
4.2	Rights Agreement, dated as of July 21, 1999, between Cubist and BankBoston, N.A., as Rights Agent (Exhibit 4.1, Current Report on Form 8-K filed on August 5, 2005, File No. 000-21379)
4.3	First Amendment, dated as of March 3, 2000, to the Rights Agreement between Cubist and Fleet National Bank (f/k/a BankBoston, N.A.), as Rights Agent, dated as of July 21, 1999 (Exhibit 4.2, Current Report on Form 8-K filed on August, 5, 2005, File No. 000-21379)
4.4	Amendment, dated as of March 20, 2002, to the Rights Agreement between Cubist and EquiServe Trust Company, N.A. (f/k/a Fleet National Bank f/k/a BankBoston, N.A.), as Rights Agent, dated as of July 21, 1999 (Exhibit 4.3, Current Report on Form 8-K filed on August 5, 2005, File No. 000-21379)
4.5	Third Amendment, dated as of August 2, 2005, to the Rights Agreement between Cubist and EquiServe Trust Company, N.A. (f/k/a Fleet National Bank f/k/a BankBoston, N.A.), as Rights Agent, dated as of July 21, 1999 (Exhibit 4.4, Current Report on Form 8-K filed on August 5, 2005, File No. 000-21379)
4.6	Indenture, dated as of June 6, 2006, between Cubist and The Bank of New York Trust Company, N.A., as trustee (Exhibit 4.1, Current Report on Form 8-K filed on June 9, 2006, File No. 000-21379)
4.7	Note, dated June 6, 2006 (Exhibit 4.7, Annual Report on Form 10-K filed on March 1, 2007, File No. 000-21379)
**10.1	Amended and Restated 1993 Stock Option Plan (Exhibit 10.6, Pre-effective Amendment No. 1 to Form S-1 Registration Statement filed on July 31, 1996, File No. 333-6795)
**10.2	First Amendment to Amended and Restated 1993 Stock Option Plan (Exhibit 10.3, Quarterly Report on Form 10-Q, filed August 12, 1998, File No. 000-21379)
**10.3	1997 Employee Stock Purchase Plan (Exhibit 10.4, Quarterly Report on Form 10-Q, filed August 12, 1998, File No. 000-21379)
**10.4	Second Amendment to Amended and Restated 1993 Stock Option Plan (Exhibit 10.41, Annual Report on Form 10-K, filed March 10, 2000, File No. 000-21379)
**10.5	Third Amendment to Amended and Restated 1993 Stock Option Plan (Exhibit 10.42, Annual Report on Form 10-K, filed March 10, 2000, File No. 000-21379)
†10.6	Development and Supply Agreement, dated April 3, 2000, by and between Cubist and Abbott Laboratories (currently known as Hospira Worldwide, Inc., or Hospira) (Exhibit 10.2, Quarterly Report on Form 10-Q, filed August 9, 2006, File No. 000-21379)
†10.7	Assignment and License Agreement, dated October 6, 2000, by and between Eli Lilly & Company, or Eli Lilly, and Cubist (Exhibit 10.59, Annual Report on Form 10-K, filed April 2, 2001, File No. 000-21379)

102

**10.8		Fourth Amendment to Amended and Restated 1993 Stock Option Plan (Exhibit 10.73, Annual Report on Form 10-K, filed April 2, 2001, File No. 000-21379)
**10.9		Fifth Amendment to Amended and Restated 1993 Stock Option Plan (Exhibit 10.74, Annual Report on Form 10-K, filed April 2, 2001, File No. 000-21379)
**10.10		Sixth Amendment to Amended and Restated 1993 Stock Option Plan (Exhibit 10.75, Annual Report on Form 10-K, filed April 2, 2001, File No. 000-21379)
**10.11		Seventh Amendment to Amended and Restated 1993 Stock Option Plan (Exhibit 10.62, Annual Report on Form 10-K, filed March 29, 2002, File No. 000-21379)
†10.12		Manufacturing and Supply Agreement, entered into as of September 30, 2001, by and between ACS Dobfar S.p.A., or ACS, and Cubist (Exhibit 10.63, Annual Report on Form 10-K, filed March 29, 2002, File No. 000-21379)
**10.13		Amended and Restated 2000 Equity Incentive Plan (Exhibit 10.1, Quarterly Report on Form 10-Q, filed August 8, 2002, File No. 000-21379)
†10.14		Amendment No. 2, dated as of February 12, 2003, to the Manufacturing and Supply Agreement by and between ACS and Cubist, entered into as of September 30, 2001 (Exhibit 10.67, Annual Report on Form 10-K, filed March 28, 2003, File No. 000-21379)
10.15		Form of Employee Confidentiality Agreement (Exhibit 10.69, Annual Report on Form 10-K, filed March 28, 2003, File No. 000-21379)
10.16		Amendment No. 1, dated July 1, 2003, to the Assignment and License Agreement between Cubist and Eli Lilly, dated October 6, 2000 (Exhibit 10.2, Quarterly Report on Form 10-Q, filed August 14, 2003, File No. 000-21379)
†10.17		License Agreement, dated as of October 2, 2003, by and between Cubist, Chiron Healthcare Ireland Ltd. and Chiron Corporation (Exhibit 10.1, Quarterly Report on Form 10-Q, filed May 4, 2007, File No. 000-21379)
10.18		Lease, dated January 2004, between the California State Teachers' Retirement System, or CALSTERS, and Cubist regarding 55 Hayden Avenue (Exhibit 10.1, Quarterly Report on Form 10-Q filed on May 7, 2004, File No. 000-21379)
†10.19		Amendment #1, dated April 1, 2004, to the License Agreement by and between Cubist, Chiron Healthcare Ireland, Ltd. and Chiron Corporation, dated October 2, 2003 (Exhibit 10.2, Quarterly Report on Form 10-Q filed on August 6, 2004, File No. 000-21379)
†10.20		Processing Services Agreement entered into as of August 11, 2004 by and between Cardinal Health PTS, LLC, or Cardinal, and Cubist (Exhibit 10.3, Quarterly Report on Form 10-Q filed on November 4, 2005, File No. 00021379)
	10.21	Amendment No. 2, dated March 31, 2005, to the Assignment and License Agreement between Cubist and Eli Lilly, dated October 6, 2000 (Exhibit 10.1, Quarterly Report on Form 10-Q, filed May 5, 2005, File No. 000-21379)
**10.22		First Amendment to Amended and Restated 2000 Equity Incentive Plan (Exhibit 10.1, Current Report on Form 8-K filed on August 5, 2005, File No. 000-21379)
10.23		First Amendment, dated September 29, 2005, to Lease by and between Cubist and The Realty Associates Fund VI, L.P., or RA, successor-in-interest to CALSTERS, dated January 2004 (Exhibit 10.7, Quarterly Report on Form 10-Q filed on November 4, 2005, File No. 000-21379)

103

†10.24	Amendment No. 3, dated as of October 20, 2005, to the Manufacturing and Supply Agreement by and between ACS and Cubist, entered into as of September 30, 2001 (Exhibit 10.2, Quarterly Report on Form 10-Q filed on November 4, 2005, File No. 000-21379)
10.25	Second Amendment, entered into as of November 18, 2005, to Lease by and between RA and Cubist, dated January 2004
†10.26	First Amendment, dated as of June 1, 2006, to Development and Supply Agreement by and between Cubist and Hospira, entered into as of April 3, 2000 (Exhibit 10.1, Quarterly Report on Form 10-Q filed on August 9, 2006, File No. 000-21379)
*10.27	Amendment No. 4, dated as of September 22, 2006, to the Manufacturing and Supply Agreement by and between ACS and Cubist, entered into as of September 30, 2001 (Exhibit 10.1, Quarterly Report on Form 10-Q filed on November 3, 2006, File No. 000-21379)
*10.28	Amendment No. 2, dated April 18, 2007, to the Processing Services Agreement by and between Cardinal and Cubist, entered into as of August 11, 2004 (Exhibit 10.3, Quarterly Report on Form 10-Q filed on August 3, 2007, File No. 000-21379)
**10.29	Amended and Restated 1997 Employee Stock Purchase Plan (Appendix B, Definitive Proxy Statement on Form DEF-14A filed on April 26, 2007, File No. 000-21379)
**10.30	Amended and Restated 2002 Directors' Equity Incentive Plan (Appendix C, Definitive Proxy Statement on Form DEF-14A filed on April 26, 2007, File No. 000-21379)
10.31	Third Amendment, entered into as of June 28, 2007, to Lease by and between RA and Cubist, dated January 2004 (Exhibit 10.4, Quarterly Report on Form 10-Q filed on August 3, 2007, File No. 000-21379)
**10.32	Retention Letter, dated October 9, 2007, by and between Cubist and Michael J. Bonney (Exhibit 10.1, Quarterly Report on Form 10-Q filed on November 2, 2007, File No. 000-21379)
**10.33	Form of Retention Letter by and between Cubist and Christopher D. T. Guiffre, David W.J. McGirr, and Robert J. Perez (Exhibit 10.2, Quarterly Report on Form 10-Q filed on November 2, 2007, File No. 000-21379)
10.34	Fourth Amendment, entered into as of October 25, 2007, to Lease by and between RA and Cubist, dated January 2004
**10.35	Short Term Incentive Plan Terms and Conditions (Exhibit 10.1, Current Report on Form 8-K filed on February 15, 2008, File No. 000-21379)
10.36	Fifth Amendment, entered into as of December 18, 2007, to Lease by and between RA and Cubist, dated January 2004
*10.37	Agreement and Plan of Merger, entered into as of December 24, 2007, by and between Edison Merger Corp., Illumigen Biosciences, Inc., IB Securityholders, LLC and Cubist
14.1	Code of Conduct and Ethics
23.1	Consent of PricewaterhouseCoopers LLP
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

104

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

Any of the above-listed Exhibits containing parenthetical information are incorporated by reference from the Company's filing indicated next to the title of such exhibit. All other above listed exhibits are filed herewith.

†

Confidential Treatment granted.

*

Confidential Treatment requested.

**

Management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report.

105

SIGNATURES

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

CUBIST PHARMACEUTICALS, INC.
By:	/s/  MICHAEL W. BONNEY Michael W. Bonney President and Chief Executive Officer

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

Signature	Title	Date
/s/  MICHAEL W. BONNEY Michael W. Bonney	President, Chief Executive Officer and Director (Principal Executive Officer)	February 29, 2008
/s/  DAVID W.J. MCGIRR David W.J. McGirr	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	February 29, 2008
/s/  KENNETH M. BATE Kenneth M. Bate	Director	February 29, 2008
/s/  SYLVIE GRÉGOIRE Sylvie Grégoire	Director	February 29, 2008
/s/  DAVID W. MARTIN, JR. David W. Martin, Jr.	Director	February 29, 2008
/s/  WALTER R. MAUPAY, JR. Walter R. Maupay, Jr.	Director	February 29, 2008
/s/  MARTIN ROSENBERG Martin Rosenberg	Director	February 29, 2008
/s/  J. MATTHEW SINGLETON J. Matthew Singleton	Director	February 29, 2008
/s/  MARTIN H. SOETERS Martin H. Soeters	Director	February 29, 2008
/s/  MICHAEL B. WOOD Michael B. Wood	Director	February 29, 2008

106

EX-10.25

QuickLinks -- Click here to rapidly navigate through this document

EXHIBIT 10.25

SECOND AMENDMENT TO LEASE

        THIS SECOND AMENDMENT TO LEASE (this "Amendment") is made as of the 18th day of November, 2005 (the "Second Amendment Date"), by and between THE REALTY ASSOCIATES FUND VI, L.P., a Delaware limited partnership ("Landlord") and CUBIST PHARMACEUTICALS, INC., a Delaware corporation ("Tenant").

RECITALS:

        WHEREAS, by a lease (the "Original Lease") dated as of January, 2004, California State Teachers' Retirement System ("Calsters") leased to Tenant approximately 15,475 rentable square feet of space, consisting of a portion of the second and fourth floors in the building known as 45-55 Hayden Avenue, Lexington, Massachusetts (the "Building"); and

        WHEREAS, Landlord has succeeded to the interests of Calsters as landlord under the Lease; and

        WHEREAS, the Original Lease has been amended by a First Amendment to Lease between Landlord and Tenant, dated as of September 29, 2005 (the "First Amendment;" the Original Lease, as so amended, being referred to as the "Lease"), pursuant to which the size of the premises demised under the Original Lease was increased to 46,928 rentable square feet (the "Existing Premises"); and

        WHEREAS, Landlord and Tenant now desire to further amend the Lease to, among other things, temporarily expand the size of the Existing Premises by adding thereto approximately 6,150 rentable square feet of space on the second floor of the Building (the "Comet Space"), and to temporarily adjust the rent and certain provisions, and to provide an option for the Tenant to lease the Comet Space for a longer term, all on the terms and conditions set forth below.

        NOW, THEREFORE, in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, Landlord and Tenant hereby agree as follows:

1.

Defined Terms.    All of the foregoing recitals are true and correct. Unless otherwise defined herein, all capitalized terms used in this Amendment shall have the meanings ascribed to them in the Lease, the Lease shall be amended to incorporate any additional definitions provided for in this Amendment, and all references in the Lease to the "Lease" or "this Lease" or "herein" or "hereunder" or similar terms or to any section thereof shall mean the Lease, or such section thereof, as amended by this Amendment.



2.

Additional Terms and Definitions.    (a) From and after the Effective Date (as defined below) and continuing through 11:59 p.m. on May 31, 2006 (the "Comet Expansion Period"), the

following terms set forth in "Article 1 Reference Data" of the Lease are hereby amended to have the following meanings:

PREMISES:	The space in the Building, including the entire fourth floor and the space located on the second floor of the 55 Hayden Avenue portion of the Building, as shown on Exhibit A-2 attached hereto and incorporated herein.
RENTABLE FLOOR AREA OF THE PREMISES:	Approximately 53,078 square feet, of which 40,173 square feet consists of the entire fourth floor of the 55 Hayden Avenue portion of the Building and 12,905 square feet are located on the second floor of the Building.
ANNUAL RENT:	The Annual Rent payable under the Lease shall be as set forth on Schedule I to the First Amendment, plus $11,787.50 per month from December 1, 2005 through May 31, 2006 for the Comet Space.

3.

Effective Date; Delivery and Condition.    (a) Tenant may commence occupancy of the Comet Space on the Effective Date. For the purposes of this Amendment, the "Effective Date" shall be the later to occur of (i) December 1, 2005 and (ii) the date on which the existing tenant vacates the Comet Space and Landlord delivers possession thereof to Tenant.



(b)

Tenant acknowledges that, except as explicitly provided in the Lease, it is leasing the Comet Space during the Comet Expansion Period (as the same may be extended as provided below) in its current AS IS condition, without any representation or warranty whatsoever on the part of Landlord. Tenant currently occupies the Existing Premises and is fully familiar with their condition and that of the common areas of the Building, and Tenant acknowledges that, to the best of Tenant's knowledge (upon reasonable investigation and inquiry), the Existing Premises and the Comet Space are in good condition and suitable for Tenant's uses. Without limiting the foregoing, Tenant agrees that Landlord has no obligation to perform any work in or to either the Existing Premises or the Comet Space to prepare the same for Tenant's continued use and occupancy.



(c)

During the Comet Expansion Period (as such period may be extended hereunder), Tenant shall have, as appurtenant to the Comet Space, the right to use the furniture, furnishings, fixtures, equipment and tenant improvements located in the Comet Space as of the date hereof and belonging to Landlord, including without limitation (i) all telephone and data communications wiring, switches and cabling, and (ii) all furniture listed on Schedule 1 attached hereto and made a part hereof (together, the "Equipment"). Tenant shall keep the Equipment in good and workable condition, reasonable wear and tear excepted, but shall have no obligation to make repairs, perform maintenance thereon or replace the same, other than reasonable and de minimus repairs and maintenance, as determined as necessary by Tenant. Except as provided below, the Equipment shall be covered under Landlord's property insurance, and any insurance proceeds on account of the Equipment shall be payable to Landlord. At the expiration or earlier termination of the Comet Expansion Period, the Equipment shall be surrendered to Landlord in its existing

2

condition, reasonable wear and tear excepted; provided, that, if Tenant extends the lease of the Comet Space pursuant to Section 6 below, all right, title and interest in the Equipment shall be transferred to Tenant, and Landlord shall promptly execute all documentation necessary to effect such transfer. From and after such transfer, the Equipment shall be covered under Tenant's property insurance, and any insurance proceeds on account of the Equipment shall be payable to Tenant.

4.

Right of First Offer.    From and after the Second Amendment Date, Exhibit G-1 (Right of First Offer) to the Lease is hereby amended by deleting the schedule of Rights of Existing Building Tenants in its entirety and replacing the same with Schedule 2 attached hereto.



5.

Parking.    During the Comet Expansion Period (as the same may be extended), Section 10.19 of the Lease shall be amended by, in the first sentence thereto:



(a)

Replacing "one hundred and forty-one (141)" with "one hundred fifty-nine (159);" and



(b)

Replacing "46,928" with "53,078."



6.

Extension Option.    Provided that, at the time of such exercise and also at May 31, 2006, (i) the Lease is still in full force and effect, and (ii) there exists no Event of Default, Tenant shall have the right to maintain the Comet Space beyond the Comet Expansion Period as a part of the Premises and the Rentable Floor Area of the Premises for the then remainder of the Term of the Lease, on all of the terms and conditions set forth in the Lease, except that the Total Annual Rent for the Comet Space shall be as follows, and such amounts shall be added to the amounts otherwise payable under the Lease pursuant to Schedule I of the First Amendment:

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
6/1/06—4/30/07	$	140,415.00	$	11,787.50	$	23.00
5/1/07—4/30/08	$	144,525.00	$	12,043.75	$	23.50
5/1/08—4/30/09	$	147,600.00	$	12,300.00	$	24.00
5/1/09—4/30/10	$	155,287.50	$	12,940.63	$	25.25
5/1/10—4/30/11	$	158,362.50	$	13,196.88	$	25.75
5/1/11—4/30/12	$	161,437.50	$	13,453.13	$	26.25
5/1/12—4/30/13	$	166,050.00	$	13,837.50	$	27.00
5/1/13—4/30/14	$	173,737.50	$	14,478.13	$	28.25
5/1/14—4/30/15	$	181,425.00	$	15,118.75	$	29.50
5/1/15—4/30/16	$	186,037.50	$	15,503.13	$	30.25

Tenant shall exercise such option to extend the Comet Expansion Period by giving written notice to Landlord not later than February 28, 2006. The giving of such notice by Tenant shall automatically and irrevocably extend the inclusion of the Comet Space as part of the Premises and the Rentable Floor Area of the Premises for the then remainder of the Term of the Lease, and no instrument of renewal need be executed. In the event that Tenant fails to give such notice to Landlord, the Comet Expansion Period shall automatically terminate on May 31, 2006, and Tenant shall have no further right or option to extend the Comet Expansion Period, it being agreed that time shall be of the essence in the giving of such notice; provided, that, Tenant shall maintain its rights throughout the Term of the Lease to the Comet Space pursuant to the Right of First Offer detailed in Exhibit G-1 to the Lease.

3

Without limiting any other provisions of the Lease, Tenant expressly agrees that Landlord may have reasonable access to the Comet Space from and after January 1, 2006 (but only prior to Tenant's exercise of the foregoing extension option) for the purpose of showing the same to prospective tenants upon reasonable notice to Tenant (which need not be in writing). If Tenant does not duly exercise its option to extend the Comet Expansion Period, then on or before 11:59 p.m. on May 31, 2006, Tenant shall surrender and deliver the Comet Space to Landlord in accordance with applicable provisions of the Lease, including without limitation Section 6.1.2 thereof.

7.

Brokers.    Tenant covenants, represents and warrants to Landlord that Tenant has had no dealings or communications with any broker or agent (other than Grubb & Ellis Company and Richards Barry Joyce & Partners) in connection with this Amendment, and Tenant covenants and agrees to pay, hold harmless and indemnify the Landlord from and against any and all cost, expense (including reasonable attorneys' fees) or liability for any compensation, commission or charges to any broker or agent (other than the foregoing named brokers) claiming through the Tenant with respect hereto.



8.

Exhibits.    During the Comet Expansion Period (as the same may be extended), Exhibit A-2 attached hereto is hereby substituted for Exhibit A-1 to the Lease. All references in the Lease to Exhibit A-1 shall be replaced by references to Exhibit A-2.



9.

Successors.    This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the provisions of the Lease regarding assignment or other transfers of each party's rights under the Lease.



10.

Authority.    Each party represents and warrants to the other that each person executing this Amendment on behalf of such party has the authority to do so and that such execution has fully obligated and bound such party to all terms and provisions of this Amendment.



11.

No Further Amendment.    It is understood and agreed that all other conditions and terms contained in the Lease not herein specifically amended shall remain unmodified and in full force and effect, and the Lease, as modified by this Amendment, is hereby ratified and confirmed. At the end of the Comet Expansion Period, unless Tenant has exercised its right to extend the lease of the Comet Space beyond the Comet Expansion Period pursuant to Section 6 hereof, the Lease shall revert to the terms and conditions thereof that existed immediately prior to the Second Amendment Date, other than Exhibit G-1, which shall remain as amended by Section 4 and Schedule 2 hereto.



12.

Tenant Representations.    As a material inducement to Landlord entering into this Amendment, Tenant represents and certifies to Landlord that as of the date hereof: (i) the Lease, as modified hereby, contains the entire agreement between the parties hereto relating to the Premises and that, except for that certain Amended and Restated Declaration of Covenants and Easements between the Landlord's predecessor in title with respect to the Building and Tenant, as amended to date (the "Declaration") there are no other agreements between the parties relating to the Premises, the Building or the Lease which are not contained or referred to herein or in the Lease, (ii) to the best of Tenant's knowledge, Landlord is not in default (continuing beyond the expiration of any applicable notice or grace periods) in any respect in any of the terms, covenants and conditions of the Lease; (iii) Tenant has no existing setoffs, counterclaims or defenses against Landlord under the Lease; (iv) Tenant has not assigned or pledged its leasehold interest under the Lease, or sublet or licensed or granted any other occupancy rights with respect to any or all of the Premises; (v) no consent or approval of any third party or parties is required in order for Tenant to enter into and be bound by this Amendment; and (vi) Tenant is not, and the performance by Tenant of its obligations

4

hereunder shall not render Tenant, insolvent within the meaning of the United States Bankruptcy Code, the Internal Revenue Code or any other applicable law, code or regulation.

13.

Landlord Representations.    As a material inducement to Tenant entering into this Amendment, Landlord represents and certifies to Tenant that as of the date hereof: (i) the Lease, as modified hereby, contains the entire agreement between the parties hereto relating to the Premises and that, except for the Declaration, there are no other agreements between the parties relating to the Premises, the Building or the Lease which are not contained or referred to herein or in the Lease, (ii) to the best of Landlord's knowledge, there exists no Event of Default on the part of Tenant in any respect in any of the terms, covenants and conditions of the Lease; and (iii) no consent or approval of any third party or parties is required in order for Landlord to enter into and be bound by this Amendment.



14.

Governing Law.    The Lease, this Amendment and the rights and obligations of both parties thereunder and hereunder shall be governed by the laws of The Commonwealth of Massachusetts.



15.

Counterparts.    This Amendment may be executed in counterparts, each of which shall be an original and all of which counterparts taken together shall constitute one and the same instrument.

5

        IN WITNESS WHEREOF, the undersigned have hereunto se their hands and seals as of the date first above written.

LANDLORD:
The Realty Associates Fund VI, L.P., a Delaware limited partnership
By:	Realty Associates Fund VI LLC, a Massachusetts limited liability company, general partner
	By:	Realty Associates Advisors LLC, a Delaware limited liability company, Manager
		By:	Realty Associates Advisors Trust, a Massachusetts business trust, sole member
		By:	/s/ Heather Hohenthal
		Name: Heather Hohenthal Title: Regional Director
By:	Realty Associates Fund VI Texas Corporation, a Texas corporation, general partner
	By:	/s/ Heather Hohenthal
	Name: Heather Hohenthal Title: Regional Director
TENANT:
CUBIST PHARMACEUTICALS, INC.
By:	/s/ David W.J. McGirr
	Name: David W.J. McGirr Title: Senior Vice President and Chief Financial Officer

6

Exhibit A-2

[Floor Plans]

EXHIBIT A
PREMISES PLAN
2nd Floor, 55 Hayden Avenue

7

SCHEDULE 1
List of Equipment

Reception Area:

2 Chairs
1 small table

Board Room, Main:

Conference table
Credenza
6 hi-back conference chairs
Whiteboard, wall-mounted
Easel

Conference Room—first office

Conference table, rectangular
Credenza
Whiteboard, wall-mounted
4 chairs
4-drawer vertical file

Conference Area—front of office

Round table
4 chairs

Offices (5):

U-shaped work surface
3-drawer file
Chair
Bookcase

Cubicles 8x8 (19) wired for electric and data:

L-shaped Work surface
3-drawer vertical file
2-drawer lateral file
Bookshelf
Overhead bin

Kitchen:

Refrigerator with freezer
Microwave
Toaster oven
Small round table
3 chairs
2 rectangular tables

8

Miscellaneous:

Bookcases, various sizes: 6
4-drawer lateral files: 1
2-door cabinet: 1
Computer racks: 5
Round table
Rectangular table
Various size cubicle walls to make additional cubes: 14
Small round tables on wheels: 3
Assorted office supplies

9

SCHEDULE 2

RIGHTS OF EXISTING BUILDING TENANTS

Celerant	Option to Extend
8,017 sf—2nd Fl (45) Expiration 8/31/07	One 5 year term (thru August 31, 2012); 12 mos. notice prior to expiration of current term required
Summit Mortgage	Option to Extend
2,805 sf—2nd Fl (45) Expiration 2/28/09	One 5 year term (thru February 28, 2014); 9 mos. notice prior to expiration of current term required
Motorola	Option to Extend
25,405 sf—2nd Fl (45) 30,019 sf—3rd Fl (55) Expiration 4/30/07	One 3 year term (thru April 30, 2010); 9 mos. notice prior to expiration of current term required
Goodrich, LLC	Option to Extend
10,495 sf—3rd Fl (55) Expiration 11/30/09	One 7 year term (thru November 30, 2016); 12 mos. notice prior to expiration of current term required
Aon Consulting	Option to Extend
5,528 sf—2nd Fl (45) Expiration 7/31/06	One 5 year term (thru July 31, 2011); 12 mos. notice prior to expiration of current term required
Spaulding and Slye	Option to Extend
14,092 sf—2nd Fl (55) Expiration 3/31/15	Two extension of 5 year terms (thru March 31, 2020 and March 31, 2025, respectively); each on 9 mos. notice prior to expiration of current term required
Spaulding and Slye	First Right to Lease
	During the term of Spaulding and Slye's lease to the 14,092 sf on the 2nd floor of the 55 Hayden Avenue portion of the Building, Spaulding and Slye holds a first right to lease the following spaces in the Building:
	• 8,017 sf—2nd Fl (45) (Celerant space)
	• 2,805 sf—2nd Fl (45) (Summit Mortgage space)
	• 5,528 sf—2nd Fl (45) (Aon Consulting space)
	• 3,089 sf—2nd Fl (45) (FCG space)
	Spaulding and Slye must respond to the Landlord's notice of any such space becoming available within 14 days of such notice.

10

QuickLinks

EXHIBIT 10.25

EX-10.34

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.34

FOURTH AMENDMENT TO LEASE

        THIS FOURTH AMENDMENT TO LEASE (this "Fourth Amendment") is made as of the 25th day of October, 2007 (the "Fourth Amendment Date"), by and between THE REALTY ASSOCIATES FUND VI, L.P., a Delaware limited partnership ("Landlord") and CUBIST PHARMACEUTICALS, INC., a Delaware corporation ("Tenant").

RECITALS:

        WHEREAS, by a lease (the "Original Lease") dated as of January, 2004, California State Teachers' Retirement System ("Calsters") leased to Tenant approximately 15,475 rentable square feet of space, consisting of a portion of the second (Suite 2201-55) and fourth (Suite 4201-55) floors in the building known as 45-55 Hayden Avenue, Lexington, Massachusetts (the "Building"); and

        WHEREAS, Landlord has succeeded to the interests of Calsters as landlord under the Lease; and

        WHEREAS, the Original Lease has been amended by a First Amendment to Lease between Landlord and Tenant, dated as of September 29, 2005 (the "First Amendment"), and by a Second Amendment to Lease between Landlord and Tenant dated as of November 18, 2005 (the "Second Amendment"), and by a Third Amendment to Lease between Landlord and Tenant dated as of June 20, 2007 (the "Third Amendment"), (the Original Lease, as so amended, being referred to as the "Lease"), pursuant to which the size of the premises demised under the Original Lease was increased to 83,097 rentable square feet (the "Existing Premises"). The Existing Premises consist of Suites 2201-55, 2200-55, 3000-55, 4201-55 and 4200-55; and

        WHEREAS, by letter dated as of April 27, 2006, and pursuant to the Second Amendment, Tenant elected to include Suite 2200-55 (also known as the Comet Space) in the Existing Premises for the remainder of the Lease Term; and

        WHEREAS, Landlord and Tenant now desire to further amend the Lease to, among other things, expand the size of the Existing Premises by adding thereto approximately 25,405 rentable square feet of space in Suite 4600-45 on the fourth floor of the Building (the "Additional Fourth Floor Space"), and to adjust the rent and certain provisions, all on the terms and conditions set forth below.

        NOW, THEREFORE, in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, Landlord and Tenant hereby agree as follows:

1.

Defined Terms.    All of the foregoing recitals are true and correct. Unless otherwise defined herein, all capitalized terms used in this Fourth Amendment shall have the meanings ascribed to them in the Lease, the Lease shall be amended to incorporate any additional definitions provided for in this Fourth Amendment, and all references in the Lease to the "Lease" or "this Lease" or "herein" or "hereunder" or similar terms or to any section thereof shall mean the Lease, or such section thereof, as amended by this Fourth Amendment.

2.

Additional Terms and Definitions.    (a) From and after the Fourth Amendment Effective Date, the following terms set forth in "Article 1 Reference Data" of the Lease are hereby amended or added, as applicable, to have the following meanings:

PREMISES:

The following areas in the 55 Hayden Avenue portion of the Building: (i) Suite 2201-55 on the second floor and Suite 4201-55 on the fourth floor, (ii) Suite 4200-55 on the fourth floor of the Building, (iii) Suite 2200-55 on the second floor of the Building, and (iv) Suite 3000-55 on the third floor of the Building; and Suite 4600-45 on the fourth floor of the 45 Hayden Avenue portion of the Building. All such spaces are shown on Exhibit A-4, attached hereto and incorporated herein.

RENTABLE FLOOR AREA OF THE PREMISES:

Approximately 108,502 square feet of the 55 Hayden Avenue portion of the Building as follows (i) 6,755 rentable square feet on the second floor contained in Suite 2201-55, (ii) 8,720 rentable square feet on the fourth floor contained in Suite 4201-55 and 31,453 rentable square feet on the fourth floor of the Building contained in Suite 4200-55, (iii) 6,150 rentable square feet on the second floor of the Building contained in Suite 2200-55, and (iv) 30,019 rentable square feet on the third floor of the Building contained in Suite 3000-55; and 25,405 rentable square feet on the fourth floor of the 45 Hayden Avenue portion of the Building contained in Suite 4600-45;.

(b)

From after the Fourth Amendment Effective Date, the term "Annual Rent" for the Premises shall be as set on Schedule I to this Fourth Amendment. Notwithstanding the foregoing, so long as the Lease remains in full force and effect, and so long as no Actionable Event of Default (as defined in the Third Amendment) shall exist under the Lease, Landlord will waive the requirement that Tenant pay Annual Rent on the Additional Fourth Floor Space for the period commencing on the Fourth Amendment Effective Date and ending on the one hundred eightieth (180^th) day after the Fourth Amendment Effective Date.



3.

Furniture.    In consideration of the terms and covenants contained in this Fourth Amendment, Landlord hereby conveys, grants, sells and transfers to Tenant as of the Fourth Amendment Date, without any warranty or representation whatsoever other than as stated in Section 15 hereto (including without limitation any representation or warranty as to condition or fitness for intended use) all of the Landlord's right, title and interest in and to the furniture and furnishings (the "Furniture") located in Suite 3000-55, located on the third floor of the 55

2

Hayden Avenue portion of the Building (the "Third Floor Space"), which was added to the Premises by the Third Amendment. Such Furniture is described on Schedule II to this Fourth Amendment, which Landlord in good faith believes to be true and correct as of the Fourth Amendment Date. Landlord shall have no liability for any inaccuracy between Schedule II and the actual number or description of Furniture items as of the Fourth Amendment Effective Date. By executing this Fourth Amendment, Tenant accepts such transfer and the Furniture on the terms and conditions stated above.

4.

Operating Expenses and Real Estate Taxes.    From and after the Fourth Amendment Effective Date, Tenant's obligations under Section 4.2 of the Lease to pay Operating Expenses with respect to the Additional Fourth Floor Space shall be computed using the calendar year ending December 31, 2008 as a base year; and Tenant's obligations under Section 4.2 of the Lease to pay increases in Real Estate Taxes with respect to the Additional Fourth Floor Space shall be computed using the fiscal year ending June 30, 2008 as the base year.



5.

Effective Date; Delivery and Condition.    (a) The "Fourth Amendment Effective Date" shall be the later to occur of (i) November 1, 2007 and (ii) the date on which Motorola, Inc. (the "Existing Tenant") vacates the Additional Fourth Floor Space and Landlord delivers possession thereof to Tenant. If the Fourth Amendment Effective Date is delayed due solely to a holdover by the Existing Tenant, and if (without imposing on Landlord any obligation to do so) Landlord actually recovers any premium rent or other additional amount in the nature of rent from the Existing Tenant solely on account of such holding over, Landlord shall pay Tenant fifty percent (50%) of any net excess rent (i.e., after deducting Landlord's reasonable costs and expenses in recovering the same) above the Existing Tenant's base rent, actually received by Landlord due to such holdover. Such payment shall be made within thirty (30) days after Landlord's receipt of such excess rent from the Existing Tenant.



(b)

Tenant acknowledges that, except as explicitly provided in this Fourth Amendment and the Lease, it is leasing the Additional Fourth Floor Space in its current AS IS condition, without any representation or warranty whatsoever on the part of Landlord. Tenant currently occupies the Existing Premises and is fully familiar with their condition and that of the common areas of the Building, and Tenant acknowledges that, to the best of Tenant's knowledge (upon reasonable investigation and inquiry), the Existing Premises and the Additional Fourth Floor Space are in good condition and suitable for Tenant's uses. Without limiting the foregoing, Tenant agrees that Landlord has no obligation to perform any work in or to either the Existing Premises or the Additional Fourth Floor Space to prepare the same for Tenant's continued use and occupancy.



(c)

Landlord acknowledges that Tenant desires to make certain alterations or improvements in the Additional Fourth Floor Space to make the same more suitable for Tenant's occupancy. Such alterations or improvements may include tenant improvements to the Additional Fourth Floor Space, including to the bathrooms within the Additional Fourth Floor Space, installation of fixtures in the Additional Fourth Floor Space, and architectural and engineering expenses in connection therewith (collectively, the "Additional Fourth Floor Improvements"). All Additional Fourth Floor Improvements shall be undertaken by Tenant in strict accordance with the applicable requirements of the Lease (including without limitation Sections 3.3 and 3.4). The Additional Fourth Floor Improvements shall be deemed substantially complete on that date on which the Additional Fourth Floor Improvements have been completed except for items of work (and, if applicable, adjustment of equipment and fixtures) which can be completed after Tenant has taken occupancy of the Additional Fourth Floor Space, or any part thereof, without causing undue interference with Tenant's use of the Additional Fourth Floor Space or such part thereof. To the extent that (i) such work is substantially completed in

3

accordance with such Lease requirements, and (ii) receipted invoices (and other material required under the Lease such as, but not limited to, lien waivers from any contractor or subcontractor performing the Additional fourth Floor Improvements) showing the actual cost thereof are presented to Landlord during the Term of the Lease, and (iii) at the time of any advance of funds, there then exists (A) no Event of Default (as defined in the Third Amendment) on the part of Tenant, nor (B) any Actionable Event of Default, Landlord shall reimburse Tenant, within thirty (30) days after receipt of each such invoice (together with lien waivers for all costs theretofore billed), for costs actually incurred by Tenant (excluding the costs of furniture), as evidenced by such invoices, in connection with the design and construction of the Additional Fourth Floor Improvements, but in no event shall Landlord be obligated to reimburse Tenant more than the lesser of (x) such actual cost, or (y) Six Hundred Thirty-five Thousand One Hundred Twenty-five Dollars ($635,125.00), or $25.00 per square foot of Rentable Area in the Additional Fourth Floor Space (the "Additional Fourth Floor Improvements Allowance"). No portion of the Additional Fourth Floor Improvements Allowance may be applied to costs of purchasing or installing furniture or wiring/cabling for the Additional Fourth Floor Space. If the Existing Tenant's lease is terminated prior to November 1, 2007, Landlord shall grant Tenant reasonable access to the Additional Fourth Floor Space from and after such termination (and the Existing Tenant vacating the Additional Fourth Floor Space) for the purpose of commencing the Additional Fourth Floor Improvements. To the extent that Tenant has not requested disbursement of any portion of the Additional Fourth Floor Improvements Allowance prior to the expiration or earlier termination of the Lease, Landlord shall have no further obligation to reimburse Tenant for any such costs incurred by Tenant. For the avoidance of doubt, this Section 5(c) shall in no way affect the Landlord's and the Tenant's respective rights and obligations pursuant to Section 5(c) of the Third Amendment.

6.

[Intentionally Omitted]



7.

[Intentionally Omitted]



8.

Parking.    From and after the Effective Date, Section 10.19 of the Lease shall be amended by, in the first sentence thereto:



(a)

Replacing "two hundred forty-nine (249)" with "three hundred twenty-five (325);" and



(b)

Replacing "83,097" with "108,502."



9.

Brokers.    Tenant covenants, represents and warrants to Landlord that Tenant has had no dealings or communications with any broker or agent (other than Grubb & Ellis Company and Richards Barry Joyce & Partners) in connection with this Fourth Amendment, and Tenant covenants and agrees to pay, hold harmless and indemnify the Landlord from and against any and all cost, expense (including reasonable attorneys' fees) or liability for any compensation, commission or charges to any broker or agent (other than the foregoing named brokers) claiming through the Tenant with respect hereto.



10.

Exhibits. Exhibit A-4 attached hereto is hereby substituted for Exhibit A-3 to the Lease. All references in the Lease to Exhibit A-1, A-2 or A-3 shall be replaced by references to Exhibit A-4.

11.

Successors.    This Fourth Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the provisions of the Lease regarding assignment or other transfers of each party's rights under the Lease.

4

12.

Authority.    Each party represents and warrants to the other that each person executing this Fourth Amendment on behalf of such party has the authority to do so and that such execution has fully obligated and bound such party to all terms and provisions of this Fourth Amendment.



13.

No Further Amendment.    It is understood and agreed that all other conditions and terms contained in the Lease not herein specifically amended shall remain unmodified and in full force and effect, and the Lease, as modified by this Fourth Amendment, is hereby ratified and confirmed.



14.

Tenant Representations.    As a material inducement to Landlord entering into this Fourth Amendment, Tenant represents and certifies to Landlord that as of the date hereof: (i) the Lease, as modified hereby, and together with that certain letter dated September 24, 2007 from Ron Friedman to Jack Kerrigan, with the subject line "Response to Specific Security Questions—Hayden Woods Corporate Center," contains the entire agreement between the parties hereto relating to the Premises and that, except for that certain Amended and Restated Declaration of Covenants and Easements between the Landlord's predecessor in title with respect to the Building and Tenant, as amended to date (the "Declaration") there are no other agreements between the parties relating to the Premises, the Building or the Lease which are not contained or referred to herein or in the Lease, (ii) to the best of Tenant's knowledge, Landlord is not in default (continuing beyond the expiration of any applicable notice or grace periods) in any respect in any of the terms, covenants and conditions of the Lease; (iii) Tenant has no existing setoffs, counterclaims or defenses against Landlord under the Lease; (iv) Tenant has not assigned or pledged its leasehold interest under the Lease, or sublet or licensed or granted any other occupancy rights with respect to any or all of the Premises; (v) no consent or approval of any third party or parties is required in order for Tenant to enter into and be bound by this Fourth Amendment; and (vi) Tenant is not, and the performance by Tenant of its obligations hereunder shall not render Tenant, insolvent within the meaning of the United States Bankruptcy Code, the Internal Revenue Code or any other applicable law, code or regulation.



15.

Landlord Representations.    As a material inducement to Tenant entering into this Fourth Amendment, Landlord represents and certifies to Tenant that as of the date hereof: (i) the Lease, as modified hereby, and together with that certain letter dated September 24, 2007 from Ron Friedman to Jack Kerrigan, with the subject line "Response to Specific Security Questions—Hayden Woods Corporate Center," contains the entire agreement between the parties hereto relating to the Premises and that, except for the Declaration, there are no other agreements between the parties relating to the Premises, the Building or the Lease which are not contained or referred to herein or in the Lease, (ii) to the best of Landlord's knowledge, there exists no Event of Default or Actionable Event of Default on the part of Tenant in any respect in any of the terms, covenants and conditions of the Lease; (iii) no consent or approval of any third party or parties is required in order for Landlord to enter into and be bound by this Fourth Amendment; and (iv) Landlord has the right to convey, grant, sell and transfer the Furniture to Tenant as provided in Section 3 hereto.



16.

Governing Law.    The Lease, this Fourth Amendment and the rights and obligations of both parties thereunder and hereunder shall be governed by the laws of The Commonwealth of Massachusetts.



17.

HVAC.    Landlord and Tenant acknowledge that letter from Tenant's counsel to Landlord's counsel dated August 13, 2007, with a subject line "45-55 Hayden Avenue, Lexington, MA," and the response from Landlord's counsel dated October 18, 2007.



18.

Counterparts.    This Fourth Amendment may be executed in counterparts, each of which shall be an original and all of which counterparts taken together shall constitute one and the same instrument.

5

        IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals as of the date first above written.

LANDLORD:
The Realty Associates Fund VI, L.P., a Delaware limited partnership
By:	Realty Associates Fund VI LLC, a Massachusetts limited liability company, general partner
	By:	Realty Associates Advisors LLC, a Delaware limited liability company, Manager
		By:	Realty Associates Advisors Trust, a Massachusetts business trust, Manager
		By:	/s/ James P. Raisides Officer: Sr. Vice President
By:	Realty Associates Fund VI Texas Corporation, a Texas corporation, general partner
By:	/s/ James P. Raisides Officer: Sr. Vice President
TENANT:
CUBIST PHARMACEUTICALS, INC.
By:	/s/ Michael W. Bonney
	Name: Michael W. Bonney Title: President and Chief Executive Officer

6

Exhibit A-4

Plans of Premises

[Floor Plans]

SECOND FLOOR
45-55 HAYDEN AVENUE
LEXINGTON, MA CUBIST SUITE 2200
6,150 RSF

7

[Floor Plans]

SECOND FLOOR
45-55 HAYDEN AVENUE
LEXINGTON, MA CUBIST SUITE 2201
6,755 RSF

8

[Floor Plans]

THIRD FLOOR
45-55 HAYDEN AVENUE
LEXINGTON, MA MOTOROLA SUITE 3000
30,019 RSF

9

[Floor Plans]

FOURTH FLOOR
45-55 HAYDEN AVENUE
LEXINGTON, MA CUBIST SUITE 4200
31,453 RSF

10

[Floor Plans]

FOURTH FLOOR
45-55 HAYDEN AVENUE
LEXINGTON, MA CUBIST SUITE 4201
8,720 RSF

11

[Floor Plans]

FOURTH FLOOR 45 HAYDEN AVENUE LEXINGTON, MA
CUBIST SUITE 4600-45	25,405 RSF

12

SCHEDULE I TO FOURTH AMENDMENT
Annual Rent

        Annual Rent for the Premises shall be the sum of the rents shown below for each portion of the Premises, determined as of the date in question.

As to Suites 2201-55, 4201-55 and 4200-55:

(a)

For the period from [Effective Date of First Amendment], 2006 through July 31, 2009:

(i)

As to Suite 2201-55 and Suite 4201-55:

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
5/1/06—1/31/07	$	371,400.00	$	30,950.00	$	24.00
2/1/07—1/31/08	$	386,875.00	$	32,238.58	$	25.00
2/1/08—7/31/09	$	402,350.00	$	33,529.17	$	26.00

        plus (ii) as to Suite 4200-55:

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
7/1/06—4/30/07	$	723,419.00	$	60,284.92	$	23.00
5/1/07—4/30/08	$	739,145.50	$	61,595.46	$	23.50
5/1/08—4/30/09	$	754,872.00	$	62,906.00	$	24.00
5/1/09—7/31/09	$	794,188.25	$	66,182.35	$	25.25

(b)

For the period after July 31, 2009, as to all of Suites 2201-55, 4201-55 and 4200-55:

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
8/1/09—4/30/10	$	1,184,932.00	$	98,744.33	$	25.25
5/1/10—4/30/11	$	1,208,396.00	$	100,699.67	$	25.75
5/1/11—4/30/12	$	1,231,860.00	$	102,655.00	$	26.25
5/1/12—4/30/13	$	1,267,056.00	$	105,588.00	$	27.00
5/1/13—4/30/14	$	1,325,716.00	$	110,476.33	$	28.25
5/1/14—4/30/15	$	1,384,376.00	$	115,364.67	$	29.50
5/1/15—4/30/16	$	1,419,572.00	$	118,297.67	$	30.25

13

As to Suite 2200-55:

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
6/1/06—4/30/07	$	140,415.00	$	11,787.50	$	23.00
5/1/07—4/30/08	$	144,525.00	$	12,043.75	$	23.50
5/1/08—4/30/09	$	147,600.00	$	12,300.00	$	24.00
5/1/09—4/30/10	$	155,287.50	$	12,940.63	$	25.25
5/1/10—4/30/11	$	158,362.50	$	13,196.88	$	25.75
5/1/11—4/30/12	$	161,437.50	$	13,453.13	$	26.25
5/1/12—4/30/13	$	166,050.00	$	13,837.50	$	27.00
5/1/13—4/30/14	$	173,737.50	$	14,478.13	$	28.25
5/1/14—4/30/15	$	181,425.00	$	15,118.75	$	29.50
5/1/15—4/30/16	$	186,037.50	$	15,503.13	$	30.25

As to Suite 3000-55:

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
Through 4/30/08	$	780,494.00	$	65,041.17	$	26.00
5/1/08—4/30/09	$	810,513.00	$	67,542.75	$	27.00
5/1/09—4/30/10	$	825,522.50	$	68,793.54	$	27.50
5/1/10—4/30/11	$	840,532.00	$	70,044.33	$	28.00
5/1/11—4/30/12	$	900,570.00	$	75,047.50	$	30.00
5/1/12—4/30/13	$	945,598.50	$	78,799.88	$	31.50
5/1/13—4/30/14	$	975,617.50	$	81,301.46	$	32.50
5/1/14—4/30/15	$	1,035,655.50	$	83,304.63	$	34.50
5/1/15—4/30/16	$	1,065,674.50	$	88,806.21	$	35.50

As to Suite 4600-45

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
Through 4/30/09	$	819,311.25	$	68,275.94	$	32.25
5/1/09—4/30/10	$	844,716.25	$	70,393.02	$	33.25
5/1/10—4/30/11	$	870,121.25	$	72,510.10	$	34.25
5/1/11—4/30/12	$	895,526.25	$	74,627.19	$	35.25
5/1/12—4/30/13	$	920,931.25	$	76,744.27	$	36.25
5/1/13—4/30/14	$	946,336.25	$	78,861.35	$	37.25
5/1/14—4/30/15	$	971,741.25	$	80,978.44	$	38.25
5/1/15—4/30/16	$	997,146.25	$	83,095.52	$	39.25

14

SCHEDULE II TO FOURTH AMENDMENT
List of Furniture

Description	QTY.
2 Drawer rolling Cabinets	38
Cube Vanity	33
Overhead Cube Bins	23
Metal Side Chairs	41
Standard wood office sets	18
Lg. Executive office sets	4
Aeron Chairs	26
Wood Side Chairs	25
Cafeteria Lounge Chairs	15
Cafeteria Lounge Sofa's	2
Green Lounge Chairs	3
42" round café tables	10
Steel Café Chairs	29
Metal Bar Stools	7
Stainless Steel refrig.	1
White refrig.	1
Microwaves	2
Red Conference Room Chairs	18
CR Table Approx. 20'x6'	1
Glass Top Credenza 6'x23"	1
Green Conference Room Chairs	12
CR Table Approx. 12'x54:	1
Credenza	1
Beige Conference Room Chairs	12
CR Table 12'x54"	1
Gold Conference Room Chairs	8
Computer Training Tables	8
White Boards	21
42" Round Pine Table	1
38"x23" pine credenzas	2
Beige 4 Shelf Bookcase	2
Grey Four Drawer laterals	3
Pine credenza/bookcase	4
Grey three draw pedestals	3
5'x2' Table	1
Brown Rolling Credenza's 34x20	3
Brown & Grey Cred, 5'x18"	2
Brown & Black 6'x3' table	1
Wood Credenza 92"x 23"	1
Oval wood & Steel meeting table	1
Large reception Cubes	2
Horseshoe training tables	2
Grey cube side tables	9
Red Reception Chairs	4
Glass Reception round table	1
8x8 Office Cubes	20
Bullpen type cubes	17

15

7x9 grey & wood tables	2
6'x24" pine credenza	1
5'x20" pine credenza	1
Grey 5 drawer file cabinet	2
Liebert cooling systems	3
Liebert Backup power unit	1

16

QuickLinks

Exhibit 10.34

EX-10.36

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.36

FIFTH AMENDMENT TO LEASE

        THIS FIFTH AMENDMENT TO LEASE (this "Fifth Amendment") is made as of the 18^th day of December, 2007 (the "Fifth Amendment Date"), by and between THE REALTY ASSOCIATES FUND VI, L.P., a Delaware limited partnership ("Landlord") and CUBIST PHARMACEUTICALS, INC., a Delaware corporation ("Tenant").

RECITALS:

        WHEREAS, by a lease (the "Original Lease") dated as of January, 2004, California State Teachers' Retirement System ("Calsters") leased to Tenant approximately 15,475 rentable square feet of space, consisting of a portion of the second (Suite 2201-55) and fourth (Suite 4201-55) floors in the building known as 45-55 Hayden Avenue, Lexington, Massachusetts (the "Building"); and

        WHEREAS, Landlord has succeeded to the interests of Calsters as landlord under the Lease; and

        WHEREAS, the Original Lease has been amended by a First Amendment to Lease between Landlord and Tenant, dated as of September 29, 2005 (the "First Amendment"), and by a Second Amendment to Lease between Landlord and Tenant dated as of November 18, 2005 (the "Second Amendment"), and by a Third Amendment to Lease between Landlord and Tenant dated as of June 20, 2007 (the "Third Amendment"), and by a Fourth Amendment to Lease dated as of October 25, 2007, (the Original Lease, as so amended, being referred to as the "Lease"), pursuant to which the size of the premises demised under the Original Lease was increased to 108,502 rentable square feet (the "Existing Premises"). The Existing Premises consist of Suites 2201-55, 2200-55, 3000-55, 4201-55, 4200-55 and 4600-45; and

        WHEREAS, by letter dated as of April 27, 2006, and pursuant to the Second Amendment, Tenant elected to include Suite 2200-55 (also known as the Comet Space) in the Existing Premises for the remainder of the Lease Term; and

        WHEREAS, Landlord and Tenant now desire to further amend the Lease to, among other things, expand the size of the Existing Premises by adding thereto approximately 12,146 rentable square feet of space in Suite 1000-55 on the first floor of the Building (the "First Floor Space"), and to adjust the rent and certain provisions, all on the terms and conditions set forth below.

        NOW, THEREFORE, in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, Landlord and Tenant hereby agree as follows:

1.

Defined Terms.    All of the foregoing recitals are true and correct. Unless otherwise defined herein, all capitalized terms used in this Fifth Amendment shall have the meanings ascribed to them in the Lease, the Lease shall be amended to incorporate any additional definitions provided for in this Fifth Amendment, and all references in the Lease to the "Lease" or "this Lease" or "herein" or "hereunder" or similar terms or to any section thereof shall mean the Lease, or such section thereof, as amended by this Fifth Amendment.

2.

Additional Terms and Definitions.    (a) From and after the Fifth Amendment Effective Date, the following terms set forth in "Article 1 Reference Data" of the Lease are hereby amended or added, as applicable, to have the following meanings:

PREMISES:

The following areas in the 55 Hayden Avenue portion of the Building: (i) Suite 2201-55 on the second floor and Suite 4201-55 on the fourth floor, (ii) Suite 4200-55 on the fourth floor of the Building, (iii) Suite 2200-55 on the second floor of the Building, and (iv) Suite 3000-55 on the third floor of the Building; and (v) Suite 4600-45 on the fourth floor of the 45 Hayden Avenue portion of the Building; and (vi) Suite 1000-55 on the first floor of the 55 Hayden Avenue portion of the Building. All such spaces are shown on Exhibit A-5, attached hereto and incorporated herein.

RENTABLE FLOOR AREA OF THE PREMISES:

Approximately 120,648 square feet of the 55 Hayden Avenue portion of the Building as follows (i) 6,755 rentable square feet on the second floor contained in Suite 2201-55, (ii) 8,720 rentable square feet on the fourth floor contained in Suite 4201-55 and 31,453 rentable square feet on the fourth floor of the Building contained in Suite 4200-55, (iii) 6,150 rentable square feet on the second floor of the Building contained in Suite 2200-55, (iv) 30,019 rentable square feet on the third floor of the Building contained in Suite 3000-55; (v) 25,405 rentable square feet on the fourth floor of the 45 Hayden Avenue portion of the Building contained in Suite 4600-45, and (vi) 12,146 rentable square feet on the first floor of the Building contained in Suite 1000-55;.

(b)

From after the Fifth Amendment Effective Date, the term "Annual Rent" for the Premises shall be as set on Schedule I to this Fifth Amendment. Notwithstanding the foregoing, so long as the Lease remains in full force and effect, and so long as no Actionable Event of Default (as defined in the Third Amendment) shall exist under the Lease, Landlord will waive the requirement that Tenant pay Annual Rent on the First Floor Space for the months of May and June, 2008. For the avoidance of doubt, for the period prior to May 1, 2008, Tenant shall owe the Annual Rent attributable to the First Floor Space on a pro-rated basis only for the period of time from the Fifth Amendment Effective Date through April 30, 2008.

2

3.

Right of First Offer.    Notwithstanding any provision of the Lease to the contrary (including without limitation Section 6 of the Third Amendment), Landlord and Tenant hereby agree that the G-1 Suspension Period is void and without further force or effect. In addition, Tenant's rights under Exhibit G-1 to the Lease (Right of First Offer) to the Lease with respect to (i) the portion of the second floor of the Building containing 8,017 rentable square feet (Suite 2500-45) which has been leased to Celerant, or (ii) the portion of the third floor of the 45 Hayden Avenue portion of the Building containing 19,815 rentable square feet (Suite 3000-45), which has been leased to NitroMed, shall be deemed to be revived and in full force and effect with respect to any future leasing (subject, however, to the existing rights and other qualifications set forth in the schedule of Rights of Existing Building Tenants annexed hereto as Schedule 2, which replaces in its entirety the similar schedule annexed to Exhibit G-1 to the Lease). Notwithstanding the foregoing, Tenant shall have no rights under Exhibit G-1 to lease approximately 2,805 rentable square feet of space located on the second floor of the Building and most recently occupied by Summit Mortgage.



4.

Operating Expenses and Real Estate Taxes.    From the Fifth Amendment Effective Date through April 30, 2008, Tenant's Annual Rent for the First Floor Space include amounts to cover Operating Expenses and Real Estate Taxes. Such amounts are agreed-upon fixed amounts and are not subject to adjustment or reconciliation. From and after April 30, 2008, Tenant's obligations under Section 4.2 of the Lease to pay Operating Expenses with respect to the First Floor Space shall be computed using the calendar year ending December 31, 2008 as a base year; and Tenant's obligations under Section 4.2 of the Lease to pay increases in Real Estate Taxes with respect to the First Floor Space shall be computed using the fiscal year ending June 30, 2008 as the base year.



5.

Effective Date; Delivery and Condition.    (a) The "Fifth Amendment Effective Date" shall be the later to occur of (i) January 1, 2008 and (ii) the date on which Zingdom Communications, Inc. (the "Existing Tenant") vacates the First Floor Space and Landlord delivers possession thereof to Tenant. If the Fifth Amendment Effective Date is delayed due solely to a holdover by the Existing Tenant, and if (without imposing on Landlord any obligation to do so) Landlord actually recovers any premium rent or other additional amount in the nature of rent from the Existing Tenant solely on account of such holding over, Landlord shall pay Tenant fifty percent (50%) of any net excess rent (i.e., after deducting Landlord's reasonable costs and expenses in recovering the same) above the Existing Tenant's base rent, actually received by Landlord due to such holdover. Such payment shall be made within thirty (30) days after Landlord's receipt of such excess rent from the Existing Tenant.



(b)

Tenant acknowledges that, except as explicitly provided in this Fifth Amendment and the Lease, it is leasing the First Floor Space in its current AS IS condition, without any representation or warranty whatsoever on the part of Landlord. Tenant currently occupies the Existing Premises and is fully familiar with their condition and that of the common areas of the Building, and Tenant acknowledges that, to the best of Tenant's knowledge (upon reasonable investigation and inquiry), the Existing Premises and the First Floor Space are in good condition and suitable for Tenant's uses. Without limiting the foregoing, Tenant agrees that Landlord has no obligation to perform any work in or to either the Existing Premises or the First Floor Space to prepare the same for Tenant's continued use and occupancy.



(c)

Landlord acknowledges that Tenant desires to make certain alterations or improvements in the First Floor Space to make the same more suitable for Tenant's occupancy. Such alterations or improvements may include tenant improvements to the First Floor Space, installation of fixtures in the First Floor Space, and architectural and engineering expenses in connection therewith (collectively, the "First Floor Improvements"). All First

3

Floor Improvements shall be undertaken by Tenant in strict accordance with the applicable requirements of the Lease (including without limitation Sections 3.3 and 3.4). The First Floor Improvements shall be deemed substantially complete on that date on which the First Floor Improvements have been completed except for items of work (and, if applicable, adjustment of equipment and fixtures) which can be completed after Tenant has taken occupancy of the First Floor Space, or any part thereof, without causing undue interference with Tenant's use of the First Floor Space or such part thereof. To the extent that (i) such work is substantially completed in accordance with such Lease requirements, and (ii) receipted invoices (and other material required under the Lease such as, but not limited to, lien waivers from any contractor or subcontractor performing the First Floor Improvements) showing the actual cost thereof are presented to Landlord during the Term of the Lease, and (iii) at the time of any advance of funds, there then exists (A) no Event of Default on the part of Tenant, nor (B) any Actionable Event of Default (as defined in the Third Amendment), Landlord shall reimburse Tenant, within thirty (30) days after receipt of each such invoice (together with lien waivers for all costs theretofore billed), for costs actually incurred by Tenant (excluding the costs of furniture), as evidenced by such invoices, in connection with the design and construction of the First Floor Improvements, but in no event shall Landlord be obligated to reimburse Tenant more than the lesser of (x) such actual cost, or (y) Two Hundred Six Thousand Four Hundred Eighty-two Dollars ($206,482.00), or $17.00 per square foot of Rentable Area in the First Floor Space (the "First Floor Improvements Allowance"). No portion of the First Floor Improvements Allowance may be applied to costs of purchasing or installing furniture or wiring/cabling for the First Floor Space. If the Existing Tenant's lease is terminated prior to January 1, 2008, Landlord shall grant Tenant reasonable access to the First Floor Space from and after such termination (and the Existing Tenant vacating the First Floor Space) for the purpose of commencing the First Floor Improvements. To the extent that Tenant has not requested disbursement of any portion of the First Floor Improvements Allowance prior to the expiration or earlier termination of the Lease, Landlord shall have no further obligation to reimburse Tenant for any such costs incurred by Tenant.

6.

Contingency.    Tenant acknowledges that the Fifth Amendment Effective Date occurring prior to May 1, 2008 is contingent on Landlord's ability to enter into a termination agreement with the Existing Tenant, on terms and conditions acceptable to Landlord in its sole discretion, pursuant to which the Existing Tenant would vacate and surrender possession of the First Floor Space on or before May 1, 2008.



7.

[Intentionally Omitted]



8.

Parking.    From and after the Fifth Amendment Effective Date, Section 10.19 of the Lease shall be amended by, in the first sentence thereto:



(a)

Replacing "three hundred twenty-five (325)" with "three hundred sixty-two (362);" and



(b)

Replacing "108,502" with "120,648."



9.

Brokers.    Tenant covenants, represents and warrants to Landlord that Tenant has had no dealings or communications with any broker or agent (other than Grubb & Ellis Company and Richards Barry Joyce & Partners) in connection with this Fifth Amendment, and Tenant covenants and agrees to pay, hold harmless and indemnify the Landlord from and against any and all cost, expense (including reasonable attorneys' fees) or liability for any compensation, commission or charges to any broker or agent (other than the foregoing named brokers) claiming through the Tenant with respect hereto.

4

10.

Exhibits. Exhibit A-5 attached hereto is hereby substituted for Exhibit A-4 to the Lease. All references in the Lease to Exhibit A-1, A-2, A-3 or A-4 shall be replaced by references to Exhibit A-5.

11.

Successors.    This Fifth Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the provisions of the Lease regarding assignment or other transfers of each party's rights under the Lease.



12.

Authority.    Each party represents and warrants to the other that each person executing this Fifth Amendment on behalf of such party has the authority to do so and that such execution has fully obligated and bound such party to all terms and provisions of this Fifth Amendment.



13.

No Further Amendment.    It is understood and agreed that all other conditions and terms contained in the Lease not herein specifically amended shall remain unmodified and in full force and effect, and the Lease, as modified by this Fifth Amendment, is hereby ratified and confirmed.



14.

Tenant Representations.    As a material inducement to Landlord entering into this Fifth Amendment, Tenant represents and certifies to Landlord that as of the date hereof: (i) the Lease, as modified hereby, and together with that certain letter dated September 24, 2007 from Ron Friedman to Jack Kerrigan, with the subject line "Response to Specific Security Questions—Hayden Woods Corporate Center," contains the entire agreement between the parties hereto relating to the Premises and that, except for that certain Amended and Restated Declaration of Covenants and Easements between the Landlord's predecessor in title with respect to the Building and Tenant, as amended to date (the "Declaration") there are no other agreements between the parties relating to the Premises, the Building or the Lease which are not contained or referred to herein or in the Lease, (ii) to the best of Tenant's knowledge, Landlord is not in default (continuing beyond the expiration of any applicable notice or grace periods) in any respect in any of the terms, covenants and conditions of the Lease; (iii) Tenant has no existing setoffs, counterclaims or defenses against Landlord under the Lease; (iv) Tenant has not assigned or pledged its leasehold interest under the Lease, or sublet or licensed or granted any other occupancy rights with respect to any or all of the Premises; (v) no consent or approval of any third party or parties is required in order for Tenant to enter into and be bound by this Fifth Amendment; and (vi) Tenant is not, and the performance by Tenant of its obligations hereunder shall not render Tenant, insolvent within the meaning of the United States Bankruptcy Code, the Internal Revenue Code or any other applicable law, code or regulation.



15.

Landlord Representations.    As a material inducement to Tenant entering into this Fifth Amendment, Landlord represents and certifies to Tenant that as of the date hereof: (i) the Lease, as modified hereby, and together with that certain letter dated September 24, 2007 from Ron Friedman to Jack Kerrigan, with the subject line "Response to Specific Security Questions—Hayden Woods Corporate Center," contains the entire agreement between the parties hereto relating to the Premises and that, except for the Declaration, there are no other agreements between the parties relating to the Premises, the Building or the Lease which are not contained or referred to herein or in the Lease, (ii) to the best of Landlord's knowledge, there exists no Event of Default or Actionable Event of Default on the part of Tenant in any respect in any of the terms, covenants and conditions of the Lease; (iii) no consent or approval of any third party or parties is required in order for Landlord to enter into and be bound by this Fifth Amendment; and (iv) Landlord has the right to lease the First Floor Space, as provided herein, to Tenant.

5

16.

Governing Law.    The Lease, this Fifth Amendment and the rights and obligations of both parties thereunder and hereunder shall be governed by the laws of The Commonwealth of Massachusetts.



17.

HVAC.    Landlord and Tenant acknowledge that letter from Tenant's counsel to Landlord's counsel dated August 13, 2007, with a subject line "45-55 Hayden Avenue, Lexington, MA," and the response from Landlord's counsel dated October 18, 2007.



18.

Counterparts.    This Fifth Amendment may be executed in counterparts, each of which shall be an original and all of which counterparts taken together shall constitute one and the same instrument.

6

        IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals as of the date first above written.

LANDLORD:
The Realty Associates Fund VI, L.P., a Delaware limited partnership
By:	Realty Associates Fund VI LLC, a Massachusetts limited liability company, general partner
	By:	Realty Associates Advisors LLC, a Delaware limited liability company, Manager
		By:	Realty Associates Advisors Trust, a Massachusetts business trust, Manager
		By:	/s/ Heather Hohenthal Officer Regional Director
By:	Realty Associates Fund VI Texas Corporation, a Texas corporation, general partner
By:	/s/ Heather Hohenthal Officer Regional Director
TENANT:
CUBIST PHARMACEUTICALS, INC.
By:	/s/ David W.J. McGirr
	Name: David W.J. McGirr Title: Senior Vice President and Chief Financial Officer

7

Exhibit A-5

Plans of Premises

[Floor Plans]

SECOND FLOOR
45-55 HAYDEN AVENUE
LEXINGTON, MA CUBIST SUITE 2200
6,150 RSF

8

[Floor Plans]

SECOND FLOOR
45-55 HAYDEN AVENUE
LEXINGTON, MA CUBIST SUITE 2201
6,755 RSF

9

[Floor Plans]

THIRD FLOOR
45-55 HAYDEN AVENUE
LEXINGTON, MA MOTOROLA SUITE 3000
30,019 RSF

10

[Floor Plans]

FOURTH FLOOR
45-55 HAYDEN AVENUE
LEXINGTON, MA CUBIST SUITE 4200
31,453 RSF

11

[Floor Plans]

FOURTH FLOOR
45-55 HAYDEN AVENUE
LEXINGTON, MA CUBIST SUITE 4201
8,720 RSF

12

[Floor Plans]

FOURTH FLOOR 45 HAYDEN AVENUE LEXINGTON, MA
CUBIST SUITE 4600-45	25,405 RSF

13

[Floor Plans]

CUBIST SUITE 1000-55 12,146 RSF

14

SCHEDULE I TO FIFTH AMENDMENT

Annual Rent

        Annual Rent for the Premises shall be the sum of the rents shown below for each portion of the Premises, determined as of the date in question.

As to Suites 2201-55, 4201-55 and 4200-55:

(a)

For the period from [Effective Date of First Amendment], 2006 through July 31, 2009:

(i)

As to Suite 2201-55 and Suite 4201-55:

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
5/1/06—1/31/07	$	371,400.00	$	30,950.00	$	24.00
2/1/07—1/31/08	$	386,875.00	$	32,238.58	$	25.00
2/1/08—7/31/09	$	402,350.00	$	33,529.17	$	26.00

        plus (ii) as to Suite 4200-55:

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
7/1/06—4/30/07	$	723,419.00	$	60,284.92	$	23.00
5/1/07—4/30/08	$	739,145.50	$	61,595.46	$	23.50
5/1/08—4/30/09	$	754,872.00	$	62,906.00	$	24.00
5/1/09—7/31/09	$	794,188.25	$	66,182.35	$	25.25

(b)

For the period after July 31, 2009, as to all of Suites 2201-55, 4201-55 and 4200-55:

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
8/1/09—4/30/10	$	1,184,932.00	$	98,744.33	$	25.25
5/1/10—4/30/11	$	1,208,396.00	$	100,699.67	$	25.75
5/1/11—4/30/12	$	1,231,860.00	$	102,655.00	$	26.25
5/1/12—4/30/13	$	1,267,056.00	$	105,588.00	$	27.00
5/1/13—4/30/14	$	1,325,716.00	$	110,476.33	$	28.25
5/1/14—4/30/15	$	1,384,376.00	$	115,364.67	$	29.50
5/1/15—4/30/16	$	1,419,572.00	$	118,297.67	$	30.25

As to Suite 2200-55:

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
6/1/06—4/30/07	$	140,415.00	$	11,787.50	$	23.00
5/1/07—4/30/08	$	144,525.00	$	12,043.75	$	23.50
5/1/08—4/30/09	$	147,600.00	$	12,300.00	$	24.00
5/1/09—4/30/10	$	155,287.50	$	12,940.63	$	25.25
5/1/10—4/30/11	$	158,362.50	$	13,196.88	$	25.75
5/1/11—4/30/12	$	161,437.50	$	13,453.13	$	26.25
5/1/12—4/30/13	$	166,050.00	$	13,837.50	$	27.00
5/1/13—4/30/14	$	173,737.50	$	14,478.13	$	28.25
5/1/14—4/30/15	$	181,425.00	$	15,118.75	$	29.50
5/1/15—4/30/16	$	186,037.50	$	15,503.13	$	30.25

15

As to Suite 3000-55:

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
Through 4/30/08	$	780,494.00	$	65,041.17	$	26.00
5/1/08—4/30/09	$	810,513.00	$	67,542.75	$	27.00
5/1/09—4/30/10	$	825,522.50	$	68,793.54	$	27.50
5/1/10—4/30/11	$	840,532.00	$	70,044.33	$	28.00
5/1/11—4/30/12	$	900,570.00	$	75,047.50	$	30.00
5/1/12—4/30/13	$	945,598.50	$	78,799.88	$	31.50
5/1/13—4/30/14	$	975,617.50	$	81,301.46	$	32.50
5/1/14—4/30/15	$	1,035,655.50	$	83,304.63	$	34.50
5/1/15—4/30/16	$	1,065,674.50	$	88,806.21	$	35.50

As to Suite 4600-45

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
Through 4/30/09	$	819,311.25	$	68,275.94	$	32.25
5/1/09—4/30/10	$	844,716.25	$	70,393.02	$	33.25
5/1/10—4/30/11	$	870,121.25	$	72,510.10	$	34.25
5/1/11—4/30/12	$	895,526.25	$	74,627.19	$	35.25
5/1/12—4/30/13	$	920,931.25	$	76,744.27	$	36.25
5/1/13—4/30/14	$	946,336.25	$	78,861.35	$	37.25
5/1/14—4/30/15	$	971,741.25	$	80,978.44	$	38.25
5/1/15—4/30/16	$	997,146.25	$	83,095.52	$	39.25

As to Suite 1000-55

RENTAL PERIOD	TOTAL ANNUAL RENT		MONTHLY PAYMENT		RENTAL RATE/SF
Through 4/30/08	$	266,024.16	$	22,168.68		N/A
5/1/08—4/30/09	$	346,161.00	$	28,846.75	$	28.50
5/1/09—4/30/10	$	352,234.00	$	29,352.83	$	29.00
5/1/10—4/30/11	$	358,307.00	$	29,858.92	$	29.50
5/1/11—4/30/12	$	364,380.00	$	30,365.00	$	30.00
5/1/12—4/30/13	$	370,453.00	$	30,871.08	$	30.50
5/1/13—4/30/14	$	376,526.00	$	31,377.17	$	31.00
5/1/14—4/30/15	$	382,599.00	$	31,883.25	$	31.50
5/1/15—4/30/16	$	388,672.00	$	32,389.33	$	32.00

16

SCHEDULE 2

RIGHTS OF EXISTING BUILDING TENANTS

Celerant	Option to Extend
8,017 sf—2nd Fl (45) Expiration 8/31/12	One 5 year term (thru August 31, 2017); Notice of exercise must be prior to 11/30/2011.
NitroMed	Option to Extend
19,815 sf—3rd Fl (45) Expiration 9/30/12	One 5 year term (thru September 30, 2017); Notice prior to September 30, 2011 required
Goodrich, LLC	Option to Extend
10,495 sf—3rd Fl (55) Expiration 11/30/09	One 7 year term (thru November 30, 2016); 12 mos. notice prior to expiration of current term required
Aon Consulting	Option to Extend
5,528 sf—2nd Fl (45) Expiration 7/31/2011	One 5 year term (thru July 31, 2016); 12 mos. notice prior to expiration of current term required
Spaulding and Slye	Option to Extend
14,092 sf—2nd Fl (55) Expiration 3/31/15	Two extension of 5 year terms (thru March 31, 2020 and March 31, 2025, respectively); each on 9 mos. notice prior to expiration of current term required
Spaulding and Slye	First Right to Lease
	During the term of Spaulding and Slye's lease to the 14,092 sf on the 2nd floor of the 55 Hayden Avenue portion of the Building, Spaulding and Slye holds a first right to lease the following spaces in the Building:
	• 8,017 sf—2nd Fl (45) (Celerant space)
	• 5,528 sf—2nd Fl (45) (Aon Consulting space)
	• 3,089 sf—2nd Fl (45) (FCG space—expires 1/31/09)
	Spaulding and Slye must respond to the Landlord's notice of any such space becoming available within 14 days of such notice.

17

QuickLinks

Exhibit 10.36

EX-10.37

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.37

CONFIDENTIAL TREATMENT

AGREEMENT AND PLAN OF MERGER

        This Agreement and Plan of Merger (this "Agreement") is made and entered into as of December 24, 2007 (the "Agreement Date"), by and among (i) Cubist Pharmaceuticals, Inc., a Delaware corporation ("Parent"), (ii) Edison Merger Corp., a Delaware corporation and a wholly owned Subsidiary of Parent ("Merger Sub"), (iii) Illumigen Biosciences, Inc. a Washington corporation (the "Company"), and (iv) IB Securityholders, LLC as the Holders Representative referred to herein for the limited purposes specifically set forth herein and only in its capacity as such. Capitalized terms used herein without definition shall have the respective meanings set forth in Article 1 hereof.

WHEREAS, in accordance with the terms set forth herein, the Merger Sub shall merge with and into the Company (the "Merger"), following which the Company shall continue as the surviving corporation and a wholly owned subsidiary of the Parent (the surviving corporation is referred to herein as the "Surviving Corporation"), upon the terms and subject to the conditions set forth in this Agreement and in accordance with the provisions of Washington Law and Delaware Law;

WHEREAS, the board of directors of the Company (the "Company Board") has carefully considered the terms of this Agreement and has determined that this Agreement and the terms and conditions of the transactions contemplated hereby, including the Merger, are fair and in the best interests of, and are advisable to, the Company and the Company Shareholders (as defined below);

WHEREAS, concurrently with the execution and delivery of this Agreement, Company and certain Company Shareholders are executing and delivering a Voting and Support Agreement in the form of Exhibit A hereto pursuant to which, among other things, such Company Shareholders are covenanting to: (i) immediately after the execution and delivery of this Agreement, vote in favor of the adoption of this Agreement and the transactions contemplated hereby, including, but not limited to, the Merger, (ii) retain ownership of the shares of Company Stock held by them as of the date hereof until the earlier of the consummation of the Merger or the termination of this Agreement pursuant to Article 10 hereof and (iii) otherwise to support this Agreement and the transactions contemplated hereby; and

WHEREAS, the Company Board will be submitting this Agreement and the performance of the transactions contemplated hereby to the holders of the shares of the capital stock of the Company (collectively, the "Company Shareholders"), for their adoption by written consent in accordance with Section 23B.07.040 of Washington Law, and the Company Board is recommending that the Company Shareholders vote for the adoption of this Agreement and the transactions contemplated hereby.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained and intending to be legally bound hereby, the Parent, the Merger Sub and the Company hereby agree as follows:

*

Confidential Treatment Requested. Omitted portions filed with the Securities and Exchange Commission (the "Commission").

ARTICLE 1
DEFINITIONS

        "Abandonment Notice" means the delivery by Parent to the Holders Representative, at any time after the Effective Time, of a written notice disclosing the Parent's election to henceforth cease development of any and all Contingent Payment Products.

        "Abandonment Grantback Notice" has the meaning ascribed to such term in Section 6.10(a) hereof.

        "Accountants" has the meaning ascribed to such term in Section 2.7(k) hereof.

        "Adverse Recommendation" has the meaning ascribed to such term in Section 7.24(d) hereof.

        "Affiliate" shall mean, with respect to any person or entity, any person or entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such person or entity.

        "Affiliated Group" has the meaning ascribed to it in Section 1504 of the Code, and in addition includes any analogous combined, consolidated or unitary group, as defined under any applicable state, local, or foreign income Tax law.

        "Agreed Contingent Payment Amount" has the meaning ascribed to such term in Section 2.7(j) hereof.

        "Agreement" has the meaning ascribed to such term in the introductory paragraph hereof.

        "Agreement Date" has the meaning ascribed to such term in the introductory paragraph hereof.

        "Amended Articles" has the meaning ascribed to such term in Section 4.30 hereof.

        "Application For Marketing Approval" means a new drug application or a biologics license application or any functional equivalent of such an application seeking approval to market a pharmaceutical product in the United States or elsewhere.

        "Appraiser" has the meaning ascribed to such term in Section 2.7(k) hereof.

        "Articles of Merger" has the meaning ascribed to such term in Section 2.2 hereof.

        "Available Closing Cash" means the amount of the Company's and its Subsidiaries' cash that, as of the close of business on the business day immediately preceding the Closing Date, is held on hand by the Company or any of its Subsidiaries or on deposit in any bank account in full compliance with the provisions of Section 6.14 hereof, subject to the following adjustments: (i) minus the aggregate amount of the Company's and its Subsidiaries' uncollected checks or other payment orders or instructions as of the close of business on the business day immediately preceding the Closing Date; and (ii) minus the aggregate amount of any checks or other payment orders or instructions made, given or executed by the Company and its Subsidiaries on the Closing Date; provided, that the amount of any items listed in clauses (ii) or (iii) shall not be a reduction of Available Closing Cash to the extent that such items have been made, given or executed for the purpose of paying one or more Closing Liabilities that resulted in an adjustment of Closing Consideration.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

2

        "Blocking Third Party Patent" has the meaning ascribed to such term in Section 2.7(f) hereof.

        "Blocking Third Party Patent Application" has the meaning ascribed to such term in Section 2.7(f) hereof.

        "Board of Managers" has the meaning ascribed to such term in Section 3.7(a) hereof.

        "Breach Dispute Notice" has the meaning ascribed to such term in Section 6.10(c) hereof.

        "business day" (whether such term is capitalized or not) means any day (other than Saturday, Sunday or a legal holiday) that banks located in Boston, Massachusetts are open for business.

        "Buyer Group" means Parent and its direct and indirect Subsidiaries, Affiliates, successors, permitted assignees and permitted licensees of any Compound, any Contingent Payment Product, the Company Program, or any portion of or interest in any of the foregoing, and includes, after the Effective Time, the Surviving Corporation and its Affiliates, successors, permitted assignees and permitted licensees of any Compound, any Contingent Payment Product, the Company Program, or any portion of or interest in any of the foregoing (all of the foregoing being collectively referred to as the "Members of the Buyer Group").

        "Capitalization Certificate" has the meaning ascribed to such term in Section 8.3(d)(ii) hereof.

        "Certificate" or "Certificates" has the meaning ascribed to such term in Section 3.2 hereof.

        "CERCLA" has the meaning ascribed to such term in Section 4.14(b) hereof.

        "Closing" has the meaning ascribed to such term in Section 2.2 hereof.

        "Closing Consideration" means nine million dollars ($9,000,000.00), subject to the following adjustments: (i) minus the aggregate amount of all Closing Liabilities that have not been paid, satisfied or discharged as of the close of business on the business day immediately preceding the Closing Date; and (ii) plus the aggregate amount of all Available Closing Cash.

        "Closing Date" has the meaning ascribed to such term in Section 2.2 hereof.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

3

        "Closing Liabilities" has the meaning ascribed to such term in Section 2.6(b) hereof.

        "Code" means the Internal Revenue Code of 1986, as amended.

        "Commercially Reasonable Efforts" means the level of efforts and resources reasonably appropriate to develop and/or commercialize (as applicable) a Section 6.9 Contingent Payment Product in a sustained manner consistent with the efforts and resources that a similarly situated biopharmaceutical company would typically devote to a product of similar market potential, profit potential, and/or proprietary protection, and similar scientific, technical, development, regulatory and competitive risks, based on market conditions then prevailing; for this purpose, in order to be considered "similarly situated" to Parent and Company, a comparable biopharmaceutical company shall be presumed not to have []*.

        "Common Warrants" shall mean all outstanding warrants exercisable for shares of Company Common Stock.

        "Company" has the meaning ascribed to such term in the introductory paragraph hereof.

        "Company Board" has the meaning ascribed to such term in the recitals hereof.

        "Company Common Stock" means the Company's common stock, $.0001 par value per share.

        "Company Disclosure Schedule" has the meaning ascribed to such term in Article 4 hereof.

        "Company Employee Benefit Plan" has the meaning ascribed to such term in Section 4.13(a) hereof.

        "Company Grantback Assets" has the meaning ascribed to such term in Section 6.10(a) hereof.

        "Company Indemnified Party" has the meaning ascribed to such term in Section 9.3 hereof.

        "Company Intellectual Property" means (i) Company Patents and (ii) all Intellectual Property (other than Company Patents) owned by, or licensed to, the Company.

        "Company Options" means the issued and outstanding options to purchase shares of Company Common Stock granted under the Company Plan.

        "Company Patents" means those United States, international and foreign patents and patent applications (including provisional applications), in each case that are listed in Schedule 4.9 of the Company Disclosure Schedule, and any subsequent continuations, continuations-in-part, divisionals, reexaminations, reissues, restorations (together with supplemental protection certificates in Europe), provisions, foreign counterparts and extensions thereof.

        "Company Plan" means the Company's 2000 Stock Option Plan.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

4

        "Company Preferred Stock" means any or all of the Company's Series A Preferred Stock, $.0001 par value per share and any or all of the Company's Series B Preferred Stock, $.0001 par value per share.

        "Company Products" has the meaning ascribed to such term in Section 4.25(a) hereof.

        "Company Program" means all of the Company's programs as currently being conducted, and as currently contemplated to be conducted, by the Company related to the application of the Compound for the treatment of infections caused by HCV.

        "Company Program Assets" means all assets of the Company used in or related to the Company Program, including, without limitation, (a) any Compound, (b) all patent rights, inventions, know-how, trade secrets, trademarks and other intellectual property rights owned or controlled by the Company that are necessary or useful to carry out such program or to research, develop, make, have made, use, import, export, market, distribute, have distributed, offer to sell, sell and have sold any Compound, and (c) all non-disclosure, invention assignment and non-competition agreements entered into by the Company with its employees and consultants.

        "Company Program Contract" has the meaning ascribed to such term in Section 4.17(a) hereof.

        "Company Program Expenditures" means identifiable expenditures specifically related to the development of a Contingent Payment Product with an indication for the treatment of infections caused by HCV (but excluding overhead and other expense allocations not specifically identifiable thereto).

        "Company Registered Intellectual Property" means those United States, international and foreign: (a) patents and patent applications (including provisional applications); (b) registered trademarks, registered service marks, applications to register trademarks or service marks, intent-to-use applications, or other registrations or applications related to trademarks or service marks; (c) registered copyrights and applications for copyright registration; and (d) registered domain names and applications for domain name registrations, in each case that are owned by or licensed to the Company.

        "Company Stock" means, as the context may require, any or all of the Company Common Stock and the Company Preferred Stock.

        "Company Shareholders" has the meaning ascribed to such term in the recitals hereof.

        "Company's Most Recent Balance Sheet" has the meaning ascribed to such term in Section 4.6 hereof.

        "Compensation Liabilities" has the meaning ascribed to such term in Section 6.16(b) hereof.

        "Complementary Technology" has the meaning ascribed to such term in Section 2.7(f) hereof.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

5

        "Compound" means IB657 and any oligoadenylate synthetase protein, []*.

        "Confidentiality Agreement" has the meaning ascribed to such term in Section 6.11 hereof.

        "Contingent Consideration" means the aggregate amount that Parent is required to pay, if any, pursuant to, and in accordance with, the provisions of Section 2.7 hereof, to the Holders Representative for the benefit of the Participating Holders.

        "Contingent Earn-Out Payment" has the meaning ascribed to such term in Section 2.7(b) hereof.

        "Contingent Earn-Out Payment Amount" means, with respect to all Contingent Payment Products, a payment amount equal to (i) []* of the portion of Net Sales from sales of all Contingent Payment Products, if any, by Buyer Group everywhere in the world during any calendar year after the Effective Time that is less than or equal to []*, plus, (ii) []* of the portion of Net Sales from sales of all Contingent Payment Products, if any, by Buyer Group everywhere in the world during any calendar year after the Effective Time that exceeds []*.

        "Contingent Earn-Out Payment Year" means each calendar year in which Net Sales of any Contingent Payment Product occur.

        "Contingent Payment" means any payment resulting from the Contingent Consideration.

        "Contingent Payment Amount" has the meaning ascribed to such term in Section 2.7(g) hereof.

        "Contingent Payment Audit" has the meaning ascribed to such term in Section 2.7(h) hereof.

        "Contingent Payment Audit Period" has the meaning ascribed to such term in Section 2.7(h) hereof.

        "Contingent Payment Certificate" has the meaning ascribed to such term in Section 2.7(g) hereof.

        "Contingent Payment Dispute Period" has the meaning ascribed to such term in Section 2.7(h) hereof.

        "Contingent Payment Product" means any pharmaceutical composition or product that includes a Compound as an active pharmaceutical ingredient, provided that the composition, use, or production of such Compound is the subject of a Valid and Enforceable Claim of a Company Patent, which Company Patent (i) was owned or controlled by the Company immediately prior to the Effective Time, which ownership or control shall be deemed to have included any subsequent continuations, continuations in part, divisionals, reexaminations, reissues, restorations (together with supplemental protection certificates in Europe), provisions, foreign counterparts, and extensions, and (ii) is owned or controlled by Parent or the Surviving Corporation or any of their Affiliates, successors, permitted assignees and permitted licensees at all times following the Effective Time.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

6

        "Corresponding HCV Milestone Payment" means, (i) with respect to HCV Milestone One, the HCV Milestone One Payment, (ii) with respect to HCV Milestone Two, the HCV Milestone Two Payment, (iii) with respect to HCV Milestone Three, the HCV Milestone Three Payment, (iv) with respect to HCV Milestone Four, the HCV Milestone Four Payment, (v) with respect to HCV Milestone Five, the HCV Milestone Five Payment, (vi) with respect to HCV Milestone Six, the HCV Milestone Six Payment, (vii) with respect to HCV Milestone Seven, the HCV Milestone Seven Payment, (viii) with respect to HCV Milestone Eight, the HCV Milestone Eight Payment and (ix) with respect to HCV Milestone Nine, the HCV Milestone Nine Payment.

        "Corresponding HCV []* Milestone Payment" means, (i) with respect to HCV []* Milestone Four, the HCV []* Milestone Four Payment, (ii) with respect to HCV []* Milestone Five, the HCV []* Milestone Five Payment, (iii) with respect to HCV []* Milestone Six, the HCV []* Milestone Six Payment and (iv) with respect to HCV []* Milestone Seven, the HCV []* Milestone Seven Payment.

        "Corresponding Non-HCV Milestone Payment" means, (i) with respect to Non-HCV Milestone One, the Non-HCV Milestone One Payment, (ii) with respect to Non-HCV Milestone Two, the Non-HCV Milestone Two Payment, (iii) with respect to Non-HCV Milestone Three, the Non-HCV Milestone Three Payment, (iv) with respect to Non-HCV Milestone Four, the Non-HCV Milestone Four Payment, (v) with respect to Non-HCV Milestone Five, the Non-HCV Milestone Five Payment, (vi) with respect to Non-HCV Milestone Six, the Non-HCV Milestone Six Payment and (vii) with respect to Non-HCV Milestone Seven, the Non-HCV Milestone Seven Payment.

        "Corresponding Sales-Based Milestone Payment" means, (i) with respect to Sales-Based Milestone One, the Sales-Based Milestone One Payment and (ii) with respect to Sales-Based Milestone Two, the Sales-Based Milestone Two Payment.

        "CPR" has the meaning ascribed to such term in Section 6.10(c) hereof.

        "Cure Notice" has the meaning ascribed to such term in Section 6.10(c) hereof.

        "D&O Policy" has the meaning ascribed to such term in Section 6.8 hereof.

        "Damages" means all damages, losses, claims, demands, actions, causes of action, diminutions of value, suits, litigations, arbitrations, liabilities, costs, and expenses, including court costs and the reasonable fees and expenses of legal counsel, in each case, regardless of whether relating to a third-party claim.

        "Delaware Law" means the Delaware General Corporation Law, as amended from time to time.

        "Dispute Notice" has the meaning ascribed to such term in Section 2.7(i) hereof.

        "Disputed Contingent Payment Amount" has the meaning ascribed to such term in Section 2.7(j) hereof.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

7

        "Disqualified Shareholder" means (with respect to any securities of the Company) Parent, Merger Sub or any Subsidiary of Parent or Merger Sub or any of their respective Affiliates or any transferees of any such securities of the Company at any time held by any of the foregoing.

        "Dissenting Shares" means shares of Company Stock that are outstanding immediately prior to the Effective Time of the Merger and which are held by shareholders who shall have not voted in favor of the Merger or consented thereto in writing and who shall have exercised rights of appraisal for such shares of Company Stock in accordance with Washington Law and who, as of the Effective Time, have not effectively withdrawn or lost such dissenters' rights.

        "dollars" (whether such word is capitalized or not) means United States dollars, the lawful currency of the United States of America.

        "Effective Time" has the meaning ascribed to such term in Section 2.2 hereof.

        "Eligible Company Option" has the meaning ascribed to such term in Section 3.1(c) hereof.

        "EMEA" means the European Medicines Agency of the European Union with headquarters in London, United Kingdom.

        "Environmental Laws" has the meaning ascribed to such term in Section 4.14(b) hereof.

        "Environmental Permits" has the meaning ascribed to such term in Section 4.14(f) hereof.

        "EPA" has the meaning ascribed to such term in Section 4.14(c) hereof.

        "EPO" means the European Patent Office.

        "ERISA" has the meaning ascribed to such term in Section 4.13(c) hereof.

        "Escrow Agent" has the meaning ascribed to such term in Section 2.6(a)(ii) hereof.

        "Escrow Agreement" has the meaning ascribed to such term in Section 2.6(a)(ii) hereof.

        "Escrow Deposit Amount" has the meaning ascribed to such term in Section 2.6(a)(ii) hereof.

        "Escrow Funds" shall mean the aggregate amounts being held by the Escrow Agent in escrow pursuant to the Escrow Agreement.

        "Facility Leases" means (i) that certain Sublease, dated as of December 1, 2005, by and between the Company and Cell Therapeutics, Inc and (ii) any lease or sublease that the Company may enter into in connection with relocating its operations to a different location from the location specified in the Sublease set forth in clause (i) of this definition.

        "FDA" means the United States Food and Drug Administration.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

8

        "FDCA" has the meaning ascribed to such term in Section 4.25(a) hereof.

        "Financial Statements" has the meaning ascribed to such term in Section 4.6 hereof.

        "First Commercial Sale" means the []* by a Member of the Buyer Group of a Contingent Payment Product []* to a purchaser []* for such sale in whichever country such sale occurs.

        "First European Commercial Sale" means the []* by a Member of the Buyer Group of a Contingent Payment Product []* to a purchaser []* for such sale []*.

        "First U.S. Commercial Sale" means the []* by a Member of the Buyer Group of a Contingent Payment Product []* to a purchaser []* for such sale []*.

        "Fraud Claim" has the meaning ascribed to such term in Section 9.6(a) hereof.

        "Governmental Authority" means any United States (federal, state or local) or foreign government, or governmental, regulatory or administrative authority, agency or commission.

        "Governmental Entity" means any government or any agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign, as well as any corporations owned or chartered by any such governmental agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality.

        "Government Contract" means any Government Prime Contract or Government Subcontract, together with any modifications, amendments or waivers thereto, as to which either (a) any performance is outstanding; (b) the Government has not made final payment; (c) any routine cost audits have not been completed; or (d) there is any outstanding audit, investigation, or dispute. A task order or delivery order is not itself a Government Contract but is a part of the Government Contract under which it was issued.

        "Government Prime Contract" means any prime contract, basic ordering agreement, letter contract, or purchase order between the Company and any state or the Federal government.

        "Government Subcontract" means any subcontract, basic ordering agreement, letter subcontract, or purchase order between the Company and any higher-tier contractor with respect to a Government Prime Contract.

        "Grantback Assets" has the meaning ascribed to such term in Section 6.10(a) hereof.

        "Grantback Date" means the date upon which Parent grants any and all licenses to the Holders Representative pursuant to Section 6.10(a) or Section 6.10(d), as applicable.

        "Grantback Licensed Patents" has the meaning ascribed to such term in Section 6.10(f) hereof.

        "Hazardous Substances" has the meaning ascribed to such term in Section 4.14(c) hereof.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

9

        "HCV" means the hepatitis C virus and all genotypes, strains, quasispecies, and clinical isolates thereof.

        "HCV First Commercial Sale" has the meaning ascribed to such term in Section 6.9(a) hereof.

        "HCV Milestone" means any of HCV Milestone One, HCV Milestone Two, HCV Milestone Three, HCV Milestone Four, HCV Milestone Five, HCV Milestone Six, HCV Milestone Seven, HCV Milestone Eight and HCV Milestone Nine.

        "HCV Milestone One" means the []* by a Member of the Buyer Group of a []*.

        "HCV Milestone Two" means the []* by a Member of the Buyer Group of a []*.

        "HCV Milestone Three" means the []* by a Member of the Buyer Group for any Contingent Payment Product that includes treatments of infections caused by HCV []*.

        "HCV Milestone Four" means []* of any Contingent Payment Product []* with an indication for the treatment of infections caused by HCV.

        "HCV Milestone Five" means []* of any Contingent Payment Product []* with an indication for the treatment of infections caused by HCV.

        "HCV Milestone Six" means the []* by a Member of the Buyer Group of an []* any Contingent Payment Product []* with an indication for the treatment of infections caused by HCV.

        "HCV Milestone Seven" means the []*, by a Member of the Buyer Group of []* any Contingent Payment Product []* with an indication for the treatment of infections caused by HCV.

        "HCV Milestone Eight" means the []* of a Contingent Payment Product with an indication for treatment of infections caused by HCV.

        "HCV Milestone Nine" means the []* of a Contingent Payment Product with an indication for treatment of infections caused by HCV.

        "HCV Milestone Payment" means any of HCV Milestone One Payment, HCV Milestone Two Payment, HCV Milestone Three Payment, HCV Milestone Four Payment, HCV Milestone Five Payment, HCV Milestone Six Payment, HCV Milestone Seven Payment, HCV Milestone Eight Payment and HCV Milestone Nine Payment.

        "HCV Milestone One Payment" means one million two hundred fifty thousand dollars ($1,250,000.00).

        "HCV Milestone Two Payment" means one million two hundred fifty thousand dollars ($1,250,000.00).

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

10

        "HCV Milestone Three Payment" means three million dollars ($3,000,000.00), provided that if the Non-HCV Milestone One Payment has been made by the Parent prior to the occurrence of HCV Milestone Three, then the "HCV Milestone Three Payment" shall mean zero dollars ($0.00).

        "HCV Milestone Four Payment" means thirty million dollars ($30,000,000.00), provided that if the HCV []* Milestone Four Payment has been made by the Parent prior to the occurrence of HCV Milestone Four, then the "HCV Milestone Four Payment" shall mean fifteen million dollars ($15,000,000.00).

        "HCV Milestone Five Payment" means twenty five million dollars ($25,000,000.00), provided that if the HCV []* Milestone Five Payment has been made by the Parent prior to the occurrence of HCV Milestone Five*, then the "HCV Milestone Five Payment" shall mean twelve million five hundred thousand dollars ($12,500,000.00)*.

        "HCV Milestone Six Payment" means ten million dollars ($10,000,000.00), provided that if the HCV []* Milestone Six Payment has been made by the Parent prior to the occurrence of HCV Milestone Six, then the "HCV Milestone Six Payment" shall mean five million dollars ($5,000,000.00).

        "HCV Milestone Seven Payment" means five million dollars ($5,000,000.00), provided that if the HCV []* Milestone Seven Payment has been made by the Parent prior to the occurrence of HCV Milestone Seven, then the "HCV Milestone Seven Payment" shall mean two million five hundred thousand dollars ($2,500,000.00).

        "HCV Milestone Eight Payment" means thirty million dollars ($30,000,000.00).

        "HCV Milestone Nine Payment" means ten million dollars ($10,000,000.00).

        "HCV []* Milestone" means any of HCV []* Milestone Four, HCV []* Milestone Five, HCV []* Milestone Six and HCV []* Milestone Seven.

        "HCV []* Milestone Four" means []* of any Contingent Payment Product []* with an indication for the treatment of infections caused by HCV.

        "HCV []* Milestone Five" means []* of any Contingent Payment Product []* with an indication for the treatment of infections caused by HCV.

        "HCV []* Milestone Six" means the []* by a Member of the Buyer Group of an []* any Contingent Payment Product []* with an indication for the treatment of infections caused by HCV.

        "HCV []* Milestone Seven" means the []*, by a Member of the Buyer Group of an []* any Contingent Payment Product []* with an indication for the treatment of infections caused by HCV.

        "HCV []* Milestone Payment" means any of HCV []* Milestone Four Payment, HCV []* Milestone Five Payment, HCV []* Milestone Six Payment and HCV []* Milestone Seven Payment.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

11

        "HCV []* Milestone Four Payment" means fifteen million dollars ($15,000,000.00), provided that if the HCV Milestone Four Payment has been made by the Parent prior to the occurrence of HCV []* Milestone Four, then the "HCV []* Milestone Four Payment" shall mean zero dollars ($0.00).

        "HCV []* Milestone Five Payment" means twelve million five hundred thousand dollars ($12,500,000.00), provided that if the HCV Milestone Five Payment has been made by the Parent prior to the occurrence of HCV []* Milestone Five, then the "HCV []* Milestone Five Payment" shall mean zero dollars ($0.00).

        "HCV []* Milestone Six Payment" means five million dollars ($5,000,000.00), provided that if the HCV Milestone Six Payment has been made by the Parent prior to the occurrence of HCV []* Milestone Six, then the "HCV []* Milestone Six Payment" shall mean zero dollars ($0.00).

        "HCV []* Milestone Seven Payment" means two million five hundred thousand dollars ($2,500,000.00), provided that if the HCV Milestone Seven Payment has been made by the Parent prior to the occurrence of HCV []* Milestone Seven, then the "HCV []* Milestone Seven Payment" shall mean zero dollars ($0.00).

        "Holders Representative" means IB Securityholders, LLC, pursuant to its appointment to serve as such under Section 3.7 hereof.

        "Holders Representative Reimbursement Amount" has the meaning ascribed to such term in Section 2.6(a)(i) hereof.

        "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

        "IB657" means the compound known as IB657 that is owned or exclusively licensed by the Company immediately prior to the Effective Time and is being developed by the Company immediately prior to the Effective Time for the treatment of infections caused by HCV.

        "Indebtedness," as applied to any person, means (a) all indebtedness of such person for borrowed money, whether current or funded, or secured or unsecured, (b) all indebtedness of such person for the deferred purchase price of property or services represented by a note or other security, (c) all indebtedness of such person created or arising under any conditional sale or other title retention agreement (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of specific property), (d) all indebtedness of such person secured by a purchase money mortgage or other Lien to secure all or part of the purchase price of property subject to such mortgage or other Lien, (e) all accounts payable, notes payable and accrued expenses of such person, (f) all indebtedness or liabilities of such person that would be required to be reflected on a balance sheet or referred to in the notes thereto in accordance with generally accepted accounting principles, (g) all indebtedness, liabilities or obligations of such person that are identified in Schedule 4.10 of the Company Disclosure Schedule as "Indebtedness," if any, (h) all other obligations of such person under leases that have been or must be, in accordance with generally accepted accounting principles, recorded as capital leases in respect of which such person is liable as lessee, (i) any liability of such person in respect of banker's acceptances or letters of credit, and (j) all indebtedness referred to in clauses (a), (b), (c), (d), (e), (f), (g), (h) or (i) hereof that is directly or indirectly guaranteed by such person or which such person has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which such person has otherwise assured a creditor against loss.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

12

        "Indemnified Party" has the meaning ascribed to such term in Section 9.4 hereof.

        "Indemnifying Party" has the meaning ascribed to such term in Section 9.4 hereof.

        "Initial Press Release" has the meaning ascribed to such term in Section 11.15 hereof.

        "Intellectual Property" means any or all of the following and all rights in, arising out of, or associated therewith: (a) all United States, international and foreign patents and applications thereof and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (b) all inventions (whether patentable or not), invention disclosures, improvements, drug candidates, trade secrets, proprietary information, know how, technology, technical data and customer lists, and all documentation relating to any of the foregoing; (c) all copyrights, copyright registrations and applications therefor, and all other rights corresponding thereto throughout the world; (d) all industrial designs and any registration and applications therefor throughout the world; (e) all trade names, logos, common law trademarks and service marks, trademark and service mark registration and applications therefor throughout the world; (f) all databases and data collections and all rights therein throughout the world; and (g) any similar or equivalent rights to any of the foregoing everywhere in the world.

        "IRB" has the meaning ascribed to such term in Section 4.25(d) hereof.

        "IRS" has the meaning ascribed to such term in Section 4.13(b) hereof.

        "knowledge," when used to qualify a representation or warranty in this Agreement, has the following meaning: Where a representation or warranty is made to the Company's knowledge, or with a similar qualification, the Company will be conclusively deemed to have knowledge of any matter with respect to which any of Charles Magness, Shawn Iadonato or Donald Elmer has actual knowledge or which a reasonable investigation of facts or information in the possession of any of the Company's employees, attorneys or agents, including but not limited to, any information contained in the patent searches described on Schedule 4.9(k) of the Company Disclosure Schedule, prior to the Effective Time would have disclosed to any of them. Where a representation or warranty is made to the Parent's knowledge, or with a similar qualification, Parent will be conclusively deemed to have knowledge of any matter with respect to which Parent's Chief Executive Officer, Chief Financial Officer, General Counsel, Senior Vice President of Research and Development and Corporate Development or Senior Vice President of Commercial Operations has actual knowledge or which a reasonable investigation of facts or information in the possession of any employee, attorney or agent of Parent (or any of its Subsidiaries or controlled Affiliates) prior to the Effective Time would have disclosed to any of them.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

13

        "Liens" means any and all liens, claims, mortgages, security interests, pledges, options, rights of first offer or refusal, charges, encumbrances, limitations on voting rights, and restrictions on transfer of any kind, except (i) in the case of references to securities, those arising under applicable securities laws solely by reason of the fact that such securities were issued pursuant to exemptions from registration under such securities laws, (ii) mechanic's, materialmen's and similar liens, (iii) liens for Taxes not yet due and payable and (iv) liens arising under worker's compensation, unemployment insurance, social security, retirement and similar legislation.

        "LLC Agreement" shall mean the Limited Liability Company Agreement of IB Securityholders, LLC dated December 21, 2007 in the form attached hereto as Exhibit B.

        "Lost Certificate or Document Affidavit" has the meaning ascribed to such term in Section 3.4 hereof.

        "Material Adverse Effect" means (a) with respect to the Company any change or effect that, when taken individually or together with all other similar or related adverse changes or effects, is or is reasonably likely to be materially adverse to the business, results of operations and financial condition of the Company and its Subsidiaries, taken as a whole, or to adversely affect the ability of the Company to consummate the transactions contemplated hereby, and (b) with respect to Parent any change or effect that, when taken individually or together with all other similar or related adverse changes or effects, is or is reasonably likely to be materially adverse to the business, results of operations and financial condition of Parent and its Subsidiaries, taken as a whole, or to adversely affect the ability of the Parent or the Merger Sub to consummate the transactions contemplated hereby, except, in each case of (a) and (b) above, for any such changes or effects resulting from or arising as a result of (i) changes in general political or geopolitical conditions, (ii) changes in the healthcare, pharmaceutical or biotechnology industries generally, or (iii) changes generally applicable to the economy or securities market in the United States or the world economy or international securities markets, unless in any such instance such change described in (i), (ii) or (iii) above impacts the Company or Parent, as the case may be, in a materially disproportionate manner relative to the majority of other similar entities impacted by such change. A decline or any fluctuation in the trading price or prices of Parent Common Stock shall in no event constitute a Material Adverse Effect with respect to Parent.

        "Material Contract" has the meaning ascribed to such term in Section 4.17(a) hereof.

        "Maximum Amount" has the meaning ascribed to such term in Section 6.8 hereof.

        "Member of the Buyer Group" has the meaning ascribed to such term in the definition of "Buyer Group" hereof.

        "Merger" has the meaning ascribed to such term in the recitals hereof.

        "Merger Certificate" has the meaning ascribed to such term in Section 2.2 hereof.

        "Merger Consideration" means, collectively, the Closing Consideration, the Contingent Consideration and any amounts distributed pursuant to Section 2.6(c).

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

14

        "Merger Consideration Certificate" has the meaning ascribed to such term in Section 2.6(b) hereof.

        "Merger Documents" has the meaning ascribed to such term in Section 2.2 hereof.

        "Merger Sub" has the meaning ascribed to such term in the introductory paragraph hereof.

        "Net Sales" means, with respect to a Contingent Payment Product, gross revenues recorded by Parent and gross revenues recorded by all other Members of the Buyer Group in the aggregate during any calendar year (or portion of a calendar year as to which Contingent Earn-Out Payments may be due under Section 2.7(b)) arising from sales of such Contingent Payment Product in all countries of the world, except to the extent otherwise provided below in this definition and subject to certain deductions specified further below. Net Sales shall be computed in accordance with generally accepted accounting principles as prescribed for application by publicly traded companies in the United States, but in any case such gross revenues shall be reduced by the following amounts to the extent applicable with respect to any sale to a particular customer that is not a Member of the Buyer Group: applicable fees; discounts; refunds; rebates; replacement or other credits allowed for return of product or as reimbursement for damaged product; freight and other shipping charges not borne by the customer; customs duties; sales and use taxes, value added taxes (VAT) and any other governmental tax or charge (except income taxes) imposed on or at the time of the importation, exportation, use, transportation, or sale of product to a particular customer, to the extent not borne by that customer. "Net Sales" shall not, however, include (A) gross revenues with respect to sales of any Contingent Payment Product that (i) are recorded by any Member of the Buyer Group in a country where such sales by a person who is not a Member of the Buyer Group would not infringe a Valid and Enforceable Claim of an issued patent in such country that is within the definition of Company Patents, and (ii) either (x) []* or (y) arise after the time at which there is a generic or unlicensed version or equivalent of such Contingent Payment Product that has been lawfully marketed or received governmental marketing approval in such country, (B) gross revenues with respect to sales of any Contingent Payment Product for non-commercial use in any country of the world, including sales for compassionate use or for research, pre-clinical development or clinical development, or (C) gross revenues with respect to sales of any Contingent Payment Product by any member of the Buyer Group to any other member of the Buyer Group in any country of the world if such sales are for re-sale or re-transfer purposes or for purposes of manufacturing or packaging a product for re-sale or re-transfer. If a Contingent Payment Product is sold in combination with other products or other components proprietary to the Buyer Group, then "Net Sales" shall be based on the []*.

        "Non-Compliance Grantback Notice" has the meaning ascribed to such term in Section 6.10(d) hereof.

        "Non-Compliance Grantback" has the meaning ascribed to such term in Section 6.10(d) hereof.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

15

        "Non-Compliance Notice" has the meaning ascribed to such term in Section 6.10(b) hereof.

        "Non-HCV Indication" means any indication for treatment other than an indication for treatment of infections caused by HCV.

        "Non-HCV Milestone" means any of Non-HCV Milestone One, Non-HCV Milestone Two, Non-HCV Milestone Three, Non-HCV Milestone Four, Non-HCV Milestone Five, Non-HCV Milestone Six and Non-HCV Milestone Seven.

        "Non-HCV Milestone One" means the []* by a Member of the Buyer Group of an []* for any Contingent Payment Product that includes treatment of a Non-HCV Indication []*.

        "Non-HCV Milestone Two" means []* of any Contingent Payment Product for the treatment of a Non-HCV Indication.

        "Non-HCV Milestone Three" means []* of any Contingent Payment Product for the treatment of a Non-HCV Indication.

        "Non-HCV Milestone Four" means the []* by a Member of the Buyer Group of an []* any Contingent Payment Product with a Non-HCV Indication.

        "Non-HCV Milestone Five" means []* by a Member of the Buyer Group with the []*, of an []* any Contingent Payment Product with a Non-HCV Indication.

        "Non-HCV Milestone Six" means []* by a Member of the Buyer Group of []* or its functional equivalent with respect to any Contingent Payment Product for the treatment of a Non-HCV Indication.

        "Non-HCV Milestone Seven" means []* by a Member of the Buyer Group of []*, with respect to any Contingent Payment Product for the treatment of a Non-HCV Indication.

        "Non-HCV Milestone Payment" means any of Non-HCV Milestone One Payment, Non-HCV Milestone Two Payment, Non-HCV Milestone Three Payment, Non-HCV Milestone Four Payment, Non-HCV Milestone Five Payment, Non-HCV Milestone Six Payment and Non-HCV Milestone Seven Payment.

        "Non-HCV Milestone One Payment" means three million dollars ($3,000,000.00), provided that if the HCV Milestone Three Payment has been made by the Parent prior to the occurrence of Non-HCV Milestone One, then the "Non-HCV Milestone One Payment" shall mean zero dollars ($0.00).

        "Non-HCV Milestone Two Payment" means (i) thirteen million dollars ($13,000,000.00) upon the first occurrence, if any, of Non-HCV Milestone Two and (ii) six million five hundred thousand dollars ($6,500,000.00) upon the second occurrence, if any, of Non-HCV Milestone Two.

        "Non-HCV Milestone Three Payment" means (i) twenty million dollars ($20,000,000.00) upon the first occurrence, if any, of Non-HCV Milestone Three and (ii) ten million dollars ($10,000,000.00) upon the second occurrence, if any, of Non-HCV Milestone Three.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

16

        "Non-HCV Milestone Four Payment" means (i) ten million dollars ($10,000,000.00) upon the first occurrence, if any, of Non-HCV Milestone Four and (ii) five million dollars ($5,000,000.00) upon the second occurrence, if any, of Non-HCV Milestone Four.

        "Non-HCV Milestone Five Payment" means (i) five million dollars ($5,000,000.00) upon the first occurrence, if any, of Non-HCV Milestone Five and (ii) two million five hundred thousand dollars ($2,500,000.00) upon the second occurrence, if any, of Non-HCV Milestone Five.

        "Non-HCV Milestone Six Payment" means (i) twenty million dollars ($20,000,000.00) upon the first occurrence, if any, of Non-HCV Milestone Six and (ii) ten million dollars ($10,000,000.00) upon the second occurrence, if any, of Non-HCV Milestone Six.

        "Non-HCV Milestone Seven Payment" means (i) ten million dollars ($10,000,000.00) upon the first occurrence, if any, of Non-HCV Milestone Seven and (ii) five million dollars ($5,000,000.00) upon the second occurrence, if any, of Non-HCV Milestone Seven.

        "Option Agreement" means that certain letter agreement between Parent and the Company dated as of October 15, 2007.

        "Outside Date" has the meaning ascribed to such term in Section 10.1(g) hereof.

        "Parent" has the meaning ascribed to such term in the introductory paragraph hereof.

        "Parent Disclosure Schedule" has the meaning ascribed to such term in Article 5 hereof.

        "Parent Grantback Assets" has the meaning ascribed to such term in Section 6.10(a) hereof.

        "Parent Grantback Work Product" has the meaning ascribed to such term in Section 6.10(a) hereof.

        "Parent Indemnified Parties" has the meaning ascribed to such term in Section 9.2 hereof.

        "Participating Holders" means those persons (other than the holders of Dissenting Shares, the Company, any Disqualified Shareholder or any Subsidiary of the Company) who, immediately prior to the Effective Time of the Merger, were holders of shares of Company Common Stock or Company Preferred Stock or holders of Common Warrants or Eligible Company Options, and whose interests therein, as the result of the Merger, are converted into the right to receive a portion of the Merger Consideration.

        "person" (whether such term is capitalized or not) means an individual, corporation, partnership, limited partnership, limited liability company, syndicate, person (including a "person" as defined in Section 13(d)(3) of the Exchange Act), trust, association or entity or government, political subdivision, agency or instrumentality of a government.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

17

        "Personnel" has the meaning ascribed to such term in Section 6.16(a) hereof.

        "Phase I" means a clinical trial, either singular or one of several such clinical trials, intended to provide an initial evaluation of the safety, pharmacokinetic and/or pharmacological effects of a Contingent Payment Product in human subjects, either healthy or diseased, and to gather sufficient information about the drug's pharmacokinetics and pharmacological effects to permit the design of a well-controlled, scientifically valid, Phase II study; provided that for certain indications, administration to diseased patients may be required, necessary or useful in order for such trial to provide an indication of activity or effectiveness and in such instance(s) such a trial shall nonetheless be deemed "Phase I".

        "Phase II" means a clinical trial, either singular or one of several such clinical trials, usually but not always conducted after the completion of a Phase I trial, intended to evaluate the effectiveness and/or side effects and risks of a Contingent Payment Product in human subjects, and to gather sufficient information about the drug's effectiveness and/or side effects and risks to permit the design of a well-controlled, scientifically valid, Phase III study.

        "Phase III" means a clinical trial, usually but not always conducted after the completion of a Phase II trial, that is intended to gather additional information as to the effectiveness and safety of a Contingent Payment Product in human subjects, in order to evaluate the overall benefits and risks of such Contingent Payment Product and to provide an adequate basis for physician labeling.

        "Post-Approval Notice" has the meaning ascribed to such term in Section 6.5 hereof.

        "Preferred Stock Closing Amount" has the meaning ascribed to such term in Section 2.6(a)(iii) hereof.

        "Presumed Breach Events" has the meaning ascribed to such term in Section 6.9(b) hereof.

        "PTO" means the United States Patent and Trademark Office.

        "RCRA" has the meaning ascribed to such term in Section 4.14(b) hereof.

        "Reimbursable Expenses" has the meaning ascribed to such term in Section 2.6(a)(i) hereof.

        "Required Shareholder Approval" has the meaning ascribed to such term in Section 4.30 hereof.

        "Rights Documents" has the meaning ascribed to such term in Section 3.2(a) hereof.

        "Sales-Based Milestone" means any of Sales-Based Milestone One and Sales-Based Milestone Two.

        "Sales-Based Milestone One" means the first occurrence of Net Sales of Contingent Payment Products in excess of []* after the Effective Time.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

18

        "Sales-Based Milestone Two" means the first occurrence of Net Sales of Contingent Payment Products in excess of []* after the Effective Time other than the year in which the Sales-Based Milestone One occurs.

        "Sales-Based Milestone One Payment" means thirty million dollars ($30,000,000.00).

        "Sales-Based Milestone Two Payment" means seventy million dollars ($70,000,000.00).

        "Sales-Based Milestone Payment" means any of Sales-Based Milestone One Payment and Sales-Based Milestone Two Payment.

        "SARA" has the meaning ascribed to such term in Section 4.14(b) hereof.

        "SEC" has the meaning ascribed to such term in Section 5.4 hereof.

        "Section 6.9 Contingent Payment Product" means any Contingent Payment Product that includes Section 6.9 IB657 as an active pharmaceutical ingredient and that is being developed for the treatment of infections caused by HCV as an indication.

        "Section 6.9 IB657" means []*.

        "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

        "Services Agreement" means the services agreement between Parent and ServicesCo substantially in the form of Exhibit C attached hereto.

        "ServicesCo" shall mean Lecura, Inc., a Washington corporation.

        "Subsidiary" or "Subsidiaries" (whether or not capitalized) of any person means (i) any corporation, or other legal entity of which such person (either above or through or together with any other Subsidiary or Subsidiaries), owns, directly or indirectly, more than 50% of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity or (ii) any partnership, limited partnership, limited liability company, joint venture, association, trust, or other entity in which such person (directly or indirectly through another Subsidiary or Subsidiaries) holds more than 50% of the equity interests the holders of which are generally entitled to vote for the election of the governing body of such legal entity.

        "Superior Proposal" has the meaning ascribed to such term in Section 7.24(a) hereof.

        "Surviving Corporation" has the meaning ascribed to such term in the recitals hereof.

        "Surviving Corporation Articles" has the meaning ascribed to such term in Section 2.4(a) hereof.

        "Takeover Proposal" has the meaning ascribed to such term in Section 7.24(a) hereof.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

19

        "Tax" or "Taxes" (and with correlative meaning, "Taxable" and "Taxing") means any federal, state, local, or non-United States income, gross receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use, transfer, registration, value added, import value added, excise, export, natural resources, severance, stamp, occupation, premium, windfall profit, environmental, customs, duties, real property, personal property, capital stock, net worth, intangibles, social security, pension insurance contributions, unemployment, disability, payroll, license, employee, withholding tax, including, but not limited to, on salaries and wages, or other tax or levy or contribution, of any kind whatsoever, including any interest, penalties, special charges or additions to tax in respect of the foregoing.

        "Tax Return" means any return, declaration, report, claim for refund, information return or other document (including any related or supporting estimates, elections, schedules, statements or information) filed or required to be filed in connection with the determination, assessment or collection of any Tax or the administration of any laws, regulations or administrative requirements relating to any Tax.

        "Taxation Authority" means any Governmental Authority having any responsibility for (a) the determination, assessment or collection or payment of any Tax, or (b) the administration, implementation or enforcement of or compliance with any law relating to any Tax.

        "Third Party Consideration Claim" has the meaning ascribed to such term in Section 9.2 hereof.

        "Third Party Payment" has the meaning ascribed to such term in Section 2.7(d) hereof.

        "Third Party Payment Offset" has the meaning ascribed to such term in Section 2.7(d) hereof.

        "Threshold Amount" has the meaning ascribed to such term in Section 9.6(a) hereof.

        "Transaction Expenses" means all expenses of each of the Company, its Subsidiaries and the Participating Holders incurred by the Company or any of its Subsidiaries in connection with the preparation, execution and consummation of this Agreement, the transactions contemplated hereby and the Closing, including all fees and disbursements of attorneys, accountants and other advisors (including, but not limited to, P2 Partners, LLC) and service providers of the Participating Holders or the Company or any of its Subsidiaries.

        "Valid and Enforceable Claim" means (i) a claim of any issued patent which has not expired, lapsed, or been held invalid, unpatentable or unenforceable by court or other authority of competent jurisdiction in the issuing country in a decision which is not subject to pending appeal or was not or is no longer appealable, or (ii) a claim in any pending patent application which has not been the subject of a final rejection notice from which an appeal cannot be taken or with respect to which the applicable period of appeal has expired.

        "Washington Law" means the Business Corporation Act of the State of Washington (Title 23B of the Revised Code of Washington), as amended from time to time.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

20

ARTICLE 2
THE MERGER

        2.1    The Merger.    Subject to the other terms and conditions of this Agreement, including those set forth in Article 8 hereof, and in accordance with Washington Law and Delaware Law, at the Effective Time (as defined below), Merger Sub shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation of the Merger.

        2.2    Consummation of the Merger; Effective Time.    Subject to the fulfillment or waiver of all of the conditions contained in Article 8, as soon as is reasonably practicable after, but in no event later than, the fifth business day following the fulfillment or waiver of such conditions, a closing (the "Closing") will be held at the offices of Bingham McCutchen LLP in Boston, Massachusetts (or such other place as the parties may agree). The date on which the Effective Time (as defined below) occurs is referred to herein as the "Closing Date." On the Closing Date, Parent, Merger Sub and the Company shall cause the Merger to be consummated by filing (i) with the Secretary of State of the State of Delaware a certificate of merger, substantially in the form of Exhibit D-1 hereto, executed in accordance with the relevant provisions of Delaware Law (the "Merger Certificate") and (ii) with the Secretary of State of the State of Washington articles of merger, substantially in the form of Exhibit D-2 hereto, executed in accordance with the relevant provisions of Washington Law (the "Articles of Merger" and together with the Merger Certificate, the "Merger Documents"). The term "Effective Time" means the later of the date and time of the filing of the Merger Documents with (i) the Secretary of State of the State of Delaware and (ii) the Secretary of State of the State of Washington, as applicable (or such later time as may be agreed by each of the parties hereto and specified in the Merger Documents in accordance with Delaware Law and Washington Law, as applicable).

        2.3    Effect of the Merger.    At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Merger Documents and as provided by the applicable provisions of Delaware Law and Washington Law. Without limiting the generality of the foregoing, and subject thereto, upon the consummation of the Merger, all the property (including, but not limited to, the Company Program Assets and all related Intellectual Property and licenses to Intellectual Property), rights, privileges, powers and franchises of the Company and the Merger Sub shall remain vested in the Surviving Corporation, and, subject to this Agreement, all debts, liabilities, obligations, restrictions, disabilities and duties of each of those corporations shall continue to be the debts, liabilities, obligations, restrictions, disabilities and duties of the Surviving Corporation.

        2.4    Charter; Bylaws.

        (a)   At the Effective Time, the articles of incorporation of the Company shall be amended in their entirety, upon the filing of the Articles of Merger, to the form attached as Exhibit E hereto, which shall thereafter be the articles of incorporation of Surviving Corporation (the "Surviving Corporation Articles") until thereafter amended as provided by Washington Law, and as permitted under the terms of such Surviving Corporation Articles.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

21

        (b)   At the Effective Time, the bylaws of the Company shall be amended in their entirety to the form attached as Exhibit F hereto, which shall thereafter be the bylaws of Surviving Corporation until thereafter amended as provided by Washington Law, and as permitted under the terms of such bylaws.

        2.5    Directors and Officers.    The directors of the Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Surviving Corporation Articles and the bylaws of the Surviving Corporation, and until their respective successors are duly elected and qualified or until their earlier death, disability, resignation or removal. The officers of the Merger Sub immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified or until their earlier death, disability, resignation or removal.

        2.6    Closing Date Consideration.

        (a)    Closing Consideration.    At the Effective Time or in the event the Effective Time is prior to January 2, 2008, on January 2, 2008 (the "Closing Consideration Payment Date") and subject to the provisions of Article 3 hereof, Parent shall pay the Closing Consideration, of which:

          (i)  Two Hundred Thousand Dollars ($200,000.00) (the "Holders Representative Reimbursement Amount") shall be deposited with the Holders Representative, to be held by the Holders Representative for the payment of expenses incurred by the Holders Representative in performing its duties pursuant to this Agreement, the Escrow Agreement and the LLC Agreement ("Reimbursable Expenses");

         (ii)  An amount equal to one million five hundred thousand dollars ($1,500,000.00) (the "Escrow Deposit Amount") shall be deposited with The Bank of New York (the "Escrow Agent") to be held for a period of one year from the Closing Date pursuant to an Escrow Agreement, substantially in the form of Exhibit G attached hereto (the "Escrow Agreement"), and distributed in accordance therewith; and

        (iii)  The remainder of the Closing Consideration shall, subject to Section 2.6(d) and Section 9.5(b), be payable in cash to those Participating Holders that are holders of shares of Company Preferred Stock immediately prior to the Effective Time (such aggregate amount being hereinafter referred to in the aggregate as the "Preferred Stock Closing Amount"), in the respective amounts reflected on the Merger Consideration Certificate, either: by (x) wire transfer to an account in the name of such Participating Holder as provided to Parent by written notice from the Holders Representative at least two (2) business days prior to the Closing Consideration Payment Date; or (y) delivery of a check, payable to such Participating Holder, to the Holders Representative on the Closing Consideration Payment Date.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

22

        (b)    Merger Consideration Certificate.    At Closing, the Company shall deliver to Parent and the Holders Representative a certificate (the "Merger Consideration Certificate") that shall include (1) a complete and accurate list of all of the liabilities of the Company and its Subsidiaries as of the close of business on the business day immediately preceding the Closing Date (the "Closing Liabilities", which shall not include liabilities under written executory Company Program Contracts to the extent that such liabilities accrue and arise from and after the Closing but shall include (i) amounts owing to Parent under the proviso to subparagraph 3(b) of the Option Agreement, (ii) any and all payment amounts due and payable by the Company under equipment leases, real estate leases and any other agreements to which the Company is a party regardless of whether any such payment amounts are accrued or due and payable prior to or after the Closing (other than payment amounts that accrue or arise from and after the Closing under Company Program Contracts) and (iii) the Transaction Expenses referred to below in clause (5) of this paragraph, and shall be calculated net of any cash deposits held by the creditor to whom the liability is owed), (2) for each of the Company's and its Subsidiaries' bank accounts, the uncollected checks or other payment orders or instructions made by the Company as of the close of business on the business day immediately preceding the Closing Date and the respective amount of each such uncollected checks or other payment orders or instructions, (3) a complete and accurate list, including the amount, of all cash and cash equivalents, as well as all cash deposits held by the Company, as of the close of business on the business day immediately preceding the Closing Date, (4) the Available Closing Cash, (5) the Transaction Expenses, if any, that have not been paid or adequately provided for as of the close of business on the business day immediately preceding the Closing Date, and (6) the number of shares of Company Preferred Stock outstanding immediately prior to the Effective Time. The Merger Consideration Certificate shall further set forth a calculation of (i) the Closing Consideration, (ii) the Preferred Stock Closing Amount in accordance with Section 2.6(a), and (iii) the respective portions of the Preferred Stock Closing Amount payable to each holder of Company Preferred Stock based on their respective holdings thereof immediately prior to the Effective Time and application of the provisions of Section 3.1 of the LLC Agreement. The information and calculations set forth in the Merger Consideration Certificate shall be deemed to constitute a representation and warranty of the Company and any inaccuracy or calculation of any information set forth in the Merger Consideration Certificate that results in Damages to Parent shall entitle Parent to make a claim for indemnification for breach of representation or warranty under Section 9.2 of this Agreement.

        (c)    Distribution of Holders Representative Reimbursement Amount.    Any of the Holders Representative Reimbursement Amount that has not been spent on Reimbursable Expenses by the Holders Representative on or prior to the end of the period in which the Holders Representative has continuing duties to perform pursuant to this Agreement, the Escrow Agreement or the LLC Agreement, shall be distributed by the Holders Representative to the Participating Holders as additional Merger Consideration pursuant to the terms of Section 3.1 of the LLC Agreement.

        (d)    Holdback.    In the event that any Participating Holder that is a holder of Company Preferred Stock shall not have returned to Parent duly executed transmittal materials in proper form pursuant to, and in accordance with, Section 3.2(a) hereof at any time prior to the Effective Time, Parent shall be entitled to hold back the portion of the Preferred Stock Closing Amount which such Participating Holder would have been entitled to receive pursuant to, and in accordance with, Section 2.6(a) hereof. Upon Parent's receipt of such Participating Holder's properly executed transmittal materials, Parent shall promptly transmit any such holdback amounts to the Holders Representative for distribution to the Participating Holder pursuant to, and in accordance with, Section 2.6(a)(iii) hereof.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

23

        2.7    Contingent Consideration.

        (a)    Milestone Payments.

        (i)    HCV Milestone Payments and HCV []* Milestone Payments.

        (A)  Subject to the limitations set forth herein, including without limitation those set forth in Sections 2.7(d) through (f) below, if any HCV Milestone is achieved by any Member of the Buyer Group, then, within sixty (60) days after the date on which such HCV Milestone has been achieved, Parent shall deliver to the Holders Representative, for the benefit of the Participating Holders and for application and distribution in accordance with Section 3.1 of the LLC Agreement, an amount of cash equal to the remainder obtained by subtracting from the Corresponding HCV Milestone Payment the aggregate amount of any and all outstanding set off claims, if any, made against any Contingent Payment pursuant to Sections 2.7(n), 3.7(e) or 9.5 hereof. The obligation of Parent under this Section 2.7(a)(i)(A) shall be subject to the provisions of Section 2.7(m) below. For purposes of clarification, Parent shall make each HCV Milestone Payment contemplated under this Section 2.7(a)(i)(A) []*.

        (B)  Subject to the limitations set forth herein, including without limitation those set forth in Sections 2.7(d) through (f) below, if any HCV []* Milestone is achieved by any Member of the Buyer Group, then, within (60) days after the date on which such HCV []* Milestone has been achieved, Parent shall deliver to the Holders Representative, for the benefit of the Participating Holders and for application and distribution in accordance with Section 3.1 of the LLC Agreement, an amount of cash equal to the remainder obtained by subtracting from the Corresponding HCV []* Milestone Payment the aggregate amount of any and all outstanding set off claims, if any, made against any Contingent Payment pursuant to Sections 2.7(n), 3.7(e) or 9.5 hereof. The obligation of Parent under this Section 2.7(a)(i)(B) shall be subject to the provisions of Section 2.7(m) below. For purposes of clarification, Parent shall make each HCV []* Milestone Payment contemplated under this Section 2.7(a)(i)(B) []*.

        (ii)    Non-HCV Milestone Payments.    Subject to the limitations set forth herein, including without limitation those set forth in Sections 2.7(d) through (f) below, if any Non-HCV Milestone is achieved by any Member of the Buyer Group, then, within sixty (60) days after the date on which such Non-HCV Milestone has been achieved, Parent shall deliver to the Holders Representative, for the benefit of the Participating Holders and for application and distribution in accordance with Section 3.1 of the LLC Agreement, an amount of cash equal to the remainder obtained by subtracting from the Corresponding Non-HCV Milestone Payment the aggregate amount of any and all outstanding set off claims, if any, made against any Contingent Payment pursuant to Sections 2.7(n), 3.7(e) or 9.5 hereof. The obligation of Parent under this Section 2.7(a)(ii) shall be subject to the provisions of Section 2.7(m) below. For purposes of clarification: (i) Parent shall make the Non-HCV Milestone One Payment contemplated under this Section 2.7(a)(ii) []*.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

24

        (iii)    Sales-Based Milestone Payments.    Subject to the limitations set forth herein, including without limitation those set forth in Sections 2.7(d) through (f) below, if any Sales-Based Milestone is achieved, then within ninety (90) days after the end of the calendar year in which such Sales-Based Milestone has been achieved by any Member of the Buyer Group, Parent shall deliver to the Holders Representative, for the benefit of the Participating Holders and for application and distribution in accordance Section 3.1 of the LLC Agreement, an amount of cash equal to the remainder obtained by subtracting from the Corresponding Sales-Based Milestone Payment the aggregate amount of any and all outstanding set off claims, if any, made against any Contingent Payment pursuant to Sections 2.7(h), 2.7(j), 2.7(k), 2.7(n), 3.7(e) or 9.5 hereof, provided however, that commencing five (5) years from the Effective Date, such ninety (90) day time period shall be modified to require payment of such Sales-Based Milestone Payment on or before March 15^th of the calendar year following achievement of such Sales-Based Milestone. The obligation of Parent under this Section 2.7(a)(iii) shall be subject to the provisions of Section 2.7(m) below. For purposes of clarification, Parent shall make each Sales-Based Milestone Payment contemplated under this Section 2.7(a)(iii) []*.

        (b)    Contingent Earn-Out Payments.    Subject to the limitations set forth herein, including without limitation those set forth in Sections 2.7(d) through (f) below, and in addition to the HCV Milestone Payments, the Non-HCV Milestone Payments and the Sales-Based Milestone Payments, if Parent or any Member of the Buyer Group at any time determines, in its sole discretion (subject to the obligations of Parent set forth in Section 6.9 below), to market and sell a Contingent Payment Product, then within ninety (90) days after the end of each calendar year in which Net Sales of such Contingent Payment Product occur, Parent shall deliver to the Holders Representative, for the benefit of the Participating Holders and for application and distribution in accordance Section 3.1 of the LLC Agreement, an amount of cash equal to the remainder obtained by subtracting from the Contingent Earn-Out Payment Amount the aggregate amount of any and all outstanding set off claims, if any, made against any Contingent Payment pursuant to Sections 2.7(h), 2.7(j), 2.7(k), 2.7(n), 3.7(e) or 9.5 hereof (each such payment, a "Contingent Earn-Out Payment"), provided however, commencing five (5) years from the Effective Date, such ninety (90) day time period shall be modified to require payment of such Contingent Earn-Out Payment on or before March 15th of the calendar year following the year in which Net Sales of such Contingent Payment Product occur. The obligation of Parent under this Section 2.7(b) shall be subject to the provisions of Section 2.7(m) below. For purposes of clarification, Parent shall make each Contingent Earn-Out Payment contemplated under this Section 2.7(b) []* during any calendar year after the Effective Time.

        (c)    Decision to Develop, Market or Sell.    Without limiting the obligations of the Parent set forth in Section 6.9 below, nothing contained in this Section 2.7 or elsewhere in this Agreement shall obligate Buyer Group to develop, commence or continue marketing or selling, any Contingent Payment Product.

        (d)    Reduction of Contingent Payments for Licensing Fees and Royalty Payments to Third Parties.    In the event that, in connection with the sale of any Contingent Payment Product by Buyer Group in any country of the world during any calendar year, there is any license fee, royalty payment or any similar payment (each a "Third Party Payment") due or owing from any Member of the Buyer Group to any third party pursuant to (x) any license or other agreement listed on the Company Disclosure Schedule or (y) any license or other agreement entered into by the Company with such third party prior to the Effective Time, then the Contingent Payments required to be made by the Parent pursuant to this Agreement shall be reduced by an amount equal to []* of all such Third Party Payments (the "Third Party Payment Offset"). The right of any Member of the Buyer Group to indemnification for Damages under any other provision of this Agreement based on a breach of any representation or warranty pertaining to any license or other agreement described in clauses (x) and (y) above shall be reduced to the extent of any Third Party Payment Offsets actually taken by Parent with respect to payments on such license.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

25

        (e)    Reduction of Contingent Payments for Patent Expiration and Patent Invalidity.    Notwithstanding anything express or implied to the contrary in this Section 2.7, in the event that the sale or manufacture of any Contingent Payment Product in any country of the world by any person would not, absent a license or sublicense granted by Buyer Group, infringe any Valid and Enforceable Claim of any issued Company Patents in such country, then the amount of any Sales-Based Milestone Payment or Contingent Earn-Out Payment that would otherwise be made with respect to sales of such Contingent Payment Product in such country may be reduced in accordance with the third sentence of the definition of Net Sales.

        (f)    Reduction of Contingent Payments for Payments in Respect of Third Party Patents and Technology.    If (a) Parent reasonably determines that (i) a patent []* (each, a "Blocking Third Party Patent"), (ii) a patent application []* (each, a "Blocking Third Party Patent Application") or (iii) a patented or proprietary complementary technology []* of such Contingent Payment Product (a "Complementary Technology"), and (b) a Member of the Buyer Group in-licenses such Blocking Third Party Patent, Blocking Third Party Patent Application or Complementary Technology pursuant to terms requiring any Member of the Buyer Group to make payments to such third party, then, with respect to such Contingent Payment Product, []* of the amount of any cash payments that Parent pays in connection with, and []* of the amount by which the consideration paid to Parent by any Member of the Buyer Group is reduced because of, any such in-licensed Blocking Third Party Patent, Blocking Third Party Patent Application or Complementary Technology, shall be offset by Parent against any and all amounts that Parent would otherwise be required to pay pursuant to Sections 2.7 hereof (after giving effect to any other adjustments thereto pursuant to this Section 2.7) with respect to such Contingent Payment Product, provided that in no event shall any and all amounts that Parent would otherwise be required to pay pursuant to Sections 2.7 hereof (after giving effect to any other adjustments thereto pursuant to this Section 2.7) during any calendar year be reduced by more than []* pursuant to this Section 2.7(f). Nothing in this Section 2.7(f) shall limit any remedy or indemnification right that any member of the Buyer Group may have under any other provision of this Agreement based on a breach of any representation or warranty contained in this Agreement. The right of any Member of the Buyer Group to indemnification for Damages under any other provision of this Agreement based on a breach of any representation or warranty as a result of or pertaining to any Blocking Third Party Patent or Complementary Technology shall be reduced to the extent of any Contingent Payment reduction actually taken by Parent with respect to payments on such license.

        (g)    Delivery of Contingent Payment Certificate.    On or prior to the ninetieth (90^th) day following the last day of each Contingent Earn-Out Payment Year, Parent shall deliver to the Holders Representative a certificate (a "Contingent Payment Certificate"), setting forth (a) the amount of Net Sales for such Contingent Earn-Out Payment Year (including the amount and location of any sales excluded from Net Sales under the third sentence of the definition of Net Sales), and (b) Parent's determination of the amount of any Contingent Earn-Out Payments and Sales-Based Milestone Payments, if any, due for such Contingent Earn-Out Payment Year (each such amount due being referred to herein as a "Contingent Payment Amount"), including the calculation of any offsets or reductions of such amounts pursuant to Sections 2.7(d), 2.7(f) or 2.7(n).

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

26

        (h)    Holders Representative Audit Rights.    Parent hereby grants, and shall cause the other members of the Buyer Group to grant, the Holders Representative and its representatives and advisers, at the Holders Representative's sole expense, the right, exercisable no more than once during each forty-five (45) day period (the "Contingent Payment Dispute Period") following the receipt by the Holders Representative of a Contingent Payment Certificate, subject to the execution of, and compliance with, a customary confidentiality agreement in form and substance reasonably satisfactory to Parent, to demand an opportunity to examine and have full access to the Buyer Group's books of account and records of Net Sales, Third Party Payment Offsets, offsets related to Blocking Third Party Patents and offsets related to Complementary Technologies for the applicable Contingent Earn-Out Payment Year with respect to which the most recent Contingent Payment Certificate has been delivered, at the location of such records on prior written notice of at least ten (10) days, for the purpose of verifying the amount of Net Sales, Third Party Payment Offsets, offsets related to Blocking Third Party Patents and offsets related to Complementary Technologies for such Contingent Earn-Out Payment Year (each such review shall be referred to herein as a "Contingent Payment Audit"). Notwithstanding the foregoing, absent fraud, intentional misconduct, or the discovery (whether or not following the completion of any Contingent Payment Audit) of a material fact that was required to be taken into account by Parent in the Contingent Payment Certificate and that was not disclosed by Parent to the Holders Representative or its representatives either in the Contingent Payment Certificate or otherwise in the course of conducting such Contingent Payment Audit, which material fact, if taken into account in the calculation of the applicable Contingent Payment Amount, would have resulted in an increase in such Contingent Payment Amount, the Holders Representative or its representatives shall not be permitted to review any records of Net Sales, Third Party Payment Offsets, offsets related to Blocking Third Party Patents and offsets related to Complementary Technologies for any Contingent Earn-Out Payment Year for which a Contingent Payment Audit has previously been performed, or, if no such Contingent Payment Audit was demanded or performed on a timely basis, after the expiration of the Contingent Payment Dispute Period. For the purpose of conducting a Contingent Payment Audit, the Holders Representative may hire, at its expense, one or more auditors or attorneys of the Holders Representative's choosing to assist in such examination, provided, that such auditors or attorneys have entered into customary confidentiality agreements with Parent in form and substance reasonably acceptable to Parent. The Holders Representative and such representatives shall have access to all of the books and records reasonably required to perform any Contingent Payment Audit at all times during the period of one hundred twenty (120) days following the date on which the Holders Representative delivers a Dispute Notice to Parent (the "Contingent Payment Audit Period"). Nothing in this Section 2.7 shall be deemed to require any Member of the Buyer Group to keep any books of account or records other than those which it maintains in the ordinary course of business in its usual and customary practice, to retain any such books of account or records for any period in excess of the period for which it retains such records in the ordinary course of business in its usual and customary practice, or to provide access to any books and records other than that specified above, and no presumption shall be made against any Member of the Buyer Group as a result of the absence of any such books and records as a result of the disposition of any such books and records in the ordinary course of business; provided, however, that in no case shall any Member of the Buyer Group dispose of such books of account or records with respect to a Contingent Earn-Out Payment Year earlier than the date that is four (4) years following the last day of the subsequent Contingent Earn-Out Payment Year; and, provided further, that once the Holders Representative delivers to Parent a Dispute Notice indicating its intention to commence a Contingent Payment Audit with respect to a Contingent Earn-Out Payment Year, the Buyer Group shall use commercially reasonable efforts to keep and retain all books of account relating to Net Sales, Third Party Payment Offsets, offsets related to Blocking Third Party Patents and offsets related to Complementary Technologies for the Contingent Earn-Out Payment Year for which such Contingent Payment Audit is being conducted, including but not limited to those identified in a request or requests from the Holders Representative with respect to any Contingent Payment Amount for such Contingent Earn-Out Payment Year. If any final Contingent Payment Amount determined pursuant to this Section 2.7(h) is greater than the corresponding Contingent Payment Amount set forth on the relevant Contingent Payment Certificate by an amount equal to more than the greater of (i) []* or (ii) five percent (5%) of the applicable Contingent Payment Amount set forth in the relevant Contingent Payment Certificate, Parent shall pay all of the reasonable out-of-pocket costs and expenses actually incurred by the Holders Representative in connection with such Contingent Payment Audit. If any final Contingent Payment Amount determined pursuant to this Section 2.7(h) is less than the corresponding Contingent Payment Amount set forth on the relevant Contingent Payment Certificate, then (x) the Holders Representative shall pay all of the reasonable out-of-pocket costs and expenses actually incurred by the Holders Representative in connection with such Contingent Payment Audit and (y) Parent shall be entitled to offset the difference between the Contingent Payment Amount set forth on the relevant Contingent Payment Certificate and such lesser amount against any and all amounts that Parent would otherwise be required to pay pursuant to this Section 2.7 (after giving effect to any other adjustments thereto pursuant to this Section 2.7).

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

27

        (i)    Dispute Notice.    In the event that the Holders Representative does not agree with or desires to investigate the calculation of any Contingent Payment Amount set forth on any Contingent Payment Certificate, the Holders Representative shall be entitled, during the Contingent Payment Audit Period, to give Parent written notice (a "Dispute Notice"), of such disagreement or desire. In the event that the Holders Representative delivers a Dispute Notice, the date by which Parent shall be obligated to deliver any Contingent Earn-Out Payment or Sales-Based Milestone Payment reflected in the Contingent Payment Certificate shall not be extended, but the date by which Parent shall be obligated to deliver any additional increment of Contingent Earn-Out Payment or Sales-Based Milestone Payment determined as a result of the Contingent Payment Audit, shall be extended until the date that is thirty (30) days following the final determination of any and all disputed Contingent Payment Amounts pursuant to the provisions of Sections 2.7(j) and 2.7(k) below. In the event that the Holders Representative does not deliver a Dispute Notice during the Contingent Payment Audit Period, all Contingent Payment Amounts set forth on such Contingent Payment Certificate shall irrevocably be deemed to be the final Contingent Payment Amounts for such Contingent Earn-Out Payment Year and all purposes of this Agreement, absent fraud or intentional misconduct, or the discovery after the expiration of the Contingent Payment Dispute Period of a material fact in existence at such time that was required to be, but was not, disclosed by Parent to the Holders Representative in the Contingent Payment Certificate.

        (j)    Agreed Contingent Payment.    In the event that the Holders Representative delivers a Dispute Notice within the Contingent Payment Dispute Period, the Holders Representative and Parent shall, for a period of not less than thirty (30) days after the later of delivery of the Dispute Notice or conclusion of any Contingent Payment Audit demanded by the Holders Representative, attempt in good faith to resolve all Contingent Payment Amount(s) that is/are in dispute (each, a "Disputed Contingent Payment Amount"), and mutually determine any adjustments to such Contingent Payment Amount(s) (each, an "Agreed Contingent Payment Amount"). Parent and the Holders Representative shall, subject to the execution of a confidentiality agreement in form and substance reasonably satisfactory to the delivering party, provide each other with such information, records and material kept in the ordinary course of business in such party's possession and which such party may disclose without violating confidentiality obligations to third parties, as is reasonably necessary and appropriate in attempting to resolve any such Disputed Contingent Payment Amount, including the delivery of a copy to the Holders Representative of any such information, records and material, to the extent then available, that was used to calculate the amount of Net Sales and the Contingent Payment Amount(s) set forth on each relevant Contingent Payment Certificate. If any final Agreed Contingent Payment Amount determined pursuant to this Section 2.7(j) is greater than the corresponding Contingent Payment Amount set forth on the relevant Contingent Payment Certificate by an amount equal to more than the greater of (i) []* or (ii) five percent (5%) of the applicable Contingent Payment Amount set forth in the relevant Contingent Payment Certificate, Parent shall pay all of the reasonable out-of-pocket costs and expenses actually incurred by the Holders Representative in connection with such Contingent Payment Audit. If any final Agreed Contingent Payment Amount determined pursuant to this Section 2.7(j) is less than the corresponding Contingent Payment Amount set forth on the relevant Contingent Payment Certificate, then (x) Holders Representative shall pay all of the reasonable out-of-pocket costs and expenses actually incurred by Parent in connection with such Contingent Payment Audit and (y) Parent shall be entitled to offset the difference between the Contingent Payment Amount set forth on the relevant Contingent Payment Certificate and such lesser amount against any and all amounts that Parent would otherwise be required to pay pursuant to this Section 2.7 (after giving effect to any other adjustments thereto pursuant to this Section 2.7).

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

28

        (k)    Appraisal of Disputed Contingent Payment Amount.    In the event that no agreement can be reached by the Holders Representative and Parent as to the calculation of any Disputed Contingent Payment Amount within ninety (90) days after the later of the delivery of a Dispute Notice or the conclusion of a Contingent Payment Audit, and such disagreement relates only to the amount of Net Sales, Third Party Payment Offsets, offsets related to Blocking Third Party Patents and offsets related to Complementary Technologies of Contingent Payment Products, then either party shall have the right to seek a determination of such Disputed Contingent Payment Amount by appraisal by an accounting firm (the "Appraiser") selected under this paragraph; provided, however, that the provisions of this Section 2.7(k) will only be applicable if there is a dispute or disagreement concerning the calculation or determination of the specific amount of any of such items and there is no dispute or disagreement concerning the interpretation or application of any of the defined terms Net Sales, Third Party Payment Offsets, Blocking Third Party Patents, Complementary Technologies and Contingent Payment Products or the nature or extent of the parties rights and obligations under this Agreement with respect to any of such defined terms or any of the items covered by such defined terms. The accounting firms qualified to serve as Appraiser under this paragraph (each an "Accountant") are the Boston, Massachusetts offices of Deloitte & Touche LLP, KPMG, Ernst & Young LLP, PricewaterhouseCoopers, BDO Seidman, LLP, Grant Thornton LLP, or their respective successors, or such other accounting firms as the Company and Parent may mutually agree; provided that such firm is not the principal regularly-engaged outside accountant to Parent, the Company, any member of the Buyer Group involved in such dispute, or any auditor that may have assisted the Holders Representative in any Contingent Payment Audit. The Holders Representative and Parent shall jointly select one (1) of the Accountants to serve as the Appraiser within thirty (30) days after either Holders Representative or Parent delivers a written demand to the other to submit the dispute to appraisal. In the event that the Holders Representative and Parent are unable to agree upon an Appraiser within such thirty (30) day period, then each of the Holders Representative and Parent shall select one of the Accountants and the two Accountants so selected shall jointly select a third Accountant to be the Appraiser. The engagement and charge of the Appraiser shall be limited to determining the specific amount of Net Sales, Third Party Payment Offsets, offsets related to Blocking Third Party Patents and offsets related to Complementary Technologies of any identified product or products for the applicable Contingent Earn-Out Payment Year. The Appraiser shall determine such Disputed Contingent Payment Amount within the limitations set forth above within ninety (90) days after the date of such Appraiser's engagement and the Appraiser shall be provided with such information and records, which may include on-site access, relating to such dispute as it may reasonably request. Any Disputed Contingent Payment Amount determined by an Appraiser in accordance with this paragraph (l) shall be deemed to be the final determination of all matters within the scope of the Appraiser's authority pursuant to this Section 2.7(k) with respect to the Contingent Payment Amount for the applicable Contingent Earn-Out Payment Year for all purposes of this Agreement. The determination of any matters within the scope of the Appraiser's authority pursuant to this Section 2.7(k) shall be conclusive unless (i) the Appraiser's determination was procured by fraud or intentional misconduct or (ii) a material fact that was (w) in existence at the time of such determination, (x) known to Parent, (y) required to be made available by Parent and (z) not made available by Parent to the Holders Representative, its representatives or the

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

29

Appraiser in the course of the dispute proceeding, is discovered by the Holders Representative after the completion of any determination by an Appraiser, and such material fact, if taken into account in the calculation of the applicable Contingent Payment Amount, would have resulted in an increase in such Contingent Payment Amount. The fees and expenses of the Appraiser shall be paid by the party who demands submission of the dispute to appraisal; provided, that if any Contingent Payment Amount calculated on the basis of matters determined by the Appraiser in any examination conducted pursuant to this Section 2.7(k) is greater than the corresponding Contingent Payment Amount set forth on the relevant Contingent Payment Certificate by an amount equal to more than the greater of (i) []* or (ii) five percent (5%) of the Contingent Payment Amount set forth in the relevant Contingent Payment Certificate, then Parent shall pay all of the fees and expenses of the Appraiser; all reasonable out-of-pocket costs and expenses actually incurred by the Holders Representative in connection with such Contingent Payment Audit; and if any final Contingent Payment Amount calculated on the basis of matters determined by the Appraiser in any examination conducted pursuant to this Section 2.7(k) is less than the corresponding Contingent Payment Amount set forth on the relevant Contingent Payment Certificate, then (x) Holders Representative shall pay all of the reasonable out-of-pocket costs and expenses actually incurred by Parent in connection with such Contingent Payment Audit and (y) Parent shall be entitled to offset the difference between the Contingent Payment Amount set forth on the relevant Contingent Payment Certificate and such lesser amount against any and all amounts that Parent would otherwise be required to pay pursuant to this Section 2.7 (after giving effect to any other adjustments thereto pursuant to this Section 2.7). For purposes of clarification, any dispute over any matter relevant to any Contingent Payment Amount that the Appraiser is not authorized to determine pursuant to the foregoing provisions of this Section 2.7(k) shall fall within the purview of the dispute resolution mechanics contemplated by Section 11.13 hereof.

        (l)    Interest.    Any Contingent Earn-Out Payments or Sales-Based Milestone Payments, or portion thereof, including any incremental amounts determined by agreement or pursuant to a determination by Appraiser, not paid when due under this Agreement shall bear interest at an annual rate equal to the prime rate established by the Wall Street Journal from the date such incremental amount would originally have been due until the date such incremental amount is paid in full.

        (m)    Holdback.    In the event that any Participating Holder shall not have (i) become a member of IB Securityholders, LLC by executing the LLC Agreement and delivering to Parent a copy of such signed counterpart signature page thereto, or (ii) returned to Parent duly executed transmittal materials in proper form pursuant to, and in accordance with, Section 3.2 hereof, in each case at any time prior to the time that Parent is required to make any payment pursuant to Section 2.7(a) or 2.7(b) hereof, then Parent shall be entitled to hold back the portion of any such payment pursuant to Section 2.7(a) or 2.7(b) hereof to which such Participating Holder would have been entitled to receive pursuant to, and in accordance with, Section 3.1 hereof and Section 3.1 of the LLC Agreement. Upon Parent's receipt of a copy of such Participating Holder's executed counterpart signature page to the LLC Agreement and such Participating Holder's properly executed transmittal materials, Parent shall promptly transmit any such holdback amounts to the Holders Representative for distribution to the Participating Holder pursuant to, and in accordance with, Section 2.7(n) below.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

30

        (n)    Payment.    Parent shall make payment to the Holders Representative of any cash amount that Parent is required to pay to the Holders Representative pursuant to the foregoing provisions of this Section 2.7 (including any increase in a Contingent Payment Amount determined in accordance with Section 2.7(j) or 2.7(k) hereof) by wire transfer to an account in the name of the Holders Representative as the Holders Representative shall have provided to Parent by giving written notice thereof in accordance with the provisions of Section 11.4 hereof at least two business days prior to the date when Parent shall be required to make such payment (which shall be within five (5) business days after any increased amount is determined under Section 2.7(j) or 2.7(k) hereof). As soon as practicable after receipt of such cash amount from the Parent, the Holders Representative shall pay to each Participating Holder that portion of such cash amount to which such Participating Holder is entitled in accordance with the terms of Section 3.1 of the LLC Agreement. Notwithstanding anything to the contrary in this Agreement, Parent shall be entitled to offset against any Contingent Payment the amount(s) of any and all payroll, social security, or other employment taxes imposed on Parent, the Surviving Corporation or any Affiliate of Parent or the Surviving Corporation in connection with any payment required to be made under Section 3.1 hereof.

        (o)    No Liability.    Subject to the right of the Holders Representative to dispute, audit and seek a determination by an Appraiser as to the amount of any Contingent Payment under the foregoing provisions, payment by Parent of any portion of any Contingent Payment to the Holders Representative pursuant to this Section 2.7 shall constitute full discharge as to that portion of such payment of any obligation Parent may have under this Agreement or otherwise to make payment of that portion of such Contingent Payment in connection with the Merger. Parent shall have no liability or obligation of any kind to any Participating Holder (or any successor or assign of such Participating Holder) (i) to make payment directly to any such Participating Holder of any portion of any payment made or required to be made by Parent to the Holders Representative pursuant to this Section 2.7 and (ii) for the failure, inability or delay of the Holders Representative to make payment to such Participating Holder of the portion of any amount paid by Parent to the Holders Representative pursuant to this Section 2.7 to which such Participating Holder may be entitled pursuant to this Agreement.

ARTICLE 3
CONVERSION OF SECURITIES;
EXCHANGE OF CERTIFICATES; PAYMENTS

        3.1    Conversion of Securities.

        (a)    Common Stock.    At the Effective Time and in accordance with the procedures set forth in Section 3.2, each share of the Company Common Stock (other than Dissenting Shares) issued and outstanding immediately prior to the Effective Time will be converted into the right to receive a portion of any Contingent Consideration that may be paid or become payable by the Parent to the Holders Representative, such portion to be determined in accordance with the provisions of Section 3.1 of the LLC Agreement. All shares of Company Common Stock (other than Dissenting Shares), when so converted, shall no longer be outstanding and shall automatically be canceled and cease to exist, and each holder of a certificate representing any

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

31

shares of Company Common Stock so converted shall cease to have any rights with respect thereto, except the right to receive the consideration set forth in this Section 3.1(a) following the surrender of such certificate in accordance with the provisions of Sections 3.1 and 3.2 hereof and Section 3.1 of the LLC Agreement.

        (b)    Preferred Stock.    At the Effective Time and in accordance with the procedures set forth in Section 3.2, each share of Company Preferred Stock (other than Dissenting Shares) issued and outstanding immediately prior to the Effective Time will be converted into

        (A)  the right to receive from Parent a cash payment of a portion of the Preferred Stock Closing Amount, such portion payable to the holder of each such share of Company Preferred Stock to be determined in accordance with the provisions of Section 3.1 of the LLC Agreement;

        (B)  the right to receive a portion of any Contingent Consideration that may be paid or payable by the Parent to the Holders Representative, such portion to be determined in accordance with the provisions of Section 3.1 of the LLC Agreement;

        (C)  the right to receive a portion of any Escrow Funds that may be distributed to the Holders Representative pursuant to, and in accordance with, the Escrow Agreement, such portion to be determined in accordance with Section 3.1 of the LLC Agreement; and

        (D)  the right to receive a portion of any of the Holders Representative Reimbursement Amount that may be distributed to the Participating Holders, such portion to be determined in accordance with Section 3.1 of the LLC Agreement.

        All shares of Company Preferred Stock (other than Dissenting Shares), when so converted pursuant to this Section 3.1(b), shall no longer be outstanding and shall automatically be cancelled and cease to exist, and each holder of a certificate representing any share of Company Preferred Stock so converted shall cease to have any rights with respect thereto, except the right to receive the consideration set forth in this Section 3.1(b) following the surrender of such certificate in accordance with Sections 2.6(d), 3.1 and 3.2 hereof.

        (c)    Options.    As soon as reasonably practicable following the Agreement Date, the Company Board (or, if appropriate, any committee thereof administering the Company Plan) shall take all necessary action, including obtaining the consent of any holder of a Company Option, if necessary, to: (i) terminate, as of the Effective Time, the Company Plan; (ii) terminate, as of the Effective Time, each Company Option that is then outstanding and unexercised, whether unvested or vested (including Company Options that become vested as a result of any acceleration of the vesting schedule of such Company Options pursuant to the terms of such Company Options as a result of or in connection with the Merger, or as a result of any such acceleration effected by the Company Board or any committee thereof prior to the Closing); (iii) exchange all such Company Options to the extent vested (including any such acceleration) as of the Effective Time (an "Eligible Company Option"), for the right to receive, in the case of each Eligible Company Option, subject to the holder of such Eligible Company Option executing and delivering the

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

32

Option Notice and Termination Agreement attached as Exhibit B to the LLC Agreement, a portion of any Contingent Consideration that may be paid or become payable by the Parent to the Holders Representative, such portion to be determined in accordance with the provisions of Section 3.1 of the LLC Agreement; and (iv) terminate all unvested Company Options without consideration. Notwithstanding the foregoing, the portion of the Contingent Consideration, if any, that any holder of an Eligible Company Option shall be entitled to receive in exchange for such Eligible Company Option shall be reduced by the total amount (including all principal and interest), if any, owed by such holder to the Company under any promissory note outstanding at the Effective Time that was made by such holder to the Company in connection with the exercise of any such Eligible Company Option. All Company Options, when terminated as contemplated under this Section 3.1(c), shall no longer be outstanding and shall automatically cease to exist, and each holder of a Company Option shall cease to have any rights with respect thereto, except the right to receive the consideration set forth in this Section 3.1(c) with respect to any Company Option that is an Eligible Company Option.

        (d)    Common Warrants.    As soon as reasonably practicable following the Agreement Date, the Company Board shall take all necessary action, including obtaining the consent of any and all holders of Common Warrants, if necessary, to: (i) terminate, as of the Effective Time, each Common Warrant that is then outstanding and unexercised (without the creation of additional liability to the Company or any of its Subsidiaries); and (ii) exchange all such Common Warrants, for the right to receive, in the case of each Common Warrant, subject to the holder of such Common Warrant executing and delivering the Warrant Notice and Termination Agreement attached as Exhibit C to the LLC Agreement, a portion of any Contingent Consideration that may be paid or become payable by the Parent to the Holders Representative, such portion to be determined in accordance with the provisions of Section 3.1 of the LLC Agreement. All Common Warrants, when terminated as contemplated under this Section 3.1(d), shall no longer be outstanding and shall automatically cease to exist, and each holder of a Common Warrant shall cease to have any rights with respect thereto, except the right to receive the consideration set forth in this Section 3.1(d).

        (e)    Treasury Stock; Stock Held by Disqualified Shareholders.    Notwithstanding anything to the contrary expressed or implied herein, each share of Company Stock held by any Subsidiary of the Company or by any Disqualified Shareholder, in each case immediately prior to the Effective Time, shall be cancelled and extinguished at the Effective Time without any conversion thereof and no payment shall be made with respect thereto.

        (f)    Stock of Merger Sub.    Each share of common stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into one (1) validly issued fully paid and nonassessable share of common stock of the Surviving Corporation.

        3.2    Exchange of Certificates and Instruments.

        (a)    Exchange Procedures.    Not less than five (5) business days prior to the Closing Date, Parent will send to each Participating Holder that is a holder of Company Stock or of Eligible Company Options or Common Warrants a letter of transmittal, in substantially the form attached hereto as Exhibit H, for the delivery to Parent, together with the certificate or certificates representing the shares of Company Stock held by such Participating Holder (each a "Certificate"

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

33

and collectively the "Certificates") and the grant and other documents evidencing any Eligible Company Options or Common Warrants (the "Rights Documents") held by such Participating Holder, or Lost Certificate or Document Affidavits pursuant to Section 3.4 hereof. Pursuant to Section 2.6(d), the receipt by Parent and the Holders Representative of such transmittal letter and the Certificates for outstanding shares of Company Preferred Stock shall be a condition precedent to the delivery by Parent to holders of any such shares of Company Preferred Stock of any portion of the Preferred Stock Closing Amount to which such Participating Holder may be entitled under Sections 2.6(a) and 2.6(d) of this Agreement in respect of the shares of Company Preferred Stock held by such Participating Holder. Pursuant to Section 3.1 of the LLC Agreement, the receipt by Parent and the Holders Representative of such transmittal letter and the Certificates and Rights Documents for all other shares of Company Stock, Eligible Company Options or Common Warrants held by any Participating Holder shall be a condition precedent to the distribution by the Holders Representative of any portion of the Contingent Consideration to which such Participating Holder may be or become entitled under Sections 2.7(a) or 2.7(b) of this Agreement. Whether or not surrendered as contemplated by this Section 3.2(a), each Certificate and Rights Document shall be deemed at any time after the Effective Time to represent only the right to receive following such surrender the applicable amounts of the Merger Consideration payable with respect thereto pursuant to this Agreement and Section 3.1 of the LLC Agreement. The transmittal materials contemplated by this Section 3.2(a) may include any certifications Parent may request with respect to compliance with any withholding obligations of Parent or the Surviving Corporation under the Code or other applicable Tax law.

        (b)    No Further Rights as Shareholders or Option or Warrant Holders.    After the Effective Time, holders of Company Stock, Company Options, or Common Warrants outstanding immediately prior to the Effective Time will cease to be, and will have no rights as, shareholders or option or warrant holders of the Company or the Surviving Corporation, other than (i) in the case of Company Stock (other than Dissenting Shares and other than any shares held by Disqualified Shareholders), Company Options or Common Warrants, the rights to receive the applicable portions of the Merger Consideration payable with respect thereto pursuant to Sections 2.6 and 2.7 of this Agreement and Section 3.1 of the LLC Agreement, and (ii) in the case of Dissenting Shares, the rights afforded to the holders thereof under Washington Law.

        (c)    Abandoned Property.    None of Parent, the Surviving Corporation or the Holders Representative shall be liable to any holder of Company Stock, Common Warrants or Company Options for any portion of the Merger Consideration properly delivered to an appropriate public official pursuant to any abandoned property, escheat or similar law.

        (d)    Withholding Rights.    Each of the Surviving Corporation, Parent and the Holders Representative shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of Company Common Stock, Company Preferred Stock or Company Options such amounts as are required to be deducted and withheld (or previously to have been deducted and withheld) under the Code, or under any provision of state, local or foreign Tax law, from such consideration (or from any prior payment of Merger Consideration). To the extent that amounts are so withheld by the Surviving Corporation, Parent or the Holders Representative, as the case may be, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to such holder in respect of which such deduction and withholding was made by the Surviving Corporation or Parent, as the case may be.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

34

        3.3    No Transfers.

        (a)   At the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers of Company Stock thereafter on the records of the Company. If, after the Effective Time, Certificates are presented (for transfer or otherwise) to the Surviving Corporation or the Holders Representative, they will be canceled and exchanged for the right to receive that portion of the Merger Consideration payable in respect thereof pursuant to Sections 2.6 and 2.7 of this Agreement and Section 3.1 of the LLC Agreement (or returned to the presenting person, if such certificate represents Dissenting Shares), provided that each person surrendering the Certificate or Certificates complies with all of the provisions of Section 3.2(a) hereof and this Section 3.3.

        (b)   To the extent permitted by applicable law, the right of each Participating Holder to receive the portion of the Merger Consideration, if any, to which such Participating Holder is entitled pursuant to Sections 2.6 and 2.7 of this Agreement upon consummation of the Merger: (i) shall be personal to such Participating Holder; (ii) shall not be transferable by such Participating Holder or any person claiming under such Participating Holder, whether by sale, assignment, pledge or otherwise, except as set forth below in this Section 3.3(b), and any other purported transfer shall be void and of no force or effect; (iii) shall not constitute or represent any equity or ownership interest in Parent or the Surviving Corporation; and (iv) shall not entitle such Participating Holder to any voting or dividend rights, or to any other rights common to shareholders in the Surviving Corporation. Notwithstanding the foregoing, this Agreement shall not restrict any Participating Holder from transferring any part or all of such Participating Holder's right to receive the portion of the Merger Consideration, if any, to which such Participating Holder is entitled pursuant to Sections 2.6 and 2.7 of this Agreement upon consummation of the Merger (A) to the Holders Representative for application and distribution in accordance with the terms of the LLC Agreement, or indirectly by means of any transfers of part or all of the Participating Holder's membership interest in the Holders Representative, (B) to other entities controlled by such Participating Holder, (C) in the case of any Participating Holder that is a corporation, general partnership, limited partnership, limited liability company or venture capital firm, to such Participating Holder's shareholders, partners, members or other holders of equity securities in such Participating Holder, as applicable, (D) in connection with tax, estate or financial planning, (E) upon the death of such Participating Holder, (F) to such Participating Holder's ancestors, descendants, spouse, siblings or other family members, or to a trust for the benefit of some or all of such persons, or (G) by operation of law, provided that, (1) such Participating Holder (or in the event of death, if applicable, such Participating Holder's executor or legal representative) provides to Parent and the Holders Representative prompt written notice of such transfer, which written notice shall be given in accordance with the provisions of Section 11.4 hereof and shall set forth the name and address of each transferee, (2) such Participating Holder does not receive any consideration in connection with such transfer, (3) any such permitted transferee agrees to assume that portion of the obligations of such Participating Holder under this Agreement and the LLC Agreement to the extent such obligations are applicable to the portion of the Merger Consideration so transferred to such permitted transferee, and (4) such transfer shall not violate, or cause Parent to be in violation, of any federal or state securities laws, as reasonably determined by Parent's legal counsel. Subsequent transfers by any such transferee of the right to receive a portion of the Merger Consideration shall also be made pursuant to, and in accordance with, all of the provisions of this Section 3.3(b) to the same extent as if each such transferee were a Participating Holder.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

35

        3.4    Lost Certificates, Etc.    In the event that any Certificate or Rights Document has been lost, stolen, or destroyed, then upon receipt by Parent or the Holders Representative, as applicable, of appropriate evidence as to such loss, theft, or destruction, and to the ownership of such Certificate or Rights Document by the person claiming such Certificate or Rights Document to be lost, stolen, or destroyed, the receipt by Parent or the Holders Representative, as applicable, (or their designees) of an affidavit (a "Lost Certificate or Document Affidavit") with appropriate and customary indemnification and the surrender pursuant to Section 3.2(a) hereof by such person of all other Certificates and Rights Documents registered in the name of such person that have not been lost, stolen, destroyed or previously surrendered, then such person shall be entitled to receive the appropriate portion of the Merger Consideration pursuant to the provisions of Sections 2.6 and 2.7 hereof and Section 3.1 of the LLC Agreement.

        3.5    No Interest.    Except as otherwise provided in Section 2.7(l), no interest shall be paid or shall accrue on the Merger Consideration or any portion thereof payable by Parent or the Holders Representative pursuant to, and in accordance with, the provisions of this Agreement or the LLC Agreement.

        3.6    Dissenting Shares.

        (a)   Notwithstanding any provision of this Agreement to the contrary, Dissenting Shares shall not be converted into or represent the right to receive any portion of the amounts to be paid pursuant to Section 3.1, but the holders thereof shall only be entitled to such rights as are granted by Washington Law. All Dissenting Shares held by shareholders who shall have failed to perfect or who effectively shall have withdrawn or lost their appraisal rights shall thereupon be deemed to have been converted into and to have become exchangeable for, as of the later of the Effective Time or the occurrence of such event, the right to receive an appropriate portion of the amounts to be paid pursuant to Sections 2.6 and 2.7 of this Agreement and Section 3.1 of the LLC Agreement, without any interest thereon, upon surrender, in the manner provided in Section 3.2, of the Certificates that formerly evidenced such shares.

        (b)   The Company shall give Parent prompt notice of any demands for (or notice of intent to demand) appraisal of shares of Company Stock received by the Company, any withdrawals of such demands, and any other related instruments served pursuant to Washington Law, if any, and received by the Company. All negotiations and proceedings with respect to any demands for the payment of fair value for shares of Company Stock under Washington Law shall be controlled by the Company prior to the Effective Time, and shall be jointly controlled by Parent and the Holders Representative after the Effective Time. During any period of joint control of such negotiations and proceedings, Parent or the Holders Representative, as applicable, shall consult with the other periodically, shall allow the other to participate at its own expense in any such negotiations or proceedings and shall not, except with the prior written consent of the other, which consent shall not be unreasonably withheld, make any payment with respect to any demands for the appraisal of shares of Company Stock or settle or offer to settle any such demands other than by operation of law or pursuant to a final order of a court of competent jurisdiction. In the event that any Company Shareholder exercises his, her or its appraisal rights pursuant to Washington Law, then Parent shall be entitled to seek indemnification pursuant to,

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

36

and in accordance with, the provisions of Article 9 hereof in connection with any Damages suffered or incurred by Parent in connection with such exercise of appraisal rights (other than costs incurred by Parent as a result of participation at its own expense, as described above).

        3.7    Holders Representative.

        (a)    Appointment of Holders Representative.    IB Securityholders, LLC is hereby appointed, effective from and after the Effective Time of the Merger, to act as the Holders Representative under this Agreement in accordance with the terms of this Section 3.7 and the Escrow Agreement. The member(s) of the limited liability company acting as the Holders Representative under this Agreement are, pursuant to Section 2.7 of the LLC Agreement required to designate (and notify Parent of such designation) a single member of the board of managers of such limited liability company (the "Board of Managers") upon whose instruction Parent, the Merger Sub and the Surviving Corporation shall be entitled to rely, without any investigation or inquiry, as having been taken or not taken upon the authority of the Holders Representative. Any provision of this Agreement that requires that any Member of the Buyer Group take any action with respect to the Holders Representative (including, without limitation, any notice given, or payment made, by Parent to the Holders Representative) shall be deemed fully performed and complied with by such Buyer Group member in the event that any such action is taken by such Buyer Group member with respect to such single member of the Board of Managers so designated by the members of such limited liability company pursuant to the provisions of the immediately preceding sentence.

        (b)    Authority After the Effective Time.    From and after the Effective Time, the Holders Representative shall be authorized to:

          (i)  take all actions required or permitted by, and exercise all rights granted to, the Holders Representative in this Agreement or the Escrow Agreement;

         (ii)  receive all notices or other documents given or to be given to the Holders Representative by Parent pursuant to this Agreement or the Escrow Agreement;

        (iii)  negotiate, undertake, compromise, defend, resolve and settle any suit, proceeding or dispute under this Agreement or the Escrow Agreement on behalf of the Participating Holders; to this Agreement or the Escrow Agreement;

        (iv)  subject to Section 3.6 hereof, jointly control with Parent the negotiation, conduct and settlement of any claims or proceedings relating to Dissenting Shares;

         (v)  execute and deliver all agreements, certificates and documents required or deemed appropriate by the Holders Representative in connection with any of the transactions contemplated by this Agreement (including executing and delivering the Escrow Agreement);

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

37

        (vi)  engage special counsel, accountants and other advisors and incur such other expenses in connection with any of the transactions contemplated by this Agreement or the Escrow Agreement on behalf of the Participating Holders;

       (vii)  approve of and execute amendments to this Agreement in accordance with this Agreement;

      (viii)  apply, out of the Holders Representative Reimbursement Amount or any portion of the Escrow Funds to which the Participating Holders are entitled pursuant to this Agreement or the Escrow Agreement, to the payment of (or reimbursement of the Holders Representative for) expenses and liabilities which the Holders Representative may incur pursuant to this Section 3.7;

        (ix)  receive and manage the Grantback Assets pursuant to Section 6.10 hereof;

         (x)  receive and distribute all or any portion of the Contingent Consideration pursuant to, and in accordance with, the provisions of Section 2.7 hereof and Section 3.1 of the LLC Agreement; and

        (xi)  take such other action as the Holders Representative may deem appropriate on behalf of the Participating Holders, including:

        (A)  agreeing to any modification or amendment of this Agreement or the Escrow Agreement and executing and delivering any such modification or amendment agreement;

        (B)  taking any actions required or permitted under the Escrow Agreement or the LLC Agreement; and

        (C)  all such other matters as the Holders Representative may deem necessary or appropriate to carry out the intents and purposes of this Agreement, the Escrow Agreement and the LLC Agreement.

        (c)    Extent and Survival of Authority.    The appointment of the Holders Representative is intended to be an agency coupled with an interest and is irrevocable and any action taken by the Holders Representative pursuant to the authority granted in this Section 3.7 or under the Escrow Agreement shall be effective and absolutely binding on each Participating Holder notwithstanding any contrary action of or direction from such Participating Holder, except for actions or omissions of the Holders Representative constituting willful misconduct or gross

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

38

negligence. The death or incapacity, or dissolution or other termination of existence, of any Participating Holder shall not terminate the authority and agency of the Holders Representative. By virtue of the adoption of this Agreement and the approval of the Merger by the shareholders of the Company, each Participating Holder (regardless of whether or not such Participating Holder votes in favor of the adoption of this Agreement and the approval of the Merger, whether at a meeting or by written consent in lieu thereof) hereby agrees to the provisions of this Agreement, including, without limitation, the provisions of this Section 3.7 and Article 9 hereof.

        (d)    Release from Liability; Indemnification.    Each Participating Holder hereby releases the Holders Representative from and each Participating Holder (in the same proportion as the portion of the Merger Consideration to which such Participating Holder is entitled as of the Effective Time bears to the portion of the Merger Consideration to which all Participating Holders collectively are entitled as of the Effective Time) agrees to indemnify the Holders Representative, and each of its managers, members, officers, agents and representatives, against, liability for any action taken or not taken by it or any of them relating to the Holders Representative's non-performance, actions or omissions as such agent, except for the liability of the Holders Representative to Participating Holders for loss which such holder may suffer from the willful misconduct or gross negligence of the Holders Representative in carrying out its duties hereunder or under the Escrow Agreement.

        (e)    Reimbursement of Expenses.    The Holders Representative shall receive no compensation for services performed as the Holders Representative, but shall receive reimbursement from, and be indemnified by, the Participating Holders, pro rata, for any and all expenses, charges and liabilities incurred in connection with such performance, including, but not limited to, reasonable attorneys' fees, incurred by the Holders Representative in the performance or discharge of its duties pursuant to this Section 3.7, the Escrow Agreement and the LLC Agreement, which expenses, charges and liabilities shall be (1) first, charged against any Holders Representative Reimbursement Amounts retained on behalf of the Holders Representative, (2) second, charged against any Escrow Funds that would be distributed to the Participating Holders pursuant to this Agreement, the Escrow Agreement or the LLC Agreement and (3) third, offset against the Contingent Consideration, if any, paid to the Holders Representative pursuant to this Agreement. Unless the Participating Holders pay all such expenses, charges and liabilities upon demand by the Holders Representative, the Holders Representative shall have no obligation to incur such expenses, charges or liabilities, or to continue to perform any duties hereunder.

        (f)    Amendment of the LLC Agreement.    Without the prior written consent of Parent, which consent shall not be unreasonably withheld, Section 3.1 of the LLC Agreement governing the distribution of the payments of the Merger Consideration to the Participating Holders shall not be amended. The Holders Representative and the Participating Holders shall indemnify and hold Parent harmless from any liability arising out of errors or other breaches of the distributions provisions of the LLC Agreement in connection with the allocation or payment of Merger Consideration to the Participating Holders for payment of the Merger Consideration.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

39

ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

        The Company hereby represents and warrants to Parent, the Merger Sub and the Surviving Corporation as follows as of each of (a) the Agreement Date and (b) the Closing Date, subject in each case to such exceptions as are set forth in the Company's disclosure schedule attached to this Agreement which disclosure schedule complies with Section 11.5 hereof (the "Company Disclosure Schedule"):

        4.1    Incorporation; Authority.    The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Washington and has all requisite corporate power and authority to own or lease and operate its properties and to carry on its business as presently conducted and as presently proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction where such qualification is required and in which failure to so qualify would have a Material Adverse Effect on the Company. The Company has delivered to Parent complete and correct copies of its articles of incorporation and by-laws, in each case with all amendments thereto, which articles of incorporation and by-laws are in full force and effect.

        4.2    Authorization and Enforceability.    The Company has all requisite corporate power to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company, subject only to the approval of the Merger and the adoption of this Agreement by the Company's shareholders. The Company Board has (i) approved and declared the advisability of this Agreement and the transactions contemplated hereby and (ii) determined that the Merger is in the best interests of the shareholders of the Company and is on terms that are fair to such shareholders. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable in accordance with its terms, except as such enforcement may be limited by (i) the effect of bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights, or (ii) the rules governing the availability of specific performance, injunctive relief or other equitable remedies and general principles of equity, regardless of whether considered in a proceeding in law or equity.

        4.3    Governmental and Other Third-Party Consents, Non-Contravention, Etc.    No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, except for (i) the filing of Merger Documents with the Delaware Secretary of State and Washington Secretary of State, as applicable; and (ii) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not have a Material Adverse Effect on the Company and would not prevent, or materially alter or delay any of the transactions contemplated by this Agreement. The execution, delivery, and performance of this Agreement and the consummation of such transactions will not violate (a) any provision of the Company's articles of incorporation or by-laws, as amended and in effect at the Effective Time, (b) any order, judgment, injunction, award or decree of any court or state or federal governmental or regulatory body applicable to the Company, or (c) any judgment, decree, order, statute, rule, regulation, agreement, instrument, or other obligation to which the Company is a party or by or to which it or any of its assets is bound or subject, which violation will not have a Material Adverse Effect on the Company.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

40

        4.4    Capitalization.    The authorized and outstanding capital stock and other securities of the Company are as set forth in Schedule 4.4 of the Company Disclosure Schedule including (1) the total number of shares of Company Common Stock for which all shares of Company Preferred Stock outstanding immediately prior to the Effective Time are then convertible in the aggregate, (2) the number of shares of Company Common Stock for which each share of Company Preferred Stock outstanding immediately prior to the Effective Time is then convertible, (3) the total number of shares of Company Common Stock issued and outstanding immediately prior to the Effective Time, (4) a list of each Eligible Company Option and each Common Warrant, the exercise price per share thereof, the aggregate exercise price thereof and the name of the holder thereof, (5) the number of shares of Company Common Stock issuable upon exercise of the Common Warrants immediately prior to the Effective Time, (6) the total number of shares of Company Common Stock issuable upon exercise of all Eligible Company Options, (7) the aggregate exercise price of those Eligible Company Options that are entitled to receive any portion of the Merger Consideration pursuant to Section 3.1(c) hereof, and (8) the aggregate exercise price of those Common Warrants, if any, that are outstanding immediately prior to the Effective Time and that are entitled to receive any portion of the Merger Consideration pursuant to Section 3.1(d)(II) hereof. All of such outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and non-assessable, and all of such outstanding shares and other securities are owned of record as set forth in Schedule 4.4 of the Company Disclosure Schedule, and were issued in compliance with all applicable laws, including securities laws, and all applicable preemptive or similar rights of any person. No person has a valid right to rescind any purchase of any shares of the Company's capital stock or other securities. Other than as set forth on Schedule 4.4 of the Company Disclosure Schedule, there are no agreements or other obligations to which the Company is a party or by which it is bound to purchase or sell any shares of its capital stock or other securities, and no outstanding convertible or exchangeable securities, options, warrants or other rights to acquire from the Company any shares of its capital stock or other securities. Schedule 4.4 of the Company Disclosure Schedule sets forth the name of each person who holds any option, warrant or other right to acquire shares of the Company's capital stock or other securities, the number and type of shares or securities subject to such option or right, the per-share exercise price payable therefor and, in the case of warrants, the priority and amount of consideration to be payable upon exercise thereof. The per-share exercise price payable for each of the options set forth on Schedule 4.4 of the Company Disclosure Schedule is equal to or greater than the fair market value of the Company Common Stock as of the date of grant of each such option. Each option set forth on Schedule 4.4 of the Company Disclosure Schedule, and all options outstanding immediately prior to the Effective Time, have been, or shall be, as the case may be, granted under, and are or shall be, as the case may be, subject to, all of the terms of the Company Plan.

        4.5    Subsidiaries.    The Company does not have any Subsidiaries or own any legal and/or beneficial interests in or to any other business enterprise or other person.

        4.6    Financial Statements.    Attached to Schedule 4.6 of the Company Disclosure Schedule are copies of the audited balance sheet of the Company as of December 31, 2006, and the related audited statements of income and retained earnings and cash flows, respectively, of the Company, for the fiscal year ended on such date, certified by Moss Adams LLC, independent

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

41

public accountants, and copies of the unaudited balance sheet of the Company as of June 30, 2007, and the related unaudited statements of income and retained earnings and cash flows, respectively, of the Company for the six months then ended (collectively, the "Financial Statements" and such unaudited balance sheet as of June 30, 2007, the "Company's Most Recent Balance Sheet"). Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior periods; such balance sheet presents fairly and accurately in all material respects the financial condition of the Company as of its respective date; and such statements of income and retained earnings and cash flows, respectively, presents fairly and accurately in all material respects the results of operations and retained earnings, or cash flows, as the case may be, of the Company for the period covered thereby, except, in the case of unaudited interim financial statements, subject to normal year-end adjustments that have not been and are not expected to be material in amount.

        4.7    Absence of Certain Changes.    Since the date of the Company's Most Recent Balance Sheet, except as disclosed on Schedule 4.7 of the Company Disclosure Schedule, there has not been any: (i) change in the assets, liabilities, sales, income, or business of the Company or in its relationships with suppliers, customers, or lessors, other than changes that were both in the ordinary course of business and have not caused, either in any case or in the aggregate, a Material Adverse Effect on the Company; (ii) acquisition or disposition by the Company of any material asset or property; (iii) damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting, either in any case or in the aggregate, the business or any material property of the Company; (iv) declaration, setting aside or payment of any dividend or any other distributions in respect of any shares of capital stock of the Company; (v) issuance of any shares of the capital stock of the Company or any direct or indirect redemption, purchase, or other acquisition by the Company of any such capital stock; (vi) loss of the services of any officer or key employee or consultant, or any increase in the compensation, pension, or other benefits payable or to become payable by the Company to any of its officers or key employees or consultants, or any bonus payments or arrangements made to or with any of them; (vii) forgiveness or cancellation of any debts or claims by the Company or any waivers of any rights; (viii) entry by the Company into any transaction with any of its Affiliates; (ix) incurrence by the Company of any obligations or liabilities, whether absolute, accrued, contingent or otherwise (including without limitation liabilities as guarantor or otherwise with respect to obligations of others), other than obligations and liabilities incurred in the ordinary course of business with persons other than Affiliates of the Company; (x) incurrence or imposition of any Lien on any of the assets, tangible or intangible, of the Company; or (xi) discharge or satisfaction by the Company of any Lien or payment by the Company of any obligation or liability (fixed or contingent) other than (A) current liabilities included in the Company's Most Recent Balance Sheet, (B) current liabilities to persons other than Affiliates of the Company incurred since the date of the Company's Most Recent Balance Sheet in the ordinary course of business, and (C) current liabilities incurred in connection with the transactions contemplated hereby and as disclosed in Schedule 4.7 of the Company Disclosure Schedule.

        4.8    Properties and Assets.

        (a)   The Company has good and marketable title or leasehold title, as the case may be, to all of its assets and properties that it purports to own or lease, including without limitation all those reflected in the Company's Most Recent Balance Sheet (except for properties or assets

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

42

sold, consumed, or otherwise disposed of in the ordinary course of business since the date of the Company's Most Recent Balance Sheet), all free and clear of Liens on the Company's interest therein. All such properties and assets are in good condition and repair, reasonable wear-and-tear excepted, and are, and as of the Closing Date will be, adequate and sufficient to carry on the business of the Company as presently conducted. Schedule 4.8 of the Company Disclosure Schedule sets forth a complete and correct list of all capital assets of the Company.

        (b)   The Company does not own any real property. The Company has not received any notice that either the whole or any portion of any real property leased by it is to be condemned, requisitioned, or otherwise taken by any public authority or is to be the subject of any public improvements that may result in special assessments against or otherwise affect such real property. Schedule 4.8 of the Company Disclosure Schedule sets forth a complete and correct description of all leases of real property to which the Company is a party. Complete and correct copies of all such leases have been delivered to Parent. Each such lease is valid and subsisting and no event or condition exists that constitutes, or after notice or lapse of time or both could constitute, a default thereunder by the Company, or to its knowledge, any other person. The leasehold interests of the Company are subject to no Lien, and the Company is in quiet possession of the properties covered by such leases.

        4.9    Intellectual Property.

        (a)   Schedule 4.9(a) of the Company Disclosure Schedule lists all inter partes proceedings or actions known to the Company before any court or tribunal (including the PTO or equivalent authority anywhere in the world) related to any Company Intellectual Property. To the Company's knowledge, no Company Intellectual Property is the subject of any inter partes proceeding or outstanding decree, order, judgment, agreement, or stipulation restricting in any manner the use, transfer, or licensing thereof by the Company, or which may affect the validity, use or enforceability of such Company Intellectual Property.

        (b)   With respect to each item of Company Registered Intellectual Property, necessary registration, maintenance, annuities and renewal fees in connection with such Company Registered Intellectual Property have been made and all necessary documents and certificates in connection with such Company Registered Intellectual Property have been filed with the relevant patent authorities in the United States and elsewhere in the world for the purposes of maintaining such Company Registered Intellectual Property and no information material to patentability under applicable law has been withheld from the examining office that would constitute fraud or inequitable conduct.

        (c)   All Company Registered Intellectual Property is, and all agreements related thereto are, listed on Schedule 4.9(c) of the Company Disclosure Schedule. The Company owns and has good and exclusive title, or the Company exclusively licenses, in each case free and clear of any Lien, all Company Registered Intellectual Property listed on Schedule 4.9(c) of the Company Disclosure Schedule.

        (d)   To the extent that any work, invention, or material has been developed or created by a third party for the Company, the Company has a written agreement with such third party with respect thereto and the Company has obtained ownership of, and is the exclusive owner of, or has a valid

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

43

license to use, all Company Intellectual Property in such work, material or invention by operation of law or by valid assignment or by agreement, as the case may be. Schedule 4.9(d) of the Company Disclosure Schedule lists each such agreement referred to in the previous sentence of this Section 4.9(d). To the knowledge of the Company and any of its Subsidiaries, no employee, independent contractor or agent of the Company or any of its Subsidiaries is in material default or breach of any term of any employment agreement, non-disclosure agreement, assignment of invention agreement or similar agreement, contract or company policy or practice relating in any way to the protection, ownership, development, use or transfer of Company Intellectual Property.

        (e)   Except as set forth on Schedule 4.9(e) of the Company Disclosure Schedule, the Company has not transferred ownership of, or granted any license with respect to, any Company Intellectual Property to any third party. Schedule 4.9(e) of the Company Disclosure Schedule lists all contracts, licenses and agreements to which the Company is a party that are currently in effect (i) with respect to Company Intellectual Property licensed or offered to any third party; or (ii) pursuant to which a third party has licensed or transferred any Company Intellectual Property to the Company.

        (f)    Schedule 4.9(f) of the Company Disclosure Schedule lists all contracts, licenses and agreements between the Company and any third party wherein or whereby the Company has agreed to, or assumed, any obligation or duty to warrant, indemnify, hold harmless or otherwise assume or incur any obligation or liability with respect to the infringement or misappropriation by the Company of any third party's Intellectual Property.

        (g)   To the Company's knowledge, the contracts, licenses and agreements listed on Schedules 4.9(e) and 4.9(f) of the Company Disclosure Schedule are in full force and effect. The consummation of the transactions contemplated by this Agreement will neither violate nor result in the breach, modification, cancellation, termination, or suspension of, nor require the consent of any party to, such contracts, licenses and agreements listed on Schedules 4.9(e) and 4.9(f) of the Company Disclosure Schedule. The Company is in compliance with, and has not breached any term any of such contracts, licenses and agreements listed on Schedules 4.9(e) and 4.9(f) of the Company Disclosure Schedule and, to the knowledge of the Company, all other parties to such contracts, licenses and agreements listed on Schedules 4.9(e) and 4.9(f) of the Company Disclosure Schedule are in compliance with, and have not breached any term of, such contracts, licenses and agreements. To the Company's knowledge, following the Closing Date, the Surviving Corporation will be permitted to exercise all of the Company's rights under the contracts, licenses and agreements listed on Schedules 4.9(e) and 4.9(f) of the Company Disclosure Schedule to the same extent the Company would have been able to had the transaction contemplated by this Agreement not occurred and without the payment of any additional funds other than ongoing fees, royalties or payments which the Company would otherwise be required to pay.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

44

        (h)   The Company (including its executive officers, directors and, to the Company's knowledge, employees) has not received notice from any third party, nor does the Company have knowledge of any basis for any third-party claim that could assert, that (i) the operation of its business, (ii) the research, development, use, manufacture, sale, other commercialization or importation of any product or product candidate of the Company or (iii) the provision by the Company of any services, would, or is reasonably likely to, infringe or misappropriate the Intellectual Property of any third party (other than any infringement of claims under patent applications of third parties that have not yet published) or constitute unfair competition or trade practices under the laws of any jurisdiction.

        (i)    Except as set forth in Schedule 4.9(i) of the Company Disclosure Schedule, to the Company's knowledge, (i) no person has infringed or misappropriated or is infringing or misappropriating any Company Intellectual Property and (ii) there have been, and are, no claims asserted against the Company or against any licensee of the Company with respect to the Company Intellectual Property.

        (j)    The Company maintains reasonable security measures for the preservation of the secrecy and proprietary nature of such of the Company Intellectual Property as constitute trade secrets or other confidential information. No officer, director, employee, or consultant of the Company is obligated under or bound by any agreement or instrument, or any judgment, decree, or order of any court of administrative agency, that (i) conflicts or may conflict with his agreements and obligations to use his best efforts to promote the interest of the Company, (ii) conflicts or may conflict with the business or operations of the Company, or (iii) restricts or may restrict the use or disclosure of any information that may be useful to the Company.

        (k)   Schedule 4.9(k) of the Company Disclosure Schedule lists all patent searches that have been performed, initiated or requested by the Company or any of its employees, attorneys or agents.

        4.10    Indebtedness.    The Company has no Indebtedness outstanding except as set forth in Schedule 4.10 of the Company Disclosure Schedule. The Company is not in default with respect to any outstanding Indebtedness or any agreement, instrument, or other obligation relating thereto and no such Indebtedness or any agreement, instrument or other obligation relating thereto purports to limit the issuance of any securities by the Company, or (except as set forth on Schedule 4.10 of the Company Disclosure Schedule) the operation of its businesses. Complete and correct copies of all agreements, instruments, and other obligations (including all amendments, supplements, waivers, and consents) relating to any Indebtedness of the Company have been furnished to Parent.

        4.11    Absence of Undisclosed Liabilities.    Except to the extent (a) reflected or reserved against in the Company's Most Recent Balance Sheet, (b) described on Schedule 4.11 of the Company Disclosure Schedule, or (c) the payment or satisfaction of which has been provided for by cash in the Company's bank accounts or otherwise in its possession, the Company does not have any liabilities or obligations, whether accrued, absolute, contingent, or otherwise (including, without limitation, liabilities, as guarantor or otherwise, in respect of obligations of others) that would be required to be reflected or reserved against in a balance sheet prepared in accordance with generally accepted accounting principles or referred to in the notes thereto.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

45

        4.12    Taxes.

        (a)    Filing of Tax Returns and Payment of Taxes.    The Company has timely filed all Tax Returns required to be filed by it, each such Tax Return has been prepared in compliance with all applicable laws and regulations, and all such Tax Returns are true, accurate and complete in all respects. All Taxes that have become due and payable by the Company have been timely paid, and the Company is not and will not be liable for any additional Taxes in respect of any Taxable period or any portion thereof ending on or before the date of the unaudited consolidated financial statements forming part of the Financial Statements included in the Company Disclosure Schedule in an amount that exceeds the corresponding reserve therefor separately identified in Schedule 4.12(a) of the Company Disclosure Schedule, if any, as reflected in such Financial Statements. Taxes of the Company arising after such date and at or before the Effective Time have been or will be incurred in the ordinary course of the business of the Company. The Company has delivered to Parent true, correct and complete copies of all Tax Returns with respect to income Taxes filed by or with respect to it with respect to Taxable periods ended on or after December 31, 2002 (the "Delivered Tax Returns"), and has delivered or made available to Parent all relevant documents and information with respect thereto, including without limitation work papers, records, examination reports, and statements of deficiencies proposed, assessed against or agreed to by the Company.

        (b)    Deficiencies.    No deficiency or adjustment in respect of Taxes has been proposed, asserted or assessed by any Taxation Authority against the Company. There are no outstanding refund claims with respect to any Tax or Tax Return of the Company.

        (c)    Liens.    There are no liens for Taxes (other than liens for current Taxes not yet due and payable) on any of the assets of the Company.

        (d)    Extensions to Statute of Limitations for Assessment of Taxes.    The Company has not consented to extend the time in which any Tax may be assessed or collected by any Taxation Authority which extension is still in effect.

        (e)    Extensions of the Time for Filing Tax Returns.    The Company has not requested or been granted an extension of the time for filing any Tax Return that has not yet been filed.

        (f)    Pending Proceedings.    There is no action, suit, Taxation Authority proceeding, or audit with respect to any Tax now in progress, pending or, to the knowledge of the Company, threatened against or with respect to the Company. No claim for assessment or collection of Taxes which previously has been asserted relating in whole or in part to the Company remains unpaid.

        (g)    No Failures to File Tax Returns.    No claim has ever been made by a Taxation Authority in a jurisdiction where the Company does not pay Tax or file Tax Returns that the Company is or may be subject to Taxes assessed by such jurisdiction.

        (h)    Elections.    All elections with respect to Taxes affecting the Company that were not made in the Delivered Tax Returns are described in Schedule 4.12(h) of the Company Disclosure Schedule.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

46

        (i)    Membership in Affiliated Groups, Liability for Taxes of Other Persons, Etc.    Except for the affiliated group of corporations of which the Company was the common parent corporation, the Company has never been a member of any affiliated group of corporations (as defined in Section 1504(a) of the Code) or filed or been included in a combined, consolidated or unitary Tax Return. The Company is neither a party to nor bound by any Tax sharing or allocation agreement. The Company is not presently liable, nor does the Company have any potential liability, for the Taxes of another person other than the Company or any Subsidiary (i) under Treasury Regulations Section 1.1502-6 (or comparable provision of state, local or foreign law), (ii) as transferee or successor, or (iii) by contract or indemnity or otherwise.

        (j)    Adjustments under Section 481.    The Company will not be required, as a result of a change in method of accounting for any period ending on or before or including the Effective Time, to include any adjustment under Section 481(c) of the Code (or any similar or corresponding provision or requirement under any other Tax law) in Taxable income for any period ending on or after the Effective Time. The Company will not be required to include any item of income in Taxable income for any Taxable period (or portion thereof) ending after the Closing Date as a result of any (i) prepaid amount received on or prior to the Closing Date, or (ii) "closing agreement" described in Section 7121 of the Code (or any similar or corresponding provision of any other Tax law).

        (k)    Withholding Taxes.    The Company has timely withheld and timely paid all Taxes which are required to have been withheld and paid by it in connection with amounts paid or owing to any employee, independent contractor, creditor, supplier, shareholder or other person.

        (l)    Permanent Establishments and Branches Outside the United States.    Except as set forth in Schedule 4.12(l) of the Company Disclosure Schedule, the Company does not have a "permanent establishment" as defined in the applicable Tax convention or treaty, in any country with which the United States of America has such a Tax convention or treaty, and does not otherwise operate or conduct business through any branch subject to income Tax in any country other than the United States.

        (m)    U.S. Real Property Holding Corporation.    The Company is not and has not been a United States real property holding corporation, within the meaning of Code Section 897(c)(2), during the applicable period specified in Code Section 897(c)(1)(A)(ii).

        (n)    Safe Harbor Lease Property.    None of the property owned or used by the Company is subject to a Tax benefit transfer lease executed in accordance with Section 168(f)(8) of the Internal Revenue Code of 1954, as amended by the Economic Recovery Tax Act of 1981.

        (o)    Tax-Exempt Use Property.    None of the property owned by the Company is "tax-exempt use property" within the meaning of Section 168(h) of the Code.

        (p)    Security for Tax-Exempt Obligations.    None of the assets of the Company directly or indirectly secures any Indebtedness, the interest on which is tax-exempt under Section 103(a) of the Code, and the Company is not directly or indirectly an obligor or a guarantor with respect to any such Indebtedness.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

47

        (q)    Section 341(f) Consent.    The Company has not filed any consent agreement under Section 341(f) of the Code (as in effect prior to its repeal by the Jobs and Growth Tax Relief Reconciliation Act of 2003) or agreed to have Section 341(f)(2) of the Code (as in effect prior to such repeal) apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code prior to such repeal) owned by the Company.

        (r)    Parachute Payments, Etc.    The Company has not made any payments, is not obligated to make any payments, and is not a party to any agreement that could obligate it, in connection with this Agreement or the transactions contemplated by this Agreement, to make any payments, that will not be deductible under Code Sections 162(m) or 280G, other than any payments for which stockholder approval satisfying the requirements of Code Section 280G(b)(5) and the Treasury Regulations thereunder will be obtained prior to the Closing.

        (s)    Rulings.    There are no outstanding rulings of, or requests for rulings by, any Taxation Authority addressed to the Company that are, or if issued would be, binding on the Company.

        (t)    Divisive Transactions.    The Company has never been either a "distributing corporation" or a "controlled corporation" in connection with a distribution of stock qualifying for tax-free treatment, in whole or in part, pursuant to Section 355 of the Code.

        (u)    Section 83(b) Elections.    To the knowledge of the Company, all persons who have purchased shares of the Company's stock that at the time of such purchase were and at the Effective Time will be subject to a substantial risk of forfeiture under Section 83 of the Code have timely filed elections under Section 83(b) of the Code and any analogous provisions of applicable foreign, state and local Tax laws.

        (v)    Nonqualified Deferred Compensation Plans.    Each plan, program, arrangement or agreement maintained by the Company which constitutes in any part a nonqualified deferred compensation plan within the meaning of Section 409A of the Code is identified as such in Schedule 4.12(v) of the Company Disclosure Schedule. Since December 31, 2004, each plan, program, arrangement or agreement there identified has been operated and maintained in accordance with a good faith, reasonable interpretation of Section 409A of the Code and its purpose, as determined under applicable guidance of the U.S. Department of Treasury and the IRS, with respect to amounts deferred (within the meaning of Section 409A of the Code) after December 31, 2004.

        (w)    Reportable Transactions, Etc.    The Company has not participated, within the meaning of Treasury Regulations Section 1.6011-4(c), in (i) any "reportable transaction" within the meaning of Section 6011 of the Code and the Treasury Regulations thereunder, (ii) any "confidential corporate tax shelter" within the meaning of Section 6111 of the Code and the Treasury Regulations thereunder, or (iii) any "potentially abusive tax shelter" within the meaning of Section 6112 of the Code and the Treasury Regulations thereunder.

        (x)    Tax Exemptions and Holidays, Etc.    The Company is in compliance in all material respects with all terms and conditions of any Tax exemptions, Tax holiday or other Tax reduction agreements, approvals or orders of any Taxation Authority and, to the Company's knowledge, the consummation of the Merger will not have any adverse effect on the validity and effectiveness of any such Tax exemptions, Tax holidays or other Tax reduction agreements or orders.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

48

        (y)    Tax Attributes, Etc.    To the best of the Company's knowledge, it has never had any outstanding option that has been at any time treated as exercised under and within the meaning of Treasury Regulations Section 1.382-4(d). The Company has not experienced an "ownership change" within the meaning of Section 382(g)(1) of the Code to which either Section 382(l)(5) or Section 382(l)(6) applied.

        For purposes of this Section 4.12, references to the Company shall be deemed to include the Company and all of its Subsidiaries.

        4.13    Employee Benefit Plans.

        (a)   Except as described on Schedule 4.13(a) of the Company Disclosure Schedule, the Company does not now maintain or contribute to, or have any liability (contingent or otherwise) in respect of, any pension, profit-sharing, deferred compensation, bonus, stock option, share appreciation right, severance, group or individual health, dental, medical, life insurance, survivor benefit, or similar plan, policy, or arrangement, whether formal or informal, for the benefit of any director, officer, consultant or employee, whether active or terminated, of the Company. Each of the arrangements set forth on Schedule 4.13(a) of the Company Disclosure Schedule is hereinafter referred to as a "Company Employee Benefit Plan".

        (b)   The Company has delivered or made available to Parent true, correct, and complete copies of each Company Employee Benefit Plan, and with respect to each such Company Employee Benefit Plan (i) any associated trust, custodial, insurance, or service agreements, (ii) any annual report, actuarial report, or disclosure materials (including specifically any summary plan descriptions) submitted to any governmental agency or distributed to participants or beneficiaries thereunder in the current calendar year or any of the three (3) preceding calendar years, and (iii) the most recently received U.S. Internal Revenue Service ("IRS") determination letters and any governmental advisory opinions or rulings.

        (c)   Each Company Employee Benefit Plan is and has heretofore been maintained and operated in material compliance with the terms of such Plan and with the requirements prescribed (whether as a matter of substantive law or as necessary to secure favorable tax treatment) by any and all statutes, governmental or court orders, and governmental rules or regulations in effect from time to time, including, but not limited to, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code, and applicable to such Plan. Each Company Employee Benefit Plan that is intended to qualify under Section 401(a) of the Code is specifically so identified in Schedule 4.13(a) of the Company Disclosure Schedule and has been determined by the IRS to be so qualified, and to the Company's knowledge, nothing has occurred since the date of the last such determination as to each such Plan or trust that has resulted or is likely to result in the revocation of such determination as to such Plan or trust, other than such failures as may be corrected without expenditure of more than ten thousand dollars ($10,000).

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

49

        (d)   There is no pending, or to the Company's knowledge, threatened, legal action, proceeding, or investigation, other than routine claims for benefits, concerning any Company Employee Benefit Plan, or to the Company's knowledge, any fiduciary thereof, and to the Company's knowledge, there is no basis for any such legal action, proceeding, or investigation.

        (e)   No Company Employee Benefit Plan nor any party in interest with respect thereto, has engaged in a prohibited transaction that could subject the Company directly or indirectly to liability under Section 409 or 502(i) of ERISA or Section 4975 of the Code.

        (f)    To the Company's knowledge, no communication, report, or disclosure has been made that, at the time made, did not reflect accurately in all material respects the terms and operations of any Company Employee Benefit Plan.

        (g)   No Company Employee Benefit Plan provides welfare benefits subsequent to termination of employment to employees or their beneficiaries (except to the extent required by applicable state insurance laws and Title I, Part 6 of ERISA), other than (A) coverage mandated by applicable law, (B) benefits the full cost of which is borne by the current or former employees (or their beneficiaries), or (C) benefits that have already been satisfied in full.

        (h)   The Company has not undertaken to maintain any Company Employee Benefit Plan for any period of time and each such Plan is terminable at the sole discretion of the Company, subject only to such constraints as may be imposed by applicable law.

        (i)    With respect to each Company Employee Benefit Plan for which a separate fund of assets is or is required to be maintained, full payment has been made of all amounts that the Company is required, under the terms of each such Plan, to have paid as contributions to that Plan as of the end of the most recently ended plan year of that Plan. The current value of the assets of each such Company Employee Benefit Plan, as of the end of the most recently ended plan year of that Plan, exceeded the current value of all accrued benefits under that Plan.

        (j)    The execution of this Agreement and the consummation of the transactions contemplated hereby will not result in any payment (whether of severance pay or otherwise) becoming due from any Company Employee Benefit Plan. to any current or former director, officer, consultant, or employee of the Company or result in the vesting, acceleration of payment, or increases in the amount of any benefit payable to or in respect of any such current or former director, officer, consultant, or employee.

        (k)   No Company Employee Benefit Plan nor any retirement plan of an ERISA Affiliate of the Company is a multiemployer plan or subject to Section 412 of the Code or Title IV of ERISA.

        (l)    For purposes of this Section 4.13, "multiemployer plan" and "party in interest" have the same meaning assigned such terms under Section 3 of ERISA, and "ERISA Affiliate" means any entity that under Section 414 of the Code is treated as a single employer with the Company.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

50

        4.14    Safety and Environmental Matters.    Except as set forth on Schedule 4.14 of the Company Disclosure Schedule:

        (a)   None of the activities carried on by the Company at any plants, offices, or properties in or on which the Company operates are in violation of any zoning, health, or safety law or regulation, including without limitation the Occupational Safety and Health Act of 1970, as amended, excluding only such violations as will not, either individually or in the aggregate, have a Material Adverse Effect on the Company.

        (b)   Neither the Company, nor to the Company's knowledge, any operator of any real property presently or formerly owned, leased, or operated by the Company is in violation or alleged violation of any judgment, decree, order, law, license, rule or regulation pertaining to environmental matters, including without limitation the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, and applicable federal, state, foreign, and local statutes, regulations, ordinances, orders, and decrees relating to Hazardous Substances (as defined in Section 4.14(c) hereof), natural resources, pollutants or protection of human health (as it relates to exposure to Hazardous Substances), safety, or the environment (all of the foregoing, collectively, "Environmental Laws"), excluding only such violations as will not, either individually or in the aggregate, have a Material Adverse Effect on the Company.

        (c)   The Company has not received notice from any third party, including without limitation any federal, state, foreign, or local governmental authority, that (i) the Company has been identified by the United States Environmental Protection Agency (the "EPA") as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B (1986); (ii) any hazardous waste as defined by 42 U.S.C. §6903(5), any hazardous substance as defined by 42 U.S.C. § 9601(14), any pollutant or contaminant as defined by 42 U.S.C. § 9601(33) or any toxic substance, oil, or hazardous material or other chemical or substance regulated by or forming the basis of liability under any Environmental Laws (collectively, "Hazardous Substances") that the Company has generated, transported, handled, used, or disposed of has been found at any site at which a federal, state, foreign, or local agency or other third party has conducted or has ordered that the Company conduct a remedial investigation, removal, or other response action pursuant to any Environmental Law; or (iii) the Company is or will be a named party to any claim, action, cause of action, complaint (contingent or otherwise), or legal or administrative proceeding arising out of any third party's incurrence of costs, expenses, losses, or damages of any kind whatsoever in connection with the release of Hazardous Substances.

        (d)   (i)    No portion of any real property presently or formerly owned, leased, or operated by the Company has been used by the Company, to handle, use, manufacture, transport, store, or dispose of Hazardous Substances except in accordance with applicable Environmental Laws; (ii) to the Company's knowledge, no portion of any real property presently owned, leased, or operated by the Company has been used by any other person to handle, use, manufacture, transport, store or dispose of Hazardous Substances except in accordance with applicable Environmental Laws; (iii) no underground tank or other underground storage receptacle for Hazardous Substances used by the Company is located on any real property presently owned, leased, or operated by the Company, or to the Company's knowledge, any real property formerly owned, leased, or operated by it; (iv) to the Company's knowledge, there have been no releases (i.e. any past or present releasing, spilling, leaking, pumping, pouring, emitting, emptying,

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

51

discharging, injecting, escaping, disposing, or dumping) or threatened releases of Hazardous Substances by the Company on, upon, into, or from any real property presently or formerly owned, leased, or operated by the Company; (v) to the Company's knowledge, there have been no releases on, upon, from, or into any real property in the vicinity of any real property presently owned, leased, or operated by the Company that, through soil or groundwater contamination, have come to be located on, any of the real property presently owned, leased, or operated by the Company; and (vi) any Hazardous Substances that have been generated by the Company, on any real property presently or formerly owned, leased, or operated by the Company, will have been transported offsite prior to the Effective Time, and, to the Company's knowledge, treated or disposed of to the extent required by and in accordance with applicable Environmental Laws. Notwithstanding anything to the contrary in this Section 4.14(d), for the purpose of continuing to develop the Company Program, small quantities of certain hazardous substances may be maintained within the real property leased by the Company, but only to the extent necessary to continue the development of the Company Program at the request of Parent, and only in the type and quantity consistent with normal biotechnology research and development and in accordance with applicable Environmental Laws.

        (e)   No real property presently owned, leased, or operated by the Company, and to the Company's knowledge, no real property formerly owned, leased, or operated by the Company, and as a result of the present or past activities of the Company, is subject to any Environmental Law requiring the performance of any Hazardous Substances site assessment, the removal or remediation of any Hazardous Substances, the giving of notice to any governmental agency or other person, or the recording and/or delivery to any governmental agency or other person of any environmental disclosure statement or document, by reason of, or as a condition to the effectiveness of, the Merger and/or any other transaction contemplated hereby.

        (f)    The Company has and maintains, in full force and effect, all licenses, permits, registrations, consents, authorizations and other approvals (the "Environmental Permits") from all governmental authorities as are required under Environmental Laws or are otherwise necessary for the conduct of the business or operation of the Company, and the Company is in compliance with all of the Environmental Permits, excluding only such matters as will not, either individually or in the aggregate, have a Material Adverse Effect on the Company.

        4.15    Labor Relations.    The Company is and has been in compliance with all federal and state laws respecting employment and employment practices, terms and conditions of employment, wages and hours, and nondiscrimination in employment, and is not and has not been engaged in any unfair labor practice. There is no charge or proceeding pending, or to the Company's knowledge, threatened, against the Company alleging unlawful discrimination in employment practices or unfair labor practice before any court or agency, including without limitation the National Labor Relations Board. There is no labor strike, dispute, work slow-down, or work stoppage pending, or to the Company's knowledge, threatened against or involving the Company. No one has petitioned within the last five years or is now petitioning for union representation of any of the employees of the Company. No grievance or arbitration proceeding arising out of or under any collective bargaining agreement is pending against the Company and no claim therefor has been asserted. None of the employees of the Company is covered by any collective bargaining agreement, and no collective bargaining agreement is currently being negotiated by the Company. The Company has not experienced any work stoppage or other labor difficulty during the last five years.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

52

        4.16    Litigation.    Except as set forth in Schedule 4.16 of the Company Disclosure Schedule, no litigation, arbitration, action, suit, proceeding, or investigation (whether conducted by any judicial or regulatory body, arbitrator, or other person) is pending (as evidenced by the Company's receipt of service of process or other written notice of such pendency), or to the Company's knowledge, threatened, against the Company, nor is there any basis therefor known to the Company.

        4.17    Material Contracts.

        (a)   Schedule 4.17(a)(i) of the Company Disclosure Schedule sets forth a complete and accurate list of all Company Program Contracts (as defined below). Schedule 4.17(a)(ii) of the Company Disclosure Schedule sets forth a complete and accurate list of all Material Contracts (as defined below). As used in this Agreement, the term "Company Program Contract" means any agreements or understanding of any kind, written or oral, that is legally enforceable by or against or otherwise binding on the Company and relates to the Company Program. As used in this Agreement, the term "Material Contract" means every agreement or understanding of any kind, written or oral, that is legally enforceable by or against or otherwise binding on the Company and which is material to the Company's business, and specifically includes without limitation: (i) agreements with any current or former officer, director, employee, consultant, or shareholder, or any partnership, corporation, joint venture, or any other entity in which any such person has an interest (other than agreements terminable by the Company upon thirty (30) days notice and which termination does not result in any obligations or liabilities to the Company); (ii) agreements with any labor union or association representing any employee; (iii) agreements for the provision of services by or to the Company in excess of $100,000; (iv) bonds or other security agreements provided by any party in connection with the business of the Company; (v) agreements for the purchase or other acquisition or the sale or other disposition of assets or properties (other than in the ordinary course of business), or for the grant to any person of any preferential rights to purchase any such assets or properties; (vi) joint venture agreements relating to the assets, properties, or business of the Company or by or to which it or any of its assets or properties is bound or subject; (vii) agreements under which the Company agrees to indemnify any party, to share tax liability of any party, or to refrain from competing with any party; (viii) agreements with regard to Indebtedness, including, without limitation, any indenture or other agreements in connection with issuances of bonds, debentures or other debt securities by the Company and any agreements in connection with bank financings by the Company; (ix) any agreement, contract, commitment, transaction or series of transaction for any purpose relating to capital expenditures or commitments or long-term obligations; (x) any purchase order or contract for the purchase of raw materials; (xi) any distribution, joint marketing or development agreement; (xii) any assignment, license or other agreement with respect to any form of intangible property; (xiii) any research collaboration agreement; (xiv) any agreements relating to venture capital and other equity financings by the Company; (xv) any shareholder agreements or other agreements with any of the Company Shareholders pertaining to the shares of Company Stock held by them or their rights as shareholders of the Company; (xvi) any voting trust or voting agreements among the Company Shareholders and (xvii) all Company Program Contracts.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

53

        (b)   All of the Material Contracts are in full force and effect, and neither the Company nor, to the Company's knowledge, any other party thereto is in default under or in breach of any of the terms thereof, nor does any event or condition exist that after notice or lapse of time or both could constitute a default thereunder or breach thereof on the part of the Company, or to the Company's knowledge, any other party thereto. All payments required under each contract, agreement or understanding of any kind, written or oral, that is legally enforceable by or against or otherwise binding on the Company have been accrued for in accordance with generally accepted accounting principles, consistently applied, and are reflected in the Company's financial statements. No approval or consent of any person that has not already been obtained and listed on Schedule 4.17 of the Company Disclosure Schedule is needed in order that the Material Contracts continue in full force and effect following the consummation of the Merger and the other transactions contemplated hereby, and, except as set forth on Schedule 4.17 of the Company Disclosure Schedule, no such Material Contract includes any provision, the effect of which may be to terminate (or give rise to a right of termination under) such Material Contract, to enlarge or accelerate any obligations of the Company thereunder, or to give additional rights to any other person, as a result of the consummation of the Merger or the other transactions contemplated hereby. The Company has delivered to Parent true, correct, and complete copies of all such Material Contracts, including all amendments, modifications, and supplements thereto.

        4.18    Potential Conflicts of Interest.    No officer, director, or, to the Company's knowledge, shareholder of the Company (a) owns, directly or indirectly, any interest (excepting not more than five percent (5%) stock holdings for investment purposes in securities of publicly held and traded companies) in, or is an officer, director, employee, or consultant of, any person that furnishes or sells services, drug candidates or products that the Company furnishes or sells or proposes to furnish or sell or is a lessor, lessee, customer, or supplier of the Company; (b) owns, directly or indirectly, in whole or in part (other than solely as a result of his or its ownership of Company Stock), any tangible or intangible property that the Company is using or the use of which is necessary for the business of the Company; or (c) to the Company's knowledge, has any cause of action or other claim whatsoever against, or owes any amount to, the Company, except for claims in the ordinary course of business, including, without limitation, claims for accrued vacation pay, accrued benefits under Employee Benefit Plans, and similar matters and agreements.

        4.19    Insurance.Schedule 4.19 of the Company Disclosure Schedule lists the policies of products liability, theft, fire, liability, worker's compensation, life, property and casualty, directors and officers, and other insurance owned or held by the Company. Such policies of insurance are of the kinds, cover such risks, and are in such amounts and with such deductibles and exclusions, as are consistent with prudent business practice for companies in the Company's line of business and of a similar size and location. All such policies are in full force and effect; are sufficient for compliance by the Company with all requirements of law and of all agreements to which the Company is a party; are valid, outstanding, and enforceable policies and provide that they will remain in full force and effect through the respective dates set forth on Schedule 4.19 of the Company Disclosure Schedule; and will not in any way be affected by, or terminate or lapse as a result of the consummation of, the transactions contemplated by this Agreement.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

54

        4.20    Bank Accounts, Signing Authority, Powers of Attorney.Schedule 4.20 of the Company Disclosure Schedule sets forth a complete and accurate list of all bank, brokerage, and other accounts, and all safe-deposit boxes, of the Company, together with the balances and contents of each, and the persons with signing or other authority to act with respect thereto. Except as so listed, the Company does not have any account or safe deposit box in any bank, and no person has any power, whether singly or jointly, to sign any checks on behalf of the Company, to withdraw any money or other property from any bank, brokerage, or other account of the Company, or to act under any agency or power of attorney granted by the Company at any time for any purpose. Schedule 4.20 of the Company Disclosure Schedule also sets forth the names of all persons authorized to borrow money or sign notes on behalf of the Company.

        4.21    Relationships With Suppliers and Licensors.    No current supplier to the Company has notified the Company of an intention to terminate or substantially alter its existing business relationship with the Company, nor has any licensor under a license agreement with the Company notified the Company of an intention to terminate or substantially alter the Company's rights under such license, which termination or alteration would have a Material Adverse Effect on the Company.

        4.22    Employment of Officers, Employees.    The name and current annual salary and other compensation payable by the Company to each of its employees including but not limited to wages, salary, commissions, normal bonus, profit sharing, deferred compensation, and other extra compensation) are as set forth on Schedule 4.22 of the Company Disclosure Schedule. Except to the extent otherwise disclosed on Schedule 4.22 of the Company Disclosure Schedule, none of the current or former officers, directors, employees or consultants of the Company is a party to, or the beneficiary of, any agreement, plan or arrangement that provides for any payment (whether of severance pay or otherwise) becoming due to such current or former officer, director, employee or consultant upon termination of his or her relationship with the Company or as a result of the Merger, or that provides for the vesting, acceleration of payment, or increases in the amount of any benefit payable to or in respect of such current or former director, officer, consultant, or employee upon termination of his or her relationship with the Company or as a result of the Merger.

        4.23    Minute Books.    The minute books of the Company made available to Parent for inspection accurately record therein all actions taken by the Company Board, all committees thereof, and the Company's shareholders.

        4.24    Brokers.    Except as set forth on Schedule 4.24 of the Company Disclosure Schedule, no finder, broker, agent, or other intermediary has acted for or on behalf of the Company in connection with the negotiation, preparation, execution, or delivery of this Agreement or the consummation of the Merger or the other transactions contemplated hereby. Schedule 4.24 of the Company Disclosure Schedule sets forth the compensation or payment obligations of the Company with respect to any such finder, broker, agent or other intermediary. The Company shall have provided to Parent a true, correct and complete copy of any and all engagement letters or other agreements between the Company and any such finder, broker, agent or other intermediary.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

55

        4.25    Regulatory Compliance.

        (a)   All biological and drug products being manufactured, distributed or developed by the Company ("Company Products") that are subject to the jurisdiction of the FDA are being manufactured, labeled, stored, tested, distributed and marketed in compliance with all applicable requirements under the Food and Drug and Cosmetic Act ("FDCA"), the Public Health Service Act, their applicable implementing regulations and all comparable applicable foreign, state and local laws and regulations. The Company has obtained all applicable approvals, clearances, authorizations, licenses, and registrations required by the FDA or any other Governmental Entity to permit any manufacturing, distribution, marketing, storing, or testing of Company Products as previously conducted or currently being conducted by the Company, and the Company is in compliance with all reporting requirements related thereto.

        (b)   All human clinical trials conducted by or on behalf of the Company have been, and are being, conducted in compliance with the applicable requirements of current Good Clinical Practice, Informed Consent and all other applicable requirements relating to protection of human subjects specifically contained in 21 CFR Parts 312, 50, 54, 56 and 11 and all applicable guidelines, and all applicable foreign, state and local laws and regulations. The Company has filed with the FDA or other appropriate Governmental Entities all required notices, and annual or other reports, including notices of adverse events, serious and/or unexpected adverse events, and serious injuries or deaths related to the use of the Company Products in human clinical trials, and the Company has provided copies of such notices to Parent.

        (c)   All manufacturing, warehousing, distributing, and testing operations conducted by or for the benefit of the Company with respect to Company Products being used in human clinical trials have been and are being conducted in accordance with the FDA's recommended current Good Manufacturing Practices continuum for drug and biological products, as set forth in 21 CFR Parts 210 and 211. In addition, the Company is in compliance with all applicable registration and listing requirements set forth in 21 U.S.C. Section 360 and 21 CFR Part 207 and all similar applicable laws and regulations.

        (d)   The Company has not received any notice that the FDA or any other Governmental Entity or Institution Review Board ("IRB") has initiated, or threatened to initiate, any action to suspend any clinical trial (i.e. clinical hold), suspend or terminate any Investigational New Drug Application sponsored by the Company or otherwise restrict the preclinical or nonclinical research on or clinical study of any Company Product or any biological or drug product being developed by the Company, or to recall, suspend or otherwise restrict the manufacture of any Company Product.

        (e)   Neither the Company nor any of its officers, key employees or, to the knowledge of the Company, agents or clinical investigators acting for the Company, has committed any act, made any statement or failed to make any statement that would reasonably be expected to provide a basis for the FDA to invoke its policy with respect to "Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities" set forth in 56 Fed. Reg. 46191 (September 10, 1991) and any amendments thereto. Neither the Company nor any officer, key employee or, to the knowledge of the Company, independent contractor, or agent of the Company has been convicted of any crime or engaged in any conduct that has resulted in or would reasonably be expected to result in (i) debarment under 21 U.S.C. Section 335a or any similar state law or (ii) exclusion under 42 U.S.C. Section 1320a-7 or any similar state law or regulation.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

56

        (f)    All animal studies or other preclinical tests performed in connection with or as the basis for any regulatory approval that has been sought or obtained for Company Products either (x) have been conducted in accordance with all applicable statutes, laws and rules, including Good Laboratory Practice requirements, contained in 21 CFR Part 58, the United States Animal Welfare Act, the International Conferences of Harmonization's (ICH) Guidance on Nonclinical Safety Studies for the Conduct of Human Clinical Trials for Pharmaceuticals or the ICH Guideline on Safety Pharmacology Studies for Human Pharmaceuticals or (y) involved experimental research techniques that were performed for informational purposes only, whether or not included in a regulatory filing, or could not be performed by a registered GLP testing laboratory (with appropriate notice being given to the FDA in regulatory filings) and have employed the procedures and controls generally used by qualified experts in animal or preclinical studies of products comparable to those being developed by the Company.

        (g)   There are no lawsuits, actions, arbitrations, proceedings, charges, complaints or investigations pending with respect to a violation by the Company of the FDCA, PHSA, FDA regulations adopted thereunder, the Controlled Substance Act or any other legislation or regulation promulgated by any other United States governmental entity.

        (h)   The Company has not received any warning or untitled letter, reports of inspection observations, including FDA Form 483s, established inspection reports, notices, clinical holds, or other documents from the FDA, any other Governmental Entity, or IRB since inception relating to Company Products and alleging a lack of compliance by the Company with any applicable laws or regulatory requirements (including those of the FDA).

        (i)    The Company has provided to Parent copies of all written communications to and from the FDA, any other Governmental Entity, or IRB relating specifically to Company Products, and their respective operations or business, including any official notices, citations, decisions, warning or untitled letters, material reports of inspection observations and establishment inspections.

        4.26    Compliance with Other Agreements, Laws, Etc.    To Company's knowledge, it has complied with, and is in compliance with, (a) all laws, statutes, governmental regulations and all judicial or administrative tribunal orders, judgments, writs, injunctions, decrees or similar commands applicable to its business, (b) all unwaived terms and provisions of all contracts, agreements and indentures to which the Company is a party, or by which the Company or any of its properties is subject, and (c) its articles of incorporation and by-laws, respectively, each as amended to date; in the case of the preceding clauses (a) and (b), excepting only any such noncompliance that, both individually and in the aggregate, have not resulted and will not result in any Material Adverse Effect with respect to the Company. The Company has not been charged with, or to its knowledge, been under investigation with respect to, any violation of any provision of any federal, state, or local law or administrative regulation.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

57

        4.27    Permits, Licenses, and Programs; No Debarment.

        (a)   Schedule 4.27 of the Company Disclosure Schedule contains a complete and correct copy of (i) each pending application or registration for governmental approval and each governmental approval held by the Company to develop, manufacture, test (including, without limitation, preclinical tests and clinical trials), import, export, store, market and sell the Company's Products or drug candidates, (ii) the most recent report by or on behalf of the FDA or any other governmental body involving or relating to any facility inspection of the Company's facilities, and (iii) a description of all ongoing proprietary internal research and development programs. Except as are set forth on Schedule 4.27 of the Company Disclosure Schedule, (i) the Company possesses such governmental approvals from all governmental bodies including, without limitation, all FDA approvals, necessary to permit the operation of its business in the manner as the same is currently conducted, and to operate, own or occupy its properties, (ii) there have been no product recalls, field corrective activity, medical device reports, warning letters or administrative actions by the FDA or any other governmental body, and (iii) to the Company's knowledge, (A) there is no administrative action pending or threatened for the revocation of any such governmental approval and (B) assuming the obtaining of the authorizations, consents, approvals and other actions listed on Schedule 4.27 of the Company Disclosure Schedule, no governmental approvals and other actions listed on Schedule 4.27 of the Company Disclosure Schedule, no governmental approval by any governmental body having jurisdiction over the operation of the Company's business, whether in whole or in part, will, to the knowledge of the Company, be revoked, or become ineffective or subject to revocation, as a consequence of the transactions contemplated by this Agreement.

        (b)   The Company (i) has not been debarred or received notice of action or threat of action with respect to its debarment under the provisions of the Generic Drug Enforcement Act of 1992, 31 U.S.C. Section 335(a) and (b), or (ii) to the Company's knowledge, has used in any capacity the services of any person which has been debarred under the provisions of the Generic Drug Enforcement Act of 1992, 21 U.S.C. Section 335(a) and (b).

        4.28    Manufacturing and Marketing Rights.    The Company has not granted rights to manufacture, produce, distribute, assemble, license, market, or sell its products to any other person and is not bound by any agreement that affects the Company's exclusive right to manufacture, produce, distribute, assemble, license, market, or sell its products.

        4.29    Distribution of Merger Consideration.    The Merger Consideration, when distributed in accordance with the terms of this Agreement and the LLC Agreement, will have been distributed to the holders of Company Stock in accordance with the provisions of the Company's articles of incorporation in effect immediately prior to the Effective Time and any other document or agreement among the Company and such holders related to the distribution of the Merger Consideration.

        4.30    Required Shareholder Approval.    The only votes, consents and approvals of the shareholders of the Company required pursuant to Title 23B of the Revised Code of Washington to adopt this Agreement, approve the terms of this Agreement and approve the Merger and the transactions contemplated hereby (the "Required Shareholder Approval") are as follows: (A) the affirmative vote of the holders of a majority of the outstanding voting power of the Company Preferred Stock and the Company Common Stock, voting together as single class, in favor of the adoption of this Agreement and the approval of the Merger and the terms thereof; (B) the affirmative vote of the holders of a majority of the outstanding shares of Company Preferred Stock, voting separately as a class, in favor of the adoption of this Agreement and the approval of the Merger and the terms thereof; and (C) the affirmative vote of (i) the holders of a majority

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

58

of the outstanding voting power of the Company Preferred Stock and the Company Common Stock, voting together as single class, (ii) the holders of a majority of the outstanding shares of Company Preferred Stock, voting separately as a class, and (iii) the holders of a majority of the outstanding voting power of the Company Common Stock, approving the amendment of the Company's Articles of Incorporation substantially in the form of Exhibit I attached hereto (the "Amended Articles").

        4.31    Government Contract Matters.

        (a)   The Company has been, and has conducted its business, in compliance with all applicable laws and regulations relating to its performance of commercial and government contracts, all terms and conditions of its government and commercial contracts, all applicable import and export laws, regulations, licenses and provisos, and all applicable anti-corruption laws and regulations. The Company has not received any notice from any Governmental Entity including, but not limited to the Defense Contract Audit Agency ("DCAA") and Defense Contract Management Agency ("DCMA"), alleging any violation by the Company of any applicable law or regulation or notice regarding disallowance of costs under a government contract. None of the Company's assets or businesses is subject to any judicial or administrative proceeding, order, or to the Company's knowledge, investigation of or by a Governmental Entity.

        (b)   With respect to each Government Contract and Bid listed on Schedule 4.31(b) of the Company Disclosure Schedule: (i) the Company has complied in all material respects with all terms and conditions of such Government Contract and Bid and any requirements of law pertaining to such Government Contract and Bid; (ii) each representation and certification executed by the Company pertaining to such Government Contract and Bid was true and correct in all material respects as of its effective date; (iii) the Company has not submitted any inaccurate or untruthful cost or pricing data or any claim for payment to any Governmental Entity in connection with such Government Contract or Bid; (iv) there is no suspension, stop work order, cure notice or show cause notice in effect for such Government Contract nor, to the Company's knowledge, is any Governmental Entity threatening to issue one; and (v) no protest of any Government Contract or Bid is pending.

        (c)   There is no pending or, to the Company's knowledge, threatened: (i) civil fraud or criminal investigation that exists or has been threatened, indictment or information of the Company by any Governmental Entity; (ii) suspension or debarment proceeding against the Company; or (iii) contracting officer's decision or legal proceeding by which a Governmental Entity claims that the Company has breached or is liable to a Governmental Entity, in each case with respect to any Government Contract. The Company has not conducted or initiated any internal investigation, or made a voluntary disclosure to the United States Government, with respect to any alleged misstatement or omission arising under or relating to any Government Contract or Bid at any time since its inception and no such investigation or voluntary disclosure is anticipated.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

59

        (d)   Except as set forth on Schedule 4.31(d) of the Company Disclosure Schedule, there are no pending or, to the Company's knowledge, threatened material claims or disputes by or between the Company and any prime contractor, subcontractor or vendor relating to any Government Contract. Except as set forth on Schedule 4.31(d) of the Company Disclosure Schedule, the Company has not received any notice of termination for convenience or default of any Government Contract, in whole or in part, and to the Company's knowledge, no such termination has been threatened or is otherwise anticipated.

        (e)   None of the officers, directors or employees of the Company has: (i) made any payments or used any funds to influence federal transactions in violation of federal laws and regulations and or failed to make any required disclosures; (ii) used any corporate or other funds or given anything of value for unlawful commissions, gratuities, contributions, payments, gifts or entertainment, or made any unlawful expenditures relating to political activity to government officials or others or established or maintained any unlawful or unrecorded funds in violation of any applicable foreign, federal or state law; or (iii) accepted or received any unlawful contributions, payments, expenditures or gifts.

        (f)    Except for those liens or assignments listed on Schedule 4.31(f) of the Company Disclosure Schedule, made in accordance with 31 U.S.C. § 3727 (as amended), otherwise known as the Assignment of Claims Act, and 41 U.S.C. § 15 (as amended), otherwise known as the Assignment of Contracts Act, the Company has not assigned or agreed to assign to any Person, or otherwise encumbered or agreed to encumber for the benefit of any Person, any right, title or interest in or to any of the Government Contracts, or any account receivable relating thereto.

        (g)   No Person or Governmental Entity has notified the Company in writing or orally that any Governmental Entity intends to seek to lower rates under any Government Contract or task order or delivery order thereunder.

        4.32    Disclosure.    No representation or warranty by the Company in this Agreement or in any exhibit or Schedule hereto contains or will contain at the time made or deemed to be made pursuant to this Agreement any untrue statement of a material fact or omits or will omit to state a material fact required to be stated herein or therein or necessary to make the statements contained herein or therein on the whole not false or misleading.

ARTICLE 5
REPRESENTATIONS AND WARRANTIES
OF PARENT AND THE MERGER SUB

        Parent and the Merger Sub hereby represent and warrant to the Company as follows as of each of (a) the Agreement Date and (b) the Closing Date, subject in each case to such exceptions as are set forth in the Parent Disclosure Schedule attached to this Agreement (the "Parent Disclosure Schedule"):

        5.1    Incorporation; Authority.    Each of Parent and the Merger Sub is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own or lease and operate its properties and to carry on its business as presently conducted and as presently proposed to be conducted. Each of Parent and the Merger Sub is duly qualified to transact business and is in good standing in each jurisdiction where such qualification is required and in which failure to so qualify would have a Material Adverse Effect on the Parent.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

60

        5.2    Ownership of Merger Sub; No Prior Activities.    Merger Sub is a direct, wholly-owned Subsidiary of Parent, was formed solely for the purpose of engaging in the transactions contemplated by this Agreement and has engaged in no business activity other than as contemplated by this Agreement.

        5.3    Authorization and Enforceability.    Each of Parent and the Merger Sub has all requisite corporate power to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and the Merger Sub, subject only to the adoption of this Agreement by Parent as the sole stockholder of Merger Sub (which shall be effected by written consent immediately following the execution and delivery of this Agreement). This Agreement has been duly executed and delivered by each of Parent and the Merger Sub and constitutes the valid and binding obligation of each of Parent and the Merger Sub, enforceable in accordance with its terms, except as such enforcement may be limited by (i) the effect of bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights, or (ii) the rules governing the availability of specific performance, injunctive relief or other equitable remedies and general principles of equity, regardless of whether considered in a proceeding in law or equity.

        5.4    Governmental and Other Third-Party Consents, Non-Contravention, Etc.    No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of Parent or Merger Sub is required in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, except for (i) the filing of Merger Documents with the Delaware Secretary of State and Washington Secretary of State, as applicable; (ii) the filing by Parent of such reports and information with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the SEC thereunder, as may be required in connection with this Agreement, the Merger and the other transactions contemplated by this Agreement; and (iii) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not have a Material Adverse Effect on Parent and would not prevent, or materially alter or delay any of the transactions contemplated by this Agreement. The execution, delivery, and performance of this Agreement and the consummation of such transactions will not violate (a) any provision of Parent's or the Merger Sub's Certificate of Incorporation or by-laws, as amended and in effect, (b) any order, judgment, injunction, award or decree of any court or state or federal governmental or regulatory body applicable to Parent or the Merger Sub, or (c) any judgment, decree, order, statute, rule, regulation, agreement, instrument, or other obligation to which Parent or the Merger Sub is a party or by or to which such entity or any of its assets is bound or subject, which violation will not have a Material Adverse Effect on Parent or Merger Sub. Parent's Board of Directors has in good faith estimated that the present value of the Merger Consideration as of the Effective Time will not equal or exceed the minimum size-of-transaction threshold that would require notification under the HSR Act.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

61

        5.5    Brokers.    Except as set forth on Schedule 5.5 of the Parent Disclosure Schedule, neither Parent nor Merger Sub have incurred, nor will they incur, any liability for brokerage or finders' fees or agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or the consummation of the transactions contemplated hereby.

        5.6    Adequacy of Funds.    Parent currently has and will at the Closing have adequate financial resources to pay the Closing Consideration as contemplated by Section 2.6 hereof, and Parent will have adequate financial resources to satisfy its payment obligations under Section 2.7 hereof, when such payment obligations are due.

        5.7    Absence of Certain Changes.    Since March 31, 2007, there has not been any change in the business, financial condition or prospects, or business relationships of Parent that has or is reasonably likely to have a materially adverse effect on the ability or commitment of Parent to fulfill its obligations under this Agreement, including but not limited to those under Section 6.9 hereof.

ARTICLE 6
MUTUAL COVENANTS.

        6.1    Satisfaction of Conditions.    Each of the parties will use commercially reasonable efforts to cause the satisfaction as promptly as possible of the conditions contained in Sections 8.1 through 8.3 hereof that impose obligations on it or require action on its part or the part of any of its shareholders or Affiliates.

        6.2    Further Assurances.    Subject to the terms and conditions set forth in this Agreement, from time to time both before and after the Effective Time, the Company, Parent, Merger Sub and the Holders Representative will use (and each of the foregoing will use commercially reasonable efforts to cause their respective members, officers and directors to use) their respective commercially reasonable efforts, as promptly as is practicable, to take or cause to be taken all actions, and to do or cause to be done all other things, as are necessary, proper, or advisable to consummate and make effective the Merger and the other transactions contemplated hereby.

        6.3    Regulatory Approval; Further Assurances.

        (a)   Parent and the Company shall use commercially reasonable efforts to effectuate the Merger and make effective the other transactions contemplated by this Agreement as soon as practicable following the Agreement Date. Without limiting the generality of the foregoing, each party to this Agreement shall: (i) make any filings and give any notices required to be made or given by such party in connection with the Merger and the other transactions contemplated by this Agreement; (ii) use commercially reasonable efforts to obtain any consent, action or non-action required (pursuant to any applicable legal requirement, contract or otherwise) in order to implement the Merger or any of the other transactions contemplated by this Agreement; and (iii) use commercially reasonable efforts to lift any restraint, injunction or other legal bar to the Merger. To the extent permitted by law, each of Parent and the Company shall promptly deliver to the other a copy of each such filing made, each such notice given and each

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

62

such consent obtained after the Agreement Date and prior to the Effective Time. For the avoidance of doubt, the term "commercially reasonable efforts" as used in this paragraph is not the defined term "Commercially Reasonable Efforts," and shall include, without limitation, the prompt submission of responsive materials in response to a request from a Governmental Entity for voluntary submission of information and documents, and substantial compliance with a formal request for information and documentary materials issued by a Governmental Entity under any foreign, federal or state antitrust, competition or fair trade law.

        (b)   Parent and the Company shall respond as promptly as practicable to (i) all inquiries or requests received by the Federal Trade Commission or the Department of Justice for information or documentation and (ii) all inquiries or requests received from any state attorney general or other Governmental Entity in connection with antitrust or related matters. Each of the Company and Parent shall (A) give the other party prompt notice of the commencement of any legal proceeding by or before any Governmental Entity with respect to the Merger or any of the other transactions contemplated by this Agreement; (B) keep the other party informed as to the status of any such legal proceeding; and (C) promptly inform the other party of any communication to or from the Federal Trade Commission, the Department of Justice or any other Governmental Entity regarding the Merger. The Company and Parent will consult and cooperate with one another, and will consider in good faith the views of one another, in connection with any analysis, appearance, presentation, memorandum, brief, argument, opinion or proposal made or submitted by either of them in connection with any legal proceeding under or relating to the HSR Act or any other foreign, federal or state antitrust, competition or fair trade law. In addition, except as may be prohibited by any Governmental Entity or by any applicable law, in connection with any legal proceeding under or relating to the HSR Act or any other foreign, federal or state antitrust, competition or fair trade law or any other similar legal proceeding relating to the Merger to which either the Company or Parent is a party, each of the Company and Parent will permit authorized representatives of the other party to be present at each meeting or conference relating to any such legal proceeding (except with respect to meetings or conferences involving only a party and its own employees, representatives, legal advisors, or consultants) and to have access to and be consulted in connection with any document, opinion or proposal made or submitted to any Governmental Entity in connection with any such legal proceeding. For the avoidance of doubt, the term "legal proceeding" as used in this paragraph shall include, without limitation, an investigation relating to the Merger by any Governmental Entity under the HSR Act or any other foreign, federal or state antitrust, competition or fair trade law.

        6.4    Amended Articles and Required Shareholder Approval.    Following the execution of this Agreement, the Company will (i) promptly solicit the Required Shareholder Approval by written consent and (ii) after having received the Required Shareholder Approval, file the Amended Articles with the Secretary of State of the State of Washington. The Company Board will recommend to its shareholders the adoption and approval of this Agreement and the transactions contemplated hereby and the other matters to be submitted to its shareholders in connection therewith, subject to withdrawal only as allowed under Section 7.24(d).

        6.5    Notice of Merger and Appraisal Rights; Notice of Shareholder Approval.    As promptly as practicable following the Agreement Date, the Company shall prepare and deliver to the shareholders of the Company a Notice of Merger and Appraisal Rights (the "Shareholder Notice"), which Shareholder Notice shall comply in all respects with the requirements of

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

63

Washington Law. As promptly as practicable after the Required Shareholder Approval has been obtained, the Company shall prepare and deliver a notice (the "Post-Approval Notice") informing the Company's shareholders of the written consent obtaining the Required Shareholder Approval, which Post-Approval Notice shall comply in all respects with the requirements of Washington Law.

        6.6    Consents.    The Company shall use commercially reasonable efforts to obtain the consents, waivers and approvals necessary for the consummation of the Merger and the transactions contemplated under this Agreement (all of such consents, waivers and approvals having been set forth in Schedule 6.6 of the Company Disclosure Schedule), including, but not limited to, all consents, waivers and approvals that are necessary or required in connection with, or as a result of, the Merger to preserve all of the Company's rights and benefits in its business, assets, properties, leases and contracts following the Merger and without incurring any additional or special liability, or accelerating any existing liability or obligation, in connection with or under its business, assets, properties, leases and contracts following the Merger.

        6.7    Notification of Certain Matters.

        (a)   Between the date hereof and the Effective Time, each of Parent and the Company shall, upon obtaining knowledge of any of the following, promptly notify the other of:

          (i)  any notice or other communication from any person alleging that the consent of such person is or may be required in connection with the Merger;

         (ii)  any actions, suits, claims, investigations or other judicial proceedings known to its executive officers commenced or threatened against such party or any of its Subsidiaries which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 4.16 hereof or which relate to the consummation of the Merger;

        (iii)  occurrence or non-occurrence of any other event known to its executive officers which is likely to cause any representation or warranty of such party contained in this Agreement to be materially untrue or inaccurate at or prior to the Effective Time; and

        (iv)  any failure of such party known to its executive officers to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder.

        (b)   In addition to its obligations set forth in Section 6.7(a) hereof, the Company shall promptly notify Parent of any adverse determination or recommendation in connection with any governmental proceeding to license any of the Company's products and any report filed with the FDA regarding an unexpected fatal or life-threatening experience with respect to any such product.

        (c)   The delivery of any notice pursuant to this Section 6.7 shall not limit or otherwise affect any remedies available to a party.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

64

        6.8    Indemnification of Directors and Officers.    From and after the Effective Time, Parent shall cause the Surviving Corporation to fulfill and honor in all respects the obligations, to the extent legally permissible, of the Company to its directors and officers pursuant to the indemnification provisions under the Company's articles of incorporation or by-laws as in effect on the date hereof. Parent shall use commercially reasonable efforts to cause the Surviving Corporation to maintain in effect for six (6) years from the Effective Time the current policies of directors' and officers' liability insurance (the "D&O Policy") maintained by the Company (provided that Surviving Corporation may substitute in place thereof policies reasonably satisfactory to it of at least the same coverage containing terms and conditions which are not materially less advantageous to the individuals covered by the D&O Policy); provided, that in no event shall the Surviving Corporation be required to pay premiums for such insurance in excess of one hundred seventy-five percent (175%) of premiums currently paid by the Company (the "Maximum Amount") and if current insurance coverage cannot be maintained or obtained for the Maximum Amount, the Surviving Corporation shall obtain as much directors' and officers' liability insurance as can be obtained by paying an annual premium not in excess of the Maximum Amount. Nothing in this Section 6.8 shall obligate Parent or the Surviving Corporation to make any payments, other than for premiums not to exceed the Maximum Amount, in respect of the D&O Policy. If at any time the Surviving Corporation or Parent is required to make indemnification payments to persons who were directors, officers or employees of the Company at or prior to the Effective Time pursuant to this Section 6.8, then Parent shall have the right to make a claim for indemnification therefor pursuant to Section 9.2 hereof, provided the indemnifiable claim against the former Company director, officer or employee is of a type that is subject to indemnification coverage pursuant to Section 9.2.

        6.9    Due Diligence Obligations.

        (a)   Subject to the provisions of this Section 6.9, Parent shall use Commercially Reasonable Efforts to []*. Parent may satisfy its obligations under this Section 6.9(a) through the efforts of any of the Members of the Buyer Group. Notwithstanding anything express or implied in the foregoing provisions of this Section 6.9(a) or in any other provision of this Agreement, Parent shall not be deemed to be in breach of any of its obligations in this Section 6.9(a) []*.

        (b)   If one or more Members of Buyer Group collectively have, on or before the []*, either (i) []* or (ii) entered into []* with respect to a Contingent Payment Product with an indication for the treatment of infections caused by HCV, then Parent will be deemed to have performed and satisfied its obligations under Section 6.9(a) throughout the period commencing on []*. If one or more Members of the Buyer Group collectively have not, on or before the []* in this Section 6.9(b) (together, the "Presumed Breach Events"), then Parent shall be presumed to have breached its obligations under Section 6.9(a) above (which presumption may be rebutted by Parent as further provided below in this Section 6.9(b)). Upon such a presumed breach, Holders Representative may, if it so elects, deliver a Non-Compliance Notice to Parent pursuant to Section 6.10(b) hereof and this Section 6.9(b) no later than sixty (60) days after the []*. If Holders Representative does not deliver a Non-Compliance Notice to Parent pursuant to Section 6.10(b) and this Section 6.9(b) within such sixty (60) day period, Holders Representative, for itself and on behalf of all Holders, shall be deemed to have waived all rights and remedies against Parent for such presumed breach. If Holders Representative delivers a Non-Compliance Notice to Parent pursuant to Section 6.10(b) and this Section 6.9(b) within such sixty (60) day period, Parent may

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

65

elect, in its sole and absolute discretion by giving to the Holders Representative a Breach Dispute Notice pursuant to Section 6.10(c), either to challenge that the Presumed Breach Events have occurred or to rebut any presumption that Parent has breached its obligations under Section 6.9(a) hereof solely because the Presumed Breach Events have occurred. If, upon receipt of any Breach Dispute Notice from Parent that sets forth Parent's election to rebut any presumption that Parent has breached its obligations under Section 6.9(a) hereof solely because the Presumed Breach Events have occurred, the Holders Representative elects thereafter to initiate judicial proceedings pursuant to Section 6.10(c), then, in such proceedings, Parent shall have the burden of proof to establish that it has satisfied its obligations under Section 6.9(a) hereof notwithstanding that the Presumed Breach Events have occurred.

        (c)   On each successive six-month anniversary of the Closing Date during the period in which a Section 6.9 Contingent Payment Product is being developed by Parent until the satisfaction of HCV Milestone Five or HCV []* Milestone Five, and thereafter on each successive anniversary of the Closing Date for so long as Parent is developing or commercializing a Section 6.9 Contingent Payment Product, Parent shall provide to the Holders Representative []* in connection with such Section 6.9 Contingent Payment Product during the preceding six or twelve month period, as applicable, including []* incurred during such period. In addition, within the period of sixty (60) days after each successive six-month anniversary of the Closing Date in which a Section 6.9 Contingent Payment Product is being developed by Parent until the satisfaction of HCV Milestone Five or HCV []* Milestone Five, and thereafter within the period of sixty (60) days after each successive anniversary of the Closing Date in which a Section 6.9 Contingent Payment Product is being developed or commercialized by Parent, Parent will, upon reasonable advance notice from Holders Representative, make []* with respect to such Section 6.9 Contingent Payment Product []* and for a period not to exceed []*. The Holders Representative may suggest other []*, and, if not unduly burdensome to Parent or such other []* and not in conflict with other responsibilities or activities that such other []* may have, such []* and encourage such other []*. For a period of sixty (60) days following the delivery of any such []*, as applicable, Parent will require that such []*, if not unduly burdensome to Parent or to such []*, via telephone or email communications related to matters []*; provided that in []*. Notwithstanding anything in this Section 6.9(c) to the contrary, Parent shall not be required to provide any such []*, (x) unless and until the Holders Representative executes and delivers a confidentiality agreement reasonably acceptable to the Parent for purposes of preserving the confidentiality of all []* and information provided by Parent pursuant to this Section 6.9(c), and (y) if any such []* or information could adversely affect the attorney-client privilege between Parent and its counsel, unless such privilege could be protected by a joint defense agreement between Parent and the Holders Representative and the Holders Representative has expressed a willingness to enter into such an agreement on terms reasonably acceptable to Parent.

        (d)   In carrying out Parent's development activities in connection with the development of a Section 6.9 Contingent Payment Product, Parent shall, and shall ensure that the Surviving Corporation shall, comply in all material respects with all applicable laws, rules and regulations applicable to such development activities.

        (e)   The Participating Holders are intended third party beneficiaries of the provisions of this Section 6.9, and the Holders Representative may enforce the Participating Holders' interests under this Section 6.9 in case of breach hereof by Parent.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

66

        6.10    Grantback Provisions.

        (a)   Within ninety (90) days following receipt by the Holders Representative of an Abandonment Notice, the Holders Representative shall be entitled to require, by means of a written notice to Parent disclosing the election of the Holders Representative to exercise such right (an "Abandonment Grantback Notice"), that Parent (and its Subsidiaries and controlled Affiliates) grant to the Holders Representative for the benefit of the Participating Holders (X) a []* (except to the extent otherwise provided below in this Section 6.10), []* under all right, title and interest of Parent (and its Subsidiaries and controlled Affiliates) in and to []*, in either case only to the extent owned by Company at the Effective Time (collectively, the "Company Grantback Assets"), to []* a Contingent Payment Product for []*, provided that the obligations of Parent (and its Subsidiaries and controlled Affiliates) under this clause (X) shall be subject to the limitations set forth below in this Section 6.10(a), (Y) a []* (except to the extent otherwise provided below in this Section 6.10), []* under all right, title and interest of Parent (and its Subsidiaries and controlled Affiliates) in and to []*, in each case only to the extent []* (collectively, the "Parent Grantback Work Product"), []* Parent Grantback Work Product []* a Contingent Payment Product for []*, provided that the obligations of Parent (and its Subsidiaries and controlled Affiliates) under this clause (Y) shall be subject to the limitations set forth below in this Section 6.10(a), and (Z) a []* (except to the extent otherwise provided below in this Section 6.10), []* under all right, title and interest of Parent (and its Subsidiaries and controlled Affiliates) in and to []* at any time after the Effective Time and prior to the date of the Abandonment Grantback Notice and that []* a Contingent Payment Product (collectively, the "Parent Grantback Assets" and together with the Company Grantback Assets and the Parent Grantback Work Product, the "Grantback Assets"), []* a Contingent Payment Product, provided that the obligations of Parent (and its Subsidiaries and controlled Affiliates) under this clause (Z) shall be subject to the limitations set forth below in this Section 6.10(a). Notwithstanding anything express or implied in any of the foregoing provisions of this Section 6.10(a) to the contrary, (i) the obligations of Parent (and its Subsidiaries and controlled Affiliates) under clause (X), (Y) or (Z) of this Section 6.10 to grant any rights to the Holders Representative for the benefit of the Participating Holders shall be subject the provisions of any third party agreements entered into by Parent (or any of its Subsidiaries or controlled Affiliates) that may prohibit, limit or prevent Parent (or any of its Subsidiaries or controlled Affiliates) from complying with the provisions of any of such clauses (X), (Y) or (Z), provided that any such third party agreement complies with the provisions (other than the provisions of clause (B)) of Section 11.3(b) hereof, and (ii) neither Parent nor any of its Subsidiaries or controlled Affiliates shall have any obligation to grant to the Holders Representative for the benefit of the Participating Holders []* pursuant to any of clauses (X), (Y) or (Z) of this Section 6.10(a) []* a Contingent Payment Product for the treatment of any non-HCV Indication if Parent (or any of its Subsidiaries or controlled Affiliates) has granted to any third party []* a Contingent Payment Product in such non-HCV Indication, and, in the case of []*, Parent is contractually prohibited from transferring its []* to any third party, in which case Parent hereby agrees that from and after the date of receipt by Parent of the Abandonment Grantback Notice, Parent shall not pursue the further development of any product in such Non-HCV Indication. Such grant shall be consummated no later than thirty (30) days following delivery to the Parent of the Abandonment Grantback Notice, by means of execution and delivery by the Parent (and any of its Subsidiaries or controlled Affiliates having any right or interest in the Grantback Assets) and the Holders Representative []*, without []* previously received by the Holders Representative or the Participating Holders. Notwithstanding any provision in this Section 6.10(a) that states or implies that []* by the Holders Representative in connection with the []* to be granted by Parent under this Section 6.10(a), the Holders Representative shall be required to make payment of all payments and royalties required to be made under any and all third party licenses that are sublicensed by Parent to Holders Representative in connection with the implementation by Parent of all of its obligations under this Section 6.10(a).

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

67

        (b)   In the event that Parent has breached its obligations under Section 6.9(a) hereof, the Holders Representative shall be entitled, subject to the provisions of the next sentence and Section 6.9(b) hereof, as applicable, to deliver a written notice (a "Non-Compliance Notice") to Parent specifying in reasonable detail the facts and circumstances surrounding such breach and reasons as to why the Holders Representative believes that such facts and circumstances give rise to such breach. Notwithstanding anything express or implied in the foregoing provisions of this Section 6.10(b), but subject to the provisions of Section 6.9(b) hereof, (i) the Holders Representative shall only be entitled to deliver a Non-Compliance Notice pursuant to this Section 6.10(b) within sixty (60) days after any meeting held pursuant to Section 6.9(c) hereof (or, if later, within sixty (60) days after the last day on which any such meeting was required to be held pursuant to Section 6.9(c) hereof) and (ii) subject to the provisions of Section 6.9(b) hereof and absent fraud or intentional misconduct or the discovery by the Holders Representative after the expiration of the applicable period described in clause (x) or (y) below, as applicable, of material facts or circumstances in existence during such period that reasonably relate to an ongoing breach by Parent of its obligations set forth in Section 6.9(a) and would have been discovered or known by Holders Representative during such period if Parent had not breached any of its obligations under Section 6.9(c) hereof to the extent applicable to such period, the facts and circumstances that constitute or give rise to the breach by Parent of its obligations under Section 6.9(a) must have occurred or failed to occur either (x) if under Section 6.9(c) meetings are required to be held every six months, during the six-month period prior to the date when the meeting relating to such Non-Compliance Notice was held or required to be held pursuant to Section 6.9(c) or (y) otherwise, during the 12-month period prior to the date when the meeting relating to such Non-Compliance Notice was held or required to be held pursuant to Section 6.9(c) and Holders Representative shall not otherwise be entitled to allege facts or circumstances that occurred or did not occur at any time prior to the applicable period under the foregoing clause (x) or (y), as applicable, to support an argument or finding that Parent has breached its obligation under Section 6.9(a) hereof.

        (c)   Within thirty (30) days after its receipt of any Non-Compliance Notice, Parent shall have the option either (i) to provide written notice to the Holders Representative of its acknowledgement of the breach asserted in such Non-Compliance Notice and a proposed plan to cure such breach (a "Cure Notice"), which plan (and the proposed timetable for its completion) must be reasonably satisfactory to the Holders Representative, or (ii) to provide written notice to the Holders Representative that it intends to dispute the asserted breach of its obligations under Section 6.9(a) (a "Breach Dispute Notice"). If Parent fails to provide either a Cure Notice or Breach Dispute Notice within such thirty (30) day period, Parent will be presumed to have provided a Breach Dispute Notice. In the event that Parent provides a Cure Notice and, within thirty (30) days after receipt by the Holders Representative of such Cure Notice, Parent and Holders Representative cannot agree on the proposed plan to cure the breach, Parent and Holders Representative shall engage in mediation, which shall last for a period of no more than sixty (60) days,

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

68

pursuant to the International Institute for Conflict Prevention and Resolution ("CPR") Mediation Procedure then in effect. Each party shall pay its own expenses incurred in connection with such mediation, and the fees and expenses of the mediator shall be divided evenly between the parties. Notwithstanding anything else contained herein, any party to such mediation shall have the right to commence litigation pursuant to Section 11.14 hereof at any time after the expiration of sixty (60) days after service of a demand for mediation under this subsection. In the event that Parent provides or is deemed to have provided a Breach Dispute Notice, or in the event that Parent has provided a Cure Notice and Parent and the Holders Representative have not, after mediation, agreed upon a plan to cure the breach, then Holders Representative shall be entitled to seek, pursuant to Section 11.14 hereof, a judicial declaration that Parent is in breach of its obligations under Section 6.9(a). At Holders Representative's election, Holders' Representative may accompany such request for a judicial declaration with a request for relief in the form of either money damages or implementation of the provisions of Sections 6.10(d) and 6.10(e) below; any such judicial proceedings shall be conducted in accordance with Section 11.14 hereof. The remedy for any breach by Parent of its obligations under Section 6.9(a) hereof shall be, at the election of the Holders Representative, either money damages or implementation of the provisions of Section 6.10(d) and 6.10(e), but not both such remedies. In no event shall the Holders Representative be entitled to any money damages upon any breach by Parent of its obligations under Section 6.9(a) hereof in the event that the Holders Representative elects, in the manner provided above, to enforce its rights under Sections 6.10(d) and 6.10(e) below.

        (d)   In the event that the Holders Representative makes an election, in accordance with the provisions of Section 6.10(c), for the implementation of this Section 6.10(d) and Section 6.10(e) below in lieu of money damages, and in the event that a court finally determines, with no opportunity for further appeal, that Parent is in breach of its obligations under Section 6.9(a), Holders Representative shall be entitled to deliver a written notice (a "Non-Compliance Grantback Notice") to Parent requiring Parent (and its Subsidiaries and controlled Affiliates) to perform all of their respective obligations under Section 6.10(a) to the same extent as if Parent had provided to the Holders Representative an Abandonment Notice and the Holders Representative had provided to Parent an Abandonment Grantback Notice; provided, however, that, notwithstanding any provision of Section 6.10(a) hereof stating or implying that the grant of any and all []* pursuant to Section 6.10(a) hereof to the Holders Representative shall be without any []*, in the event that the grant of []* arises by virtue of the implementation of the provisions of this Section 6.10(d), then Parent shall be entitled to []* in connection with the grant []* if and to the extent so provided in Section 6.10(e) below (the grant []* by virtue of the implementation of, and in accordance with, the provisions of this Section 6.10(d) to the Holders Representative shall be referred to in this Agreement as the "Non-Compliance Grantback"). For the avoidance of doubt, the parties agree that the right to demand performance of this Section 6.10(d) and Section 6.10(e) is a purely contractual remedy governed by the terms of this Agreement, and that any request for court assistance in enforcing such right shall not be subject to the same principles of equity applied to requests for rescission. Notwithstanding anything express or implied in this Section 6.10 or elsewhere in this Agreement to the contrary, in no event shall the foregoing provisions of this Section 6.10(d) or the provisions of Section 6.10(e) below apply or be implemented or enforced at any time after []*.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

69

        (e)   If the Non-Compliance Grantback occurs at any time before the earlier to occur of []*, then, subject to the provisions set forth below in this Section 6.10(e) and Section 6.10(f), the grant []* to the Holders Representative that constitute the Non-Compliance Grantback shall occur without []*. If the Non-Compliance Grantback occurs at any time following the occurrence of []*, but prior to the occurrence of []*, and if the Holders Representative thereafter effects a subsequent sublicense or other disposition of all or any portion of the []* granted by Parent (or its Subsidiaries or controlled Affiliates) pursuant to Section 6.10(d) in order to implement the Non-Compliance Grantback, or if there is any sale of the Holders Representative or any other person that is the direct or indirect owner or holder of []*, in either case for cash or other liquid consideration, then the Holders Representative shall, within forty-five (45) days after receipt of such consideration, deliver or cause to be delivered to Parent a written report specifying the source and calculation of such consideration received, []*. []* shall be calculated based on the fair market value of such non-marketable securities or other illiquid assets at the time of such sublicense or other disposition or such sale of Holders Representative or other person based on valuation methods reasonably acceptable to both Parent and Holders Representative) shall be deferred until the earlier of the date on which such consideration is converted into cash or the date on which Parent is permitted to receive its []* without violating applicable securities laws. If the Non-Compliance Grantback occurs at any time following the occurrence of []*, but prior to the occurrence of []*, and if the Holders Representative thereafter develops and commercializes a Contingent Payment Product, then the Holders Representative shall make payment to Parent of []*. In the event that the provisions of the immediately preceding sentence become applicable, the provisions set forth in Sections 2.7(g) through 2.7(k) hereof with respect to reporting, audit and dispute rights and obligations of the Parent and the Holders Representative, as applicable, pertaining to []* shall be applied mutatis mutandis to create reporting, audit and dispute rights and obligations of the Parent and the Holders Representative, as applicable, pertaining to []*. Notwithstanding any provision in Section 6.10(d) that states or implies that []* by the Holders Representative in connection with the []* to be granted by Parent in connection with the Non-Compliance Grantback and in addition to []*, the Holders Representative shall be required to make payment of all payments and royalties required to be made under []* in connection with the implementation by Parent of all of its obligations under Section 6.10(d) and the Holders Representative shall be required to comply with its []* under Section 6.10(f) below.

        (f)    Subject to the provisions of this Section 6.10(f), upon the grant by Parent []* to the Holders Representative pursuant to Section 6.10(a) or Section 6.10(d), as applicable, Parent shall []* (collectively, the "Grantback Licensed Patents"). The Holders Representative shall be obligated to []*; provided, however, that, (i) in the event that any of the Grantback Licensed Patents are also []*, then the []*, and (ii) until the earlier of (x) the granting by Holders Representative of a license to a third party to the right, title and interest of the Participating Rights Holders and/or the Holders Representative in and to any of the Grantback Licensed Patents or (y) the []* of the Grantback Date, Holders Representative shall have the right to elect to defer its obligation under the foregoing provisions of this Section 6.10(f) to []* is subject to compliance by the Holders Representative with the provisions of this Section 6.10(f). Parent may at any time terminate its obligation to []* to the Holders Representative or to any third party that is also a []* Grantback License Patent, provided that, in the case of any such third party []*. In the case of any such []* of a Grantback License Patent that has more than one []*.

        (g)   For purposes of clarification, if, at any time before the grant []* by Parent to the Holders Representative pursuant to Section 6.10(a) hereof or the occurrence of the Non-Compliance Grantback, Parent grants to any Member of the Buyer Group []* any Contingent Payment Product, the grant []* to the Holders Representative shall not release Parent from any of its obligations under this Agreement with respect to such Contingent Payment Product except for those obligations, if any, of Parent under this Agreement that correspond to the portion of Parent's right, title and interest in and to such Contingent Payment Product that have been []* to the Holders Representative pursuant to []*.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

70

        6.11    Confidentiality.    Any and all non-public information disclosed or made available by Parent to the Company or by the Company to Parent as a result of the negotiations or due diligence investigations leading to the execution of this Agreement and the consummation of the transactions contemplated under this Agreement, or in furtherance thereof, including, without limitation, any information disclosed or made available pursuant to Section 7.1 hereof, shall remain subject to the terms and conditions of that certain Mutual Confidentiality Agreement, by and between the Company and Parent, dated May 19, 2006 (the "Confidentiality Agreement").

        6.12    Employees.    The Company shall terminate, and shall cause its Subsidiaries, to the extent necessary, to terminate, all employees of the Company and its Subsidiaries, respectively, effective as of immediately prior to the Effective Time.

        6.13    Non-Company Program Liabilities.    Prior to the Effective Time, the Company shall satisfy, discharge or pay, or provide for the satisfaction, discharge or payment of (which may include requesting Parent to pay or assume at Closing, and deduct from the Closing Consideration, the Closing Liabilities set forth in the Merger Consideration Certificate pursuant to Section 2.6(b)), all of its and its Subsidiaries' liabilities or obligations (whether accrued or contingent), including, without limitation, (i) accounts payable accrued for in the books and records of the Company immediately prior to the Effective Time, (ii) Transaction Expenses and (iii) employee-related liabilities of any kind or nature; provided, however, that, notwithstanding the foregoing, the Company may have liabilities under any written executory Company Program Contracts, but only if and to the extent that such liabilities accrue and arise from and after the Closing.

        6.14    Bank Accounts; Maintenance of Cash Balances.    Except for those bank accounts listed on Schedule 4.20 of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries shall open or maintain any bank, brokerage or other accounts, or safe-deposit boxes. At Closing, all cash held by the Company or any of its Subsidiaries shall be held in one or more of those bank accounts listed on Schedule 4.20 of the Company Disclosure Schedules that are not foreign bank accounts.

        6.15    Termination of Company Employee Benefit Plans.    Effective immediately prior to the Closing and contingent upon the Closing, the Company will terminate any and all Company Employee Benefit Plans intended to qualify as a qualified cash or deferred arrangement under Section 401(k) of the Code and effective as of such termination, no employee of the Company shall have any right to contribute any amounts to any Company Employee Benefit Plan intended to qualify as a qualified cash or deferred arrangement under Section 401(k) of the Code. At the request of Parent, the Company will provide Parent with evidence that such Company Employee Benefit Plans have been terminated effective immediately prior to the Closing pursuant to resolutions duly adopted by the Company Board. In addition, the Company will terminate any and all other Company Employee Benefit Plans, including any group health, dental, severance, separation or salary continuation plans, programs or arrangements, effective immediately prior to the Closing and contingent upon the Closing, and, at the request of Parent, the Company will provide Parent with evidence that such Company Employee Benefit Plans have been so terminated pursuant to resolutions duly adopted by the Company Board. The Company also shall take such other actions in furtherance of terminating such Company Employee Benefit Plans as Parent may reasonably require.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

71

        6.16    Employees and Compensation.

        (a)   No Member of the Buyer Group (including for the avoidance of doubt the Surviving Corporation) shall have any obligation to employ or continue the engagement of any officer, director, employee or independent contractor employed or otherwise engaged by the Company and its Affiliates as of the Closing Date (collectively, the Company's "Personnel"). After satisfaction of all applicable legal and contractual requirements, if any, the Company shall terminate the employment or engagement, as the case may be, of each of its Personnel effective not later than the Closing Date.

        No Member of the Buyer Group (including for the avoidance of doubt the Surviving Corporation) shall have any obligation to provide or liability for the provision of compensation or benefits to any of the Company's Personnel, current or former, whether in connection with their employment or engagement or the termination of the same and including without limitation under or in connection with the establishment, maintenance, or termination of any Company Employee Benefit Plan (collectively, "Compensation Liabilities").

        6.17    Tax Certificate.    At the Closing, the Company shall deliver to Parent a certificate dated as of immediately prior to the Effective Time, setting forth the following information as to each share of the Company's stock (as defined in Treas. Reg. § 1.382-2(a)(3)), as of the Closing Date: (i) the date of issuance, (ii) the holder at issuance, (iii) the issue price and (if different), in the case of common stock or options on common stock, the most recent fair market value determination of such common stock made by the Company's board of directors for purposes of option grants, (iv) the date(s) of any transfer(s), (v) any information available to the Company as to the fair market value at the time of transfer, (vi) any information as to the holder of that share from time to time that is described in Treas. Reg. §§ 1.382-2T(h)(6) and/or 1.382-2T(k) and is actually known to the Company (it being understood that the Company shall be considered to actually know only such information as is available from existing Company records and shall not require the Company to make any investigation), and (vii) a summary of any written materials indicative of, or other information or estimates as to, the fair market value of that share from time to time (including, e.g., the exercise price of any incentive stock options granted at any time at or following the issuance date of that share to acquire shares of the same class of stock), provided that no obligation to indemnify shall arise as a result of any good-faith valuation errors that may be reflected in the information provided pursuant to this Section 6.17.

        6.18    Patent Diligence.    Without limiting Parent's obligations set forth in Section 6.9(a), following the Effective Time, Parent shall use commercially reasonable efforts to obtain and maintain an issued Company Patent in each of []*. In addition, Parent shall use commercially reasonable efforts to obtain issued patents from those patent applications within the Company Patents for which claims are allowed by the applicable patent authorities and for which the issuance of a patent by such applicable patent authorities for such allowed claims would satisfy HCV Milestone One or HCV Milestone Two. Notwithstanding the foregoing, from and after the Grantback Date, the provisions of this Section 6.18 shall be of no further force or effect and the provisions of Section 6.10(f) shall thereafter apply.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

72

ARTICLE 7
CONDUCT OF BUSINESS PENDING THE CLOSING

        From and after the date of this Agreement and until the Closing, except as otherwise specifically agreed by Parent:

        7.1    Full Access.    Subject to applicable law, the Company will afford to Parent and its authorized representatives full access, upon request and reasonable notice and during normal business hours, to all of the properties, books, records, contracts, and documents of the Company, and a reasonable opportunity to make such investigations as Parent desires to make, and will furnish or cause to be furnished to Parent and its authorized representatives all such information with respect to the Company's affairs and businesses as Parent reasonably requests. No information or knowledge obtained by Parent in any investigation pursuant to this Section 7.1 shall affect or be deemed to modify any representation or warranty contained herein or the conditions of the parties to consummate the Merger.

        7.2    Course of Business Pending the Closing.    Subject to the provisions set forth below in this Article 7, the Company shall operate the Company's business in the ordinary course consistent with past practices.

        7.3    No Dividends, Issuances, Repurchases, Etc.    Except as set forth on Schedule 7.3 of the Company Disclosure Schedule, the Company will not declare, set aside, or pay any dividends (whether in cash, shares of stock, other property, or otherwise) on, or make any other distribution in respect of, any shares of its capital stock or other securities, or purchase, redeem, or otherwise acquire for value any shares of its capital stock or other securities. Except as set forth on Schedule 7.3 of the Company Disclosure Schedule, the Company will not issue any shares of its capital stock or other securities (including without limitation any options, warrants, or other rights to acquire Company Stock), other than shares of Company Stock issued upon the due exercise or conversion of Eligible Company Options, Company Preferred Stock or Common Warrants listed in Schedule 4.4 of the Company Disclosure Schedule (which exercises or conversions will be disclosed by the Company in a supplement to the Company Disclosure Schedule pursuant to Section 7.25 hereof).

        7.4    No Compensation Changes.    Except in the ordinary course of business consistent with past practices, the Company will not increase the base salary payable or to become payable to any of its officers, directors, employees, consultants or agents, or pay or increase any severance, bonus, insurance, pension, or other benefit plan, payment, or arrangement made to, for, or with any such officers, directors, employees, consultants or agents, except as described in Schedule 7.4 of the Company Disclosure Schedule. The Company shall not pay any severance benefits to, enter into any contract, agreement or arrangement to provide severance benefits to, or implement any severance plan for the benefit of, any of the Company's officers, directors, employees or consultants, except pursuant to any severance plan, contract or arrangement described in Schedule 4.13 or Schedule 7.4 of the Company Disclosure Schedule.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

73

        7.5    Contracts and Commitments.    Except as set forth on Schedule 7.5 of the Company Disclosure Schedule, the Company will not enter into any material contract or commitment, or engage in any other transaction, other than as specifically contemplated by this Agreement or in the schedules hereto or with the prior written consent of Parent.

        7.6    Purchase and Sale of Assets.    Except as set forth on Schedule 7.6 of the Company Disclosure Schedule, the Company will not purchase, lease as lessee, license as licensee, or otherwise acquire any interest in, or sell, lease as lessor, license as licensor, or otherwise dispose of any interest in, any assets (including, without limitation, any Company Intellectual Property), other than purchases and sales of assets, leases, or licenses in the ordinary course of business or in amounts not exceeding ten thousand dollars ($10,000) individually or fifty thousand dollars ($50,000) in the aggregate. Notwithstanding the foregoing, in no event shall the Company sell, lease, license or otherwise dispose of any Company Intellectual Property, computer hard drives, computer servers, computer network hardware, physical or electronic offsite storage materials, electronic tapes and/or other backup media materials or material written documents of the Company.

        7.7    Liabilities.    The Company shall not incur any Indebtedness or enter into any contracts or commitments involving potential payments to or by the Company or any Subsidiary of the Company, except for accounts payable and payroll and other services liabilities incurred or entered into by the Company in the ordinary course of business consistent with past practices and expenses incurred in furtherance of the Merger.

        7.8    Charter and By-Laws.    Except as set forth on Schedule 7.8 of the Company Disclosure Schedule, the Company shall not cause, permit or propose any amendments to its articles of incorporation or by-laws except as contemplated under this Agreement.

        7.9    Acquisitions.    Except to the extent permitted under Section 7.6 above, the Company shall not make, or permit to be made, any acquisition of property, assets or businesses.

        7.10    Capital Expenditures.    The Company shall not authorize or incur any single capital expenditure in excess of ten thousand dollars ($10,000) or capital expenditures which in the aggregate exceed fifty thousand dollars ($50,000).

        7.11    Accounts Payable.    The Company shall make payment with respect to all of its accounts payable and its Indebtedness in a timely manner in accordance with their respective terms in the ordinary course of business consistent with the Company's past practices, and shall make payment of or provision for all such accounts payable and Indebtedness prior to Closing in accordance with Section 6.13 hereof.

        7.12    Employees.    The Company shall not hire any employee without the prior written consent of Parent.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

74

        7.13    Accounting Policies.    Except as may be required as a result of a change in law or in generally accepted accounting principles, change any of the accounting practices or principles used by it.

        7.14    Taxes.    The Company shall not, and shall not permit any Subsidiary to, make any Tax election or settle or compromise any material federal, state, local or foreign Tax liability (other than settlements or compromises not involving any payments of Taxes), change its annual tax accounting period, change any method of Tax accounting, enter into any closing agreement relating to any Tax, surrender any right to claim a Tax refund, or consent to any extension or waiver of the limitations period applicable to any Tax claim or assessment. The Company shall, and shall cause each of its Subsidiaries to, timely file all of its Tax Returns as they become due (taking all timely filed proper extension requests into account), all such Tax Returns to be true, correct and complete, and the Company shall, and shall cause each of its Subsidiaries to, timely pay and discharge as they become due and payable all Taxes (other than Taxes contested in good faith by the Company or its Subsidiaries in appropriate proceedings), assessments and other governmental charges or levies imposed upon it or its income or any of its property.

        7.15    Legal.    The Company shall not settle or compromise any pending or threatened suit, action or claim.

        7.16    Extraordinary Transactions.    The Company shall not adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company (other than the Merger, or except as permitted under Section 7.24(d)).

        7.17    New Agreements; Amendments.    Except as set forth on Schedule 7.17 of the Company Disclosure Schedule, the Company shall not enter into or modify, or permit any Subsidiary to enter into or modify, any supply, license, development, research or collaboration agreement with any other person or entity.

        7.18    Obligations.    The Company shall not obligate itself to do any of the things that the Company is prohibited from doing pursuant to any of the provisions of this Section 7.

        7.19    Preservation of Organization.    The Company will use commercially reasonable efforts to preserve its business organization intact, to preserve for the benefit of the Surviving Corporation its present business relationships with its suppliers, customers, employees, consultants and others having business relationships with it.

        7.20    Intellectual Property Rights.    The Company will maintain, preserve and protect the Company Intellectual Property.

        7.21    No Default.    The Company will not take or omit to take any action, or permit any action or omission to act, that would cause a default under or a breach of any of its contracts, commitments, or obligations.

        7.22    Compliance with Laws.    The Company will duly comply in all material respects with all applicable laws, regulations, and orders.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

75

        7.23    Advice of Change.    The Company will promptly advise Parent in writing of any event or occurrence which results in or is reasonably likely to result in a Material Adverse Effect on the Company.

        7.24    No Solicitation by Target; Board Recommendation; Fiduciary Exceptions.

        (a)   For purposes of this Agreement:

          (i)  The term "Takeover Proposal" means any written proposal or offer from any person that would reasonably be expected to lead to any acquisition or purchase, in one transaction or a series of related transactions, of assets or businesses that constitute 50% or more of the revenues, net income or the assets of the Company and its Subsidiaries, taken as a whole, or 50% or more of any class of equity securities of the Company, any tender offer or exchange offer that if consummated would result in any person beneficially owning 50% or more of any class of equity securities of the Company, or any merger, consolidation, business combination, recapitalization, liquidation, dissolution, joint venture, binding share exchange or similar transaction involving the Company pursuant to which any person or the shareholders of any person would own 50% or more of any class of equity securities of the Company or of any resulting parent of the Company, other than the transactions contemplated by this Agreement; provided, that the term "Takeover Proposal shall not be deemed to include additional purchases of newly issued Company Stock by Pacific Horizon Ventures or any of its Affiliates.

         (ii)  The term "Superior Proposal" means any written proposal made by a third party that if consummated would result in such person (or its shareholders) owning, directly or indirectly, (A) all or substantially all of the shares of capital stock of the Company then outstanding, or (B) all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, in each case which was not in any way solicited by the Company or any of its Subsidiaries, affiliates, agents or representatives after the Agreement Date and did not otherwise result from a breach of this Agreement and which a majority of the members of the Company Board determines in good faith (after consultation with a financial advisor of recognized reputation) to be (x) on terms, taking into account all the terms and conditions of such proposal and this Agreement (including any proposal by Parent to amend the terms of this Agreement and the transactions contemplated hereby) more favorable to the shareholders of the Company from a financial point of view than the transactions contemplated by this Agreement and (y) that has a high likelihood of being completed, taking into account all financial, legal, regulatory and other aspects of such proposal.

        (b)   Subject to Section 7.24(c), the Company shall not, nor shall it authorize or permit any of its Subsidiaries or any of their respective directors or officers to (and the Company shall use its best efforts to cause its employees and any investment banker, financial advisor, attorney, accountant or other advisor, agent or representative retained by it or any of its Subsidiaries not to), directly or indirectly, (i) solicit, initiate or encourage, or take any other action designed to facilitate, any Takeover Proposal or (ii) enter into any discussions or negotiations with any third party regarding, or furnish to any person any information in connection with, any Takeover Proposal. The Company shall, and shall cause its Subsidiaries to, immediately cease and cause to be terminated all existing discussions or negotiations with any person conducted heretofore with respect to any Takeover Proposal or that may reasonably be expected to lead to a Takeover Proposal.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

76

        (c)   Notwithstanding the provisions of clause (b) of this Section 7.24 or anything else in this Agreement, but subject to the termination provisions set forth below in this Section 7.24(c), in response to any written Takeover Proposal received by the Company Board that constitutes a Superior Proposal or that a majority of the members of the Company Board determines in good faith (after consultation with a financial advisor of recognized reputation and outside legal counsel) has a high likelihood of resulting in the completion of a Superior Proposal, and which Takeover Proposal did not result from a breach of this Section 7.24 by the Company and was not in any way solicited by the Company or any of its Subsidiaries, affiliates, agents or representatives after the Agreement Date, the Company may, if a majority of the members of the Company Board determines in good faith (after consultation with outside counsel) that the failure to do so would be inconsistent with the fiduciary duties of the Company Board to the shareholders of the Company under applicable laws, (x) furnish information with respect to the Company and its Subsidiaries to the person making such Takeover Proposal and such person's representatives pursuant to a customary confidentiality agreement not less restrictive of the other party than the Confidentiality Agreement, provided that all such information has previously been provided to Parent or is provided to Parent prior to or substantially concurrent with the time it is provided to such person and (y) participate in discussions or negotiations with the person making such Takeover Proposal (and such person's representatives) regarding such Takeover Proposal. Notwithstanding anything to the contrary expressed or implied in this Agreement, the provisions of this Section 7.24(c) and the rights of the Company and the Company Board under this Section 7.24(c) shall terminate immediately upon receipt of the Required Shareholder Approval.

        (d)   Except as permitted by this Section 7.24(d), neither the Company Board nor any committee thereof shall (i) (A) withdraw (or modify in a manner adverse to Parent), or publicly propose to withdraw (or modify in a manner adverse to Parent), the approval, recommendation or declaration of advisability by the Company Board or any such committee thereof of this Agreement, the Merger or the other transactions contemplated by this Agreement or (B) recommend, adopt or approve, or propose publicly to recommend, adopt or approve, any Takeover Proposal (clauses (i)(A) and (i)(B) being collectively referred to herein as an "Adverse Recommendation") or (ii) allow, cause or authorize the Company or any of its Subsidiaries to execute or enter into, any letter of intent, memorandum of understanding, agreement in principle, merger agreement, acquisition agreement, option agreement, joint venture agreement, partnership agreement or other similar agreement providing for or contemplating the consummation of any Takeover Proposal (other than a confidentiality agreement as provided in Section 7.24(c)). Notwithstanding the foregoing or any other provision of this Agreement, but subject to the termination provisions set forth below in this Section 7.24(d), (x) the Company Board may make an Adverse Recommendation as a result of a Superior Proposal, if (I) such Superior Proposal has been actually received by the Company Board, (II) in light of such Superior Proposal a majority of the members of the Company Board determines in good faith (after consultation with outside counsel) that the failure to do so would constitute a breach by the Company Board of its fiduciary obligations to the shareholders of the Company under applicable laws, (III) the Company has notified Parent in writing of the determination described in clause (II) above, (IV) at least five (5) business days following receipt by Parent of the notice referred to in clause (III) above, and taking into account any revised proposal made by Parent since receipt of the notice referred to in clause (III) above, such Superior Proposal remains a Superior Proposal and a majority of the members of the Company Board has again made the determinations referred to in clause (II) above, (V) the Company is in compliance with this Section 7.24 and (VI) Parent is not at such time entitled to terminate this Agreement pursuant to Section 10.1(c), and (y) if the Company Board receives a written Takeover Proposal that constitutes a Superior Proposal, and which Takeover Proposal was not in any way solicited by the Company or any of its Subsidiaries, affiliates, agents or representatives after the Agreement Date (other than to the limited extent allowed under Section 7.24(c)(x) and (y) above) and did not otherwise result from a breach of this Agreement, the Company may, contemporaneously with the termination of this Agreement pursuant to Section 10.1(h) and within 24 hours after the three (3) business day period described in the following proviso, enter into a definitive agreement with respect to such Superior Proposal, provided, however, that the Company may not enter into any such agreement until the third business day following Parent's receipt of written notice from the Company advising Parent that the Company Board has received a Superior Proposal, specifying the material terms and conditions of such Superior Proposal, identifying the person making such Superior Proposal and stating that the Company Board intends to exercise its right to enter into an agreement with respect to such Superior Proposal (it being understood that, prior to entering into any such agreement, any amendment to the price or any other material terms of such Superior Proposal shall require a new notice to Parent and a new three business day period). Notwithstanding anything to the contrary expressed or implied in this Agreement, the provisions of this Section 7.24(d) and the rights of the Company and the Company Board under this Section 7.24(d), including the provisions of this Section 7.24(d) that allow the Company and the Company Board to take the actions described in clause (x) or clause (y) above shall terminate immediately upon receipt of the Required Shareholder Approval.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

77

        (e)   In addition to the obligations of the Company set forth in this Section 7.24, the Company shall promptly advise Parent orally and in writing after any director or officer of the Company, or any investment banker, financial advisor, attorney or other advisor retained by the Company or any of its Subsidiaries in connection with the Merger, has become aware of any Takeover Proposal (whether such Takeover Proposal was directed to any such director, officer, investment banker, financial advisor, attorney or other advisor or to any other person), of the material terms and conditions of any such Takeover Proposal (including any changes to the price or other material terms thereof) and the identity of the person making any such Takeover Proposal. The Company shall keep Parent reasonably informed of the status and details of any such Takeover Proposal and provide to Parent as soon as practicable after receipt or delivery thereof with copies of all correspondence and other written material sent or provided to the Company from any third party in connection with any Takeover Proposal or sent or sent or provided by the Company to any third party in connection with any Takeover Proposal.

        (f)    Nothing contained in this Section 7.24 shall prohibit the Company from making any required disclosure to the Company's shareholders if, in the good faith judgment of the Company Board, after consultation with outside counsel, failure so to disclose would be inconsistent with its obligations under applicable law. Notwithstanding anything in this Section 7.24, the Company Board may not take any action that would result in the Company's shareholders no longer being legally capable under Washington Law of validly adopting the Merger Agreement.

        7.25    Disclosure Supplements.    From time to time before the Closing, and in any event immediately before the Closing, each of Parent and the Company will promptly advise the other in writing of any matter hereafter arising or becoming known to the disclosing party that, if existing, occurring, or known at or before the date of this Agreement, would have been required to be set forth or described in the Company Disclosure Schedule or Parent Disclosure Schedule, as the case may be, or that is necessary to correct any information in such Disclosure Schedule that is or has become inaccurate. No such disclosure will be taken into account in determining whether the conditions to (i) in the case of any such supplemental disclosure by Parent, the obligations of the Company, and (ii) in the case of any such supplemental disclosure by the Company, the respective obligations of Parent and Merger Sub, to consummate the transactions contemplated by this Agreement have been satisfied. If the Merger is consummated, then for purposes of the indemnification provisions of this Agreement, such supplemental disclosures pursuant to this Section 7.25 will have no effect on the availability of indemnification hereunder.

        7.26    Subsidiaries.    The Company shall not permit any Subsidiary to take any action that the Company is not permitted to do pursuant to this Section 7.

ARTICLE 8
CONDITIONS TO THE PARTIES' OBLIGATIONS

        8.1    Mutual Conditions.    The parties' obligations to consummate the Merger are subject to the satisfaction (or waiver by each such party, in its sole discretion) of each of the conditions set forth in this Section 8.1 on or before the Closing Date. If the Merger is consummated, such conditions will conclusively be deemed to have been satisfied or waived.

        (a)    No Injunctions or Restraints.    No temporary restraining order, preliminary or permanent injunction, or other order issued by any court of competent jurisdiction, or other legal restraint or prohibition preventing the consummation of the Merger, shall be in effect, and no petition or request for any such injunction or other order shall be pending.

        (b)    Proceedings and Documents Satisfactory.    All proceedings in connection with the transactions contemplated by this Agreement and all certificates and other documents delivered to such party pursuant to this Agreement or in connection with the Closing will be reasonably satisfactory to such party and its counsel.

        (c)    Escrow Agreement.    The Escrow Agreement shall have been executed and delivered by the Escrow Agent.

        8.2    Conditions to the Company's Obligations.    The obligations of the Company to consummate the Merger are subject to the satisfaction (or waiver by the Company, in its sole discretion) of each of the conditions set forth in this Section 8.2 on or before the Closing Date. If the Merger is consummated, such conditions will conclusively be deemed to have been satisfied or waived.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

78

        (a)    Representations and Warranties.    Each of the representations and warranties made by Parent and/or Merger Sub in or pursuant to this Agreement or in any statement, certificate, or other document delivered to the Company in connection with this Agreement, the Merger, or any of the other transactions contemplated hereby (a) that is qualified as to materiality or Material Adverse Effect shall be true and correct in all respects when made and shall be true and correct in all respects as of the Closing Date as though each such representation and warranty had been made on and as of the Closing Date, except to the extent any such representation and warranty expressly speaks only as of an earlier date (in which case as of such earlier date), and (b) that is not so qualified shall be true and correct in all material respects when made and shall be true and correct in all material respects as of the Closing Date as though each such representation and warranty had been made on and as of the Closing Date, except to the extent any such representation and warranty expressly speaks only as of an earlier date (in which case as of such earlier date).

        (b)    Compliance with Agreement.    Parent and Merger Sub shall have performed and complied in all material respects with all of their respective obligations under this Agreement to be performed or complied with by them before or at the Closing.

        (c)    Closing Certificate.    Parent and Merger Sub shall have executed and delivered to the Company, at and as of the Closing, a certificate certifying that the conditions referred to in Sections 8.2(a) and 8.2(b) hereof have been satisfied.

        (d)    Opinion of Counsel.    Bingham McCutchen LLP, counsel to Parent and Merger Sub, shall have delivered to the Company a written legal opinion addressed to the Company, dated on and as of the Closing Date, in a form reasonably satisfactory to the Company.

        (e)    Escrow Agreement.    The Escrow Agreement shall have been executed and delivered by Parent and Escrow Agent.

        (f)    Third Party Consents of Parent.    Company shall have been furnished with evidence reasonably satisfactory to it that the Parent has obtained the consents, approvals and waivers required pursuant to Section 5.4 hereof and any other consents, approvals and waivers that are necessary or required in connection with, or as a result of, the Merger.

        (g)    Services Agreement.    The Services Agreement shall have been executed and delivered by Parent.

        8.3    Conditions to Parent's and Merger Sub's Obligations.    The obligations of each of Parent and Merger Sub, respectively, to consummate the Merger are subject to the satisfaction (or waiver by Parent, in its sole discretion) of each of the conditions set forth in this Section 8.3 on or before the Closing Date. If the Merger is consummated, such conditions will conclusively be deemed to have been satisfied or waived.

        (a)    Representations and Warranties.    Each of the representations and warranties made by the Company in or pursuant to this Agreement or in any statement, certificate, or other document delivered to Parent or Merger Sub in connection with this Agreement, the Merger, or any of the other transactions contemplated hereby (a) that is qualified as to materiality or Material Adverse Effect shall be true and correct in all respects when made and shall be true and correct in all respects as of the Closing Date as though each such representation and warranty had been made on and as of the Closing Date, except to the extent any such representation and warranty expressly speaks only as of an earlier date (in which case as of such earlier date), and (b) that is not so qualified shall be true and correct in all material respects when made and shall be true and correct in all material respects as of the Closing Date as though each such representation and warranty had been made on and as of the Closing Date, except to the extent any such representation and warranty expressly speaks only as of an earlier date (in which case as of such earlier date).

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

79

        (b)    Required Shareholder Approval.    The Required Shareholder Approval shall have been obtained.

        (c)    Compliance with Agreement.    The Company shall have performed and complied in all material respects with all of its obligations under this Agreement to be performed or complied with by it before or at the Closing.

        (d)    Closing Certificates.    The Company will have executed and delivered to Parent, at and as of the Closing,

          (i)  a certificate certifying that the conditions referred to in Sections 8.3(a), 8.3(b), 8.3(c), 8.3(f) and 8.3(g) hereof have been satisfied;

         (ii)  a certificate that incorporates by reference the representations and warranties set forth in Section 4.4 hereof and sets forth the information required to be set forth on Schedule 4.4 of the Company Disclosure Schedule as of the Effective Time (the "Capitalization Certificate"), which Capitalization Certificate shall be deemed to be a representation and warranty of the Company as of immediately prior to the Effective Time hereunder, together with a list of all Participating Holders and their respective percentage interests in the Preferred Stock Closing Amount; and

        (iii)  the Merger Consideration Certificate, together with duly executed pay-off letters with respect to all Transaction Expenses (and anticipated Transaction Expenses).

        (e)   Opinion of Counsel.    Heller Ehrman LLP, counsel to the Company, will have delivered to Parent a written legal opinion addressed to Parent, dated on and as of the Closing Date, and in a form reasonably satisfactory to Parent.

        (f)    No Pending Litigation.    No action, suit or proceeding shall be pending against the Company or any of its Subsidiaries wherein any unfavorable injunction, judgment, order, decree ruling or charge would have a Material Adverse Effect on the Company.

        (g)    Third Party Consents.    Parent shall have been furnished with evidence reasonably satisfactory to it that the Company has obtained the consents, approvals and waivers set forth in Schedule 4.17 of the Company Disclosure Schedule and any other consents, approvals and waivers that are necessary or required in connection with, or as a result of, the Merger to preserve all of the Company's rights and benefits in its business, assets, properties, leases and contracts following the Merger and without incurring any additional or special liability, or accelerating any existing liability or obligation, in connection with or under its business, assets, properties, leases and contracts following the Merger.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

80

        (h)    Resignation of Directors and Officers.    The directors and officers of the Company in office immediately prior to the Effective Time shall have resigned as directors and officers of the Surviving Corporation effective as of the Effective Time.

        (i)    Dissenters' Rights.    Either (i) the period provided under Washington Law for the exercise by Company Shareholders of their rights of dissent and appraisal under Washington Law with respect to their shares of Company Stock by virtue of the Merger shall have expired with no Company Shareholders having exercised or perfected such rights, or (ii) Company Shareholders that collectively hold shares of Company Stock representing no more than five percent (5%) of the issued and outstanding shares of Company Stock, shall have exercised, or shall continue to be entitled to assert rights of dissent and appraisal under Washington Law with respect to their shares of the Company Stock by virtue of the Merger.

        (j)    Escrow Agreement.    The Escrow Agreement shall have been executed and delivered by the Holders Representative.

        (k)    FIRPTA Certificate.    The Company shall have delivered to Parent a properly executed statement, dated as of the Closing Date, in a form reasonably acceptable to Parent conforming to the requirements of Treasury Regulations Section 1.1445-2(c)(3).

        (l)    Facility Leases.    With respect to each Facility Lease, ServicesCo the Company and shall have entered into an agreement, which shall, among other things, (x) provide for the assumption of such Facility Lease and all of the Company's obligations thereunder by ServicesCo, and (y) be in form and substance reasonably satisfactory to Parent.

        (m)    Equipment Leases.    The Company shall have provided evidence reasonably satisfactory to Parent that all of the Company's obligations under any and all equipment leases to which the Company is a party immediately prior to the Effective Time have been satisfied and discharged in full without the imposition of any obligation on Parent under such equipment leases.

        (n)    Services Agreement.

          (i)  Parent and ServicesCo shall have entered into a services agreement substantially in the form of Exhibit C attached hereto (the "Services Agreement");

         (ii)  Parent shall be reasonably satisfied (x) that ServicesCo has sufficient facilities, equipment, and other assets and resources required to perform its obligations under the Services Agreement and (y) that each of Charles Magness, Shawn Iadonato, Christina Scherer and Maralee McVean are full-time employees of ServicesCo; and

        (iii)  All of the asset transfers and/or license grants contemplated by the Services Agreement shall have occurred.

81

        (o)    P2 Partners, LLC.    P2 Partners, LLC shall have agreed in writing to seek satisfaction of any payments owing to it in connection with the Merger solely from the Holders Representative.

        (p)    License Agreement Amendment.    The License Agreement, dated as of January 14, 2005, by and between the Company and the University of South Florida Research Foundation, Inc., as amended by that certain Amendment No. 1 to License Agreement, dated as of August 14, 2007, by and between the Company and the University of South Florida Research Foundation, Inc., shall remain in full force and effect and shall not have been further amended unless Parent shall have approved of any such further amendment in writing to the Company.

        (q)    Asset Transfer Agreement.

          (i)  The Company and ServicesCo shall have entered into an Asset Transfer Agreement substantially in the form of Exhibit J attached hereto (the "Asset Transfer Agreement");

         (ii)  All of the transactions contemplated by the Asset Transfer Agreement shall have been consummated; and

        (iii)  The Promissory Note (as defined in the Asset Transfer Agreement) shall have been assigned by the Company to the Holders Representative.

ARTICLE 9
INDEMNIFICATION

        9.1    Effectiveness.    The provisions of this Article 9 shall apply and become effective only if the Merger is consummated.

        9.2    Joint and Several Indemnification by Participating Holders.    Subject to the limitations set forth in Section 9.6 hereof, the Participating Holders, jointly and severally, shall indemnify, defend, and hold harmless Parent, the Surviving Corporation and each of the directors, officers, employees, agents, representatives and other Affiliates of Parent and/or Merger Sub (all persons entitled to indemnification under this Section 9.2 being hereinafter referred to as the "Parent Indemnified Parties") from and against any and all Damages related to or arising, directly or indirectly, out of or in connection with (i) any breach by the Company of any representation, warranty, covenant, agreement, obligation, or undertaking made by the Company in this Agreement (including any schedule or exhibit hereto), or any other agreement, instrument, certificate, or other document delivered by or on behalf of the Company in connection with this Agreement, the Merger, or any of the other transactions contemplated hereby, (ii) any payments (and the amount thereof) made or to be made by Parent, the Merger Sub or the Surviving Corporation after the Effective Time with respect to any Dissenting Shares, to the extent that such payments exceed the portion of the Merger Consideration that would have been paid with respect to such Dissenting Shares pursuant to Section 3.1 had such Dissenting Shares not been Dissenting Shares, (iii) any claim made by any third party, other than any

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

82

Participating Rights Holder or holder of Dissenting Shares, that all or any portion of the Merger Consideration is owed to such third party (a "Third Party Consideration Claim"), (iv) any claim made by any Participating Rights Holder that all or any portion of the Merger Consideration to which such Participating Rights Holder is entitled to under the Company's Certificate of Incorporation, as amended and in effect immediately prior to the Effective Time, any other agreement between the Company and such Participating Rights Holder and/or applicable law has not been paid to or received by such Participating Rights Holder, (v) any claim arising as a result of any inaccuracy or error in the Capitalization Certificate or the Merger Consideration Certificate, (vi) any claims made by any Company Shareholder in connection with this Agreement or the transactions contemplated hereby, whether based upon any alleged breach of fiduciary or other duty by any officer, director or shareholder of the Company or otherwise, or any claims by any officer, director, employee or shareholder of the Company to indemnification by the Company or the Surviving Corporation with respect to any such claim, (vii) any Transaction Expenses that are not paid by the Company prior to the Effective Time, (viii) severance liabilities or obligations of the Company or any other employee-related liabilities of any kind of the Company, including, without limitation, any and all Compensation Liabilities and any and all claims for post-termination health insurance benefits, (ix) any and all other liabilities arising from the operation of the business of the Company and its Subsidiaries prior to the Effective Time, (x) any and all liabilities arising from or related to any Facility Lease whether arising prior to or after the Effective Time, or (xi) any and all liabilities arising from or related to (A) that certain DAAD audit referred to on Schedule 4.11 of the Company Disclosure Schedule, (B) that certain U.S. Army Contract No. DAAD19-03-C-005 dated April 8, 2005 or (c) a breach of any of the representations or warranties set forth in Section 4.31 of this Agreement, in all such cases, whether arising prior to or after the Effective Time; provided, however, that the foregoing clauses (vii), (viii) and (ix) shall in no event include any of the liabilities referred to in such clauses if and to the extent that such liabilities are paid by Parent and deducted from the Closing Consideration pursuant to Section 6.13 hereof.

        9.3    Indemnification by Parent.    Subject to the limitations set forth in Section 9.7 hereof, Parent shall indemnify, defend, and hold harmless Company, the Participating Holders and the Holders Representative and each of the directors, officers, employees, agents, representatives and other Affiliates of the Company and the Holders Representative (all persons entitled to indemnification under this Section 9.3 being hereinafter referred to as the "Company Indemnified Parties") from and against any and all Damages related to or arising, directly or indirectly, out of or in connection with any breach by the Parent of any representation, warranty, covenant, agreement, obligation, or undertaking made by the Parent in this Agreement (including any schedule or exhibit hereto), or any other agreement, instrument, certificate, or other document delivered by or on behalf of the Parent in connection with this Agreement, the Merger, or any of the other transactions contemplated hereby. The Holders Representative shall have the exclusive right to bring or defend, as applicable, any claims on behalf of any Company Indemnified Party.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

83

        9.4    Third Party Claims.    Each Parent Indemnified Party or Company Indemnified Party (each, an "Indemnified Party"), as applicable, shall give prompt written notification to the other party (the "Indemnifying Party") of the commencement of any action, suit or proceeding relating to a third party claim for which indemnification pursuant to this Section 9 may be sought; provided, however, that no delay on the part of such Indemnified Party in notifying the other party shall relieve the Indemnifying Party of any liability or obligation hereunder except to the extent of any damage or liability caused by or arising out of such delay. Within twenty (20) days after delivery of such notification, the Indemnifying Party may (except to the extent otherwise provided below in this Section 9.4), upon written notice to such Indemnified Party, assume control of the defense of such action, suit or proceeding with counsel reasonably satisfactory to such Indemnified Party, provided that, the third party seeks monetary damages only. If the Indemnifying Party does not so assume control of such defense, the Indemnified Party may elect to control such defense. The party not controlling such defense may participate therein at its own expense; provided that if the Indemnifying Party assumes control of such defense and such Indemnified Party reasonably concludes that the Indemnifying Party and such Indemnified Party have conflicting interests or different defenses available with respect to such action, suit or proceeding, the reasonable fees and expenses of counsel to such Indemnified Party shall be considered "Damages" for purposes of this Agreement. The party controlling such defense shall keep the other party advised of the status of such action, suit or proceeding and the defense thereof and shall consider in good faith recommendations made by the other party with respect thereto. The Indemnified Party shall not agree to any settlement of such action, suit or proceeding without the prior written consent of the Indemnifying Party which shall not be unreasonably withheld or delayed. The Indemnifying Party shall not agree to any settlement of or the entry of a judgment in any action, suit or proceeding without the prior written consent of the applicable Indemnified Party, which shall not be unreasonably withheld or delayed (it being understood that it is reasonable to withhold such consent if, among other things, the settlement or the entry of a judgment (A) lacks a complete release of all Indemnified Parties for all liability with respect thereto or (B) imposes any liability or obligation on any Indemnified Party). For the avoidance of doubt, the Holders Representative shall be granted the right to bring or defend, as applicable, any claims on behalf of any Company Indemnified Party. Notwithstanding anything to the contrary expressed or implied herein, Parent shall control all claims relating to any Third Party Consideration Claim, Taxes and all claims relating to any Compound, Contingent Payment Product or intellectual property of the Company or any of its Affiliates or Subsidiaries.

        9.5    Payment of Claims.    (a)    In the event of any claim for indemnification pursuant to Section 9.2 or 9.3 hereof, the Indemnified Party will advise the Indemnifying Party in writing with reasonable specificity of the amount and circumstances surrounding such claim. If within thirty (30) days of a claim for indemnification the Indemnifying Party has not contested pursuant to Section 11.13 such claim in writing, the full amount thereof shall be paid (i) with respect to any Parent Indemnified Party, out of the Escrow Funds to the extent available and subject to the limitations set forth in Section 9.6 below, within two (2) days after the expiration of such period, and (ii) with respect to any Company Indemnified Party, by Parent, subject to the limitations set forth in Section 9.7 below, via wire transfer to the Holders Representative within two (2) days after the expiration of such period. With respect to the Parent Indemnified Party, to the extent the Escrow Funds are insufficient or not available to satisfy the full amount of such claim for indemnification, Parent shall be entitled to set off, and accordingly reduce, any Contingent Payment that Parent would otherwise be required to pay to the Holders Representative pursuant to Section 2.7 hereof, subject to the limitations set forth in Section 9.6 hereof, provided, however, that any Parent Indemnified Party shall not be entitled to set-off or reduce any Contingent Payment in the event and to the extent that adequate funds have been reserved in escrow, or previously offset by the Parent. Upon the final determination of any indemnified claim pursuant to Section 9.2, the full amount of any excess offset or reduction amount shall be released by the Parent Indemnified Party and paid by wire transfer to the Holders Representative within five (5) business days after such final determination.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

84

        (b)   Notwithstanding anything to contrary set forth herein, in the event that any Closing Liability or any inaccuracy in the Merger Consideration Certificate, including but not limited to the amount of Available Closing Cash or the amount of Transaction Expenses, or the Capitalization Certificate is discovered by Parent after the Effective Time and prior to the Closing Consideration Payment Date that was not listed on the Merger Consideration Certificate, Parent shall be entitled to set off, and accordingly reduce the Closing Consideration that Parent would otherwise be required to pay to the Holder's Representative pursuant to Section 2.6(a) hereof. Other than as provided in the preceding sentence, Parent's remedies and recourse with respect to the Closing Consideration shall be limited in accordance with Sections 9.6(b) and 9.10 below.

        9.6    Limitations of Liability of Company.

        (a)    Threshold.    There shall be no liability for any claim for indemnification under Section 9.2 hereof unless and until the aggregate amount of Damages in connection with all claims for indemnification under Section 9.2 hereof by any Parent Indemnified Party and all other Parent Indemnified Parties (including, without limitation, prior claims for indemnification regardless of whether or not they are still pending) exceeds $100,000 (the "Threshold Amount"), whereupon each Parent Indemnified Party shall be entitled to be paid the full amount of all Damages in connection with all claims for indemnification under this Article 9 by such Parent Indemnified Party irrespective of such Threshold Amount; provided, however that, notwithstanding the foregoing, (i) the liability for any claim for indemnification under Section 9.2 shall be subject to the limitations set forth in Section 9.6(b), (ii) the provisions of this Section 9.6(a) shall not apply to any claim for intentional fraud under applicable laws (a "Fraud Claim") and (iii) the provisions of this Section 9.6(a) shall not apply to any claim for indemnification made by a Parent Indemnified Party pursuant to clause (ii), (iii), (iv),(v), (vii), (viii), (x) or (xi) of Section 9.2 or with respect to a breach by the Company in the performance of any covenant, agreement, obligations or undertaking made by the Company in this Agreement.

        (b)    Limited Recourse.    Notwithstanding anything expressed or implied in this Agreement to the contrary, other than as set forth in Section 9.10 and other than with respect to any Fraud Claim, the sole recourse available to any Parent Indemnified Party in connection with any claim for indemnification under Section 9.2 hereof, or under any other common law or statutory recovery theory relating to the financial or other condition of the Company or any of the subject matters described in Article 4, shall be limited to (i) proceeding against the Escrow Funds pursuant to, and in accordance with, the terms and conditions of the Escrow Agreement and/or (ii) setting off against the Contingent Consideration, if any, that Parent would otherwise be required to pay to the Holders Representative, pursuant to Section 9.5 hereof.

        (c)    Time Limit.    Except with respect to any Fraud Claim or claim based on intentional misconduct, there shall be no liability in connection with any claim for indemnification under Section 9.2 hereof by any applicable Parent Indemnified Party unless such claim for indemnification is made in writing by such Parent Indemnified Party on or prior to the date on which the Parent is required to make any final payment of the Contingent Consideration, if any, pursuant to Section 2.7 hereof.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

85

        (d)    Reduction of Indemnification Amounts.    The amount of any Damages otherwise payable to any Parent Indemnified Party hereunder will be reduced by (i) any insurance proceeds actually received by such Parent Indemnified Party in respect thereof, to the extent that such reduction is permitted without reduction of the amount of such proceeds payable under the applicable insurance policy, and (ii) shall also be reduced to the extent of any offsets taken pursuant to Sections 2.7(d) or 2.7(f) hereof.

        9.7    Limitations of Liability of Parent.

        (a)    Threshold.    There shall be no liability for any claim for indemnification under Section 9.3 hereof unless and until the aggregate amount of Damages in connection with all claims for indemnification under Section 9.3 hereof by any Company Indemnified Party and all other Company Indemnified Parties (including, without limitation, prior claims for indemnification regardless of whether or not they are still pending) exceeds the Threshold Amount, whereupon each Company Indemnified Party shall be entitled to be paid the full amount of all Damages in connection with all claims for indemnification under this Article 9 by such Company Indemnified Party irrespective of such Threshold Amount; provided, however that, notwithstanding the foregoing, the liability for any claim for indemnification under Section 9.3 shall not apply to any Fraud Claim or with respect to a breach by Parent, Merger Sub or the Surviving Corporation in the performance of any covenant, agreement, obligation or undertaking made by it or them in this Agreement.

        (b)    Time Limit.    Subject to Section 9.10 below and except with respect to any Fraud Claim or claim based on intentional misconduct, there shall be no liability in connection with any claim for indemnification under Section 9.3 hereof by any applicable Company Indemnified Party hereby, unless (x) in the case of any such claim for indemnification resulting from a breach of a representation or warranty made by Parent, such claim for indemnification is made in writing by the Holders Representative on or prior to the second anniversary of the Closing Date, (y) in the case of any such claim for indemnification resulting from a breach of a covenant or agreement made by Parent (other than a breach of a covenant or agreement made by Parent in Sections 2.7, 6.9, 6.10, 6.18 or 11.3(b) hereof), such claim for indemnification is made in writing by the Holders Representative on or prior to the one year anniversary of such breach, and (z) in the case of any such claim for indemnification resulting from a breach of a covenant or agreement made by Parent in Sections 2.7, 6.9, 6.10, 6.18 or 11.3(b) hereof, such claim for indemnification is made in writing by the Holders Representative on or prior to the later of the one year anniversary of such breach or the expiration of one year after the Holders Representative acquires actual knowledge of previously undisclosed material facts that provide a basis for a claim against Parent under any of Sections 2.7, 6.9, 6.10, 6.18 or 11.3(b) hereof; provided, however, that in no event shall any claim for indemnification under this clause (z) be made at any time after the one year anniversary of the date of the final Contingent Payment payable pursuant to the terms of Section 2.7 hereof.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

86

        (c)    Reduction of Indemnification Amounts.    The amount of any Damages otherwise payable to any Company Indemnified Party hereunder will be reduced by any insurance proceeds actually received by such Company Indemnified Party in respect thereof, to the extent that such reduction is permitted without reduction of the amount of such proceeds payable under the applicable insurance policy.

        9.8    Insurance Collection.    The Indemnified Party shall use commercially reasonable efforts to pursue, and to cause its Affiliates to use commercially reasonable efforts to pursue, all insurance claims to which it may be entitled in connection with any Damages it incurs for which it makes a claim for indemnification pursuant to this Article 9, provided that (i) the foregoing provisions of this Section 9.8 shall not be a condition precedent for any Indemnified Party to make any claim for indemnification pursuant to this Article 9 and (ii) the foregoing provisions of this Section 9.8 shall not apply to any Fraud Claim. The parties shall cooperate with each other in pursuing any such insurance claims. If any Indemnified Party recovers any amount from any insurer after payment to such Indemnified Party of all Damages suffered or incurred by such Indemnified Party in respect of the matters to which such insurance payment relates, then such Indemnified Party will promptly pay over to the Indemnifying Party the amount so recovered, to the extent not in excess of the amount previously paid to such Indemnified Party in respect of such matter.

        9.9    Subrogation.    In the event that a Indemnified Party is indefeasibly indemnified in full pursuant to this Article 9 with respect to any matter, the Indemnifying Party shall be subrogated, to the extent of the amount of indemnification received by such Indemnified Party, to the rights of such Indemnified Party against all other persons in respect of the matter for which such indemnification was received by such Indemnified Party, to the extent permitted by applicable insurance policies of such Indemnified Party, and, upon such subrogation, the Indemnifying Party may assert such rights against such other persons.

        9.10    Exclusive Remedies.    The parties hereby acknowledge and agree that, if the Merger is consummated, the sole and exclusive remedies of any and all Indemnified Parties in respect of any and all claims (except any Fraud Claim) relating to any breach or purported breach of any representation, warranty, covenant, agreement, obligation, or undertaking that is contained in this Agreement or otherwise relating thereto will be pursuant to the indemnification provisions of this Article 9; provided, however, that the foregoing provisions of this Section 9.10 shall not apply to limit the exercise of any remedy seeking specific performance or injunctive relief or the exercise by the Holders Representative of its rights under Sections 6.10(d) and 6.10(e) to obtain the Non-Compliance Grantback). Notwithstanding anything to the contrary in this Agreement, including but not limited to the provisions of this Section 9.10 or any other provisions of this Article 9, in the event that the Holders Representative obtains, or elects to require, the license of the Grantback Assets pursuant to Section 6.10 above, then such license shall be the sole and exclusive remedy with respect to any breach by Parent of its obligations under Section 6.9 hereof.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

87

ARTICLE 10
TERMINATION

        10.1    Termination.    This Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time (whether before or after approval of the Merger by the shareholders of the Company or by Parent as sole stockholder of Merger Sub) only as follows:

        (a)   at any time by mutual written agreement of Parent, Merger Sub and the Company;

        (b)   by the Company, upon written notice to Parent and Merger Sub if there has been a material breach by Parent or Merger Sub of any representation, warranty, covenant or agreement set forth in this Agreement and such material breach is not curable, or, if curable, is not cured within thirty (30) days after written notice of such breach is given by the Company to Parent and Merger Sub;

        (c)   by Parent, upon written notice to the Company and the Holders Representative if there has been a material breach by the Company of any representation, warranty, covenant or agreement set forth in this Agreement and such material breach is not curable, or, if curable, is not cured within thirty (30) days after written notice of such breach is given by Parent to the Company and the Holders Representative;

        (d)   by Parent, if Company or any of its directors or officers shall participate in discussions or negotiations in breach of, or otherwise breach, Section 7.24;

        (e)   by Parent if the Company Board or any committee thereof makes an Adverse Recommendation;

        (f)    by the Company or Parent, upon written notice to the other parties to this Agreement if a court of competent jurisdiction or Governmental Authority have issued a non-appealable final and permanent injunction, or other binding legal restraint or prohibition, having the effect of permanently preventing the consummation of the Merger or the other transactions contemplated hereby;

        (g)   by the Company or Parent, upon written notice to the other parties to this Agreement if the Merger has not been consummated on or before the thirtieth (30th) day following the date of this Agreement or on or before any later date that the Company and Parent shall mutually determine (such thirtieth (30th) day following the date of this Agreement or such later date, as the case may be, being referred to herein as the "Outside Date"), provided, however, that the right to terminate this Agreement pursuant to this Section 10.1(g) shall not be available to any party whose material breach of a representation or warranty or failure to fulfill any covenant or other agreement under this Agreement has been the cause of, or resulted in the failure of, the Merger to occur on or before the Outside Date, and shall not be available to the Company if the Required Shareholder Approval has not been obtained prior to the Outside Date; or

        (h)   by the Company if (i) the Company has not breached Section 7.24, (ii) the Required Shareholder Approval has not been obtained and the Company has not breached any of its obligations under Section 6.4 and (iii) concurrently with such termination the Company enters into a definitive agreement with respect to a Superior Proposal.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

88

        (i)    by Parent if the Required Stockholder Approval is not obtained within one day following the Agreement Date.

        10.2    Effect of Termination.    If this Agreement is terminated pursuant to Section 10.1 hereof, then (a) the provisions of this Section 10.2, Section 10.3 and Article 11 shall survive any such termination, (b) such termination shall not relieve any party hereto from liability arising from any breach by such party of any provision of this Agreement if such breach occurred prior to such termination, (c) each party will redeliver all documents, work papers and other material of the other party or parties relating to the transactions contemplated hereby including such memoranda, notes, lists, records or other documents compiled or derived from such material, whether so obtained before or after the execution hereof, to the party furnishing the same and (d) all information received by any party hereto with respect to the business of the other parties or their affiliated companies shall remain subject to the terms of the Confidentiality Agreement.

        10.3    Costs and Expenses.

        (a)   If (i) this Agreement is validly terminated pursuant to Section 10.1(h) hereof, and (ii) neither Parent nor Merger Sub shall have materially breached any of their representations, warranties or covenants under this Agreement, then the Company shall pay to Parent, in cash, a fee in the amount equal to the sum of (x) one million five hundred thousand dollars ($1,500,000) plus all costs and expenses incurred by Parent and Merger Sub in connection with the transactions contemplated by this Agreement. Any fee due under this Section 10.3(a) shall be paid by wire transfer of same-day funds on the date of termination of this Agreement.

        (b)   Except as otherwise provided in this Agreement and whether or not the transactions contemplated by this Agreement are consummated, all costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be borne by the party incurring such expenses. The fees and expenses of the Escrow Agent shall be borne and paid by Parent. Parent acknowledges and agrees that Company has disclosed that it is obligated and will become further obligated for Transaction Expenses incurred by the Company in connection with the Merger and the transactions contemplated hereby (including fees and expenses of its legal counsel and other advisors). It is understood and agreed that all of such Transactions Expenses (including amounts reasonably expected to be incurred through the Closing Date and thereafter for post-Closing services related to the Merger) shall to the extent practicable be paid and pre-paid by the Company prior to the Closing, but that all Transaction Expenses (including estimated prepayments) not paid by the Company prior to Closing shall be paid by Parent at the Closing, provided that all of such Transaction Expenses shall have been disclosed to Parent prior to Closing and shall be deducted from the Closing Consideration as a Closing Liability pursuant to the definition of "Closing Consideration" set forth herein.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

89

ARTICLE 11
GENERAL

        11.1    Cooperation.    Each of the parties will cooperate with the others and use commercially reasonable efforts to prepare all necessary documentation, to effect all necessary filings, and to obtain all necessary permits, consents, approvals, and authorizations of all governmental bodies and other third parties necessary to consummate the transactions contemplated by this Agreement.

        11.2    Survival of Provisions.    The provisions of this Agreement, including without limitation the representations and warranties of the parties, and the provisions of the other documents executed and delivered in connection with this Agreement, the Merger, and the other transactions contemplated hereby will be deemed material, and, notwithstanding any investigation by or on behalf of any party or any knowledge that any party has or should have as a result of such investigation, will be deemed to have been relied on by each party, and will survive the Closing and the consummation of the Merger and the other transactions contemplated hereby, subject to all of the limitations set forth in Article 9 hereof, including, without limitation, the limitations set forth in Section 9.5(c) hereof.

        11.3    Benefits of Agreement; No Assignments; No Third-Party Beneficiaries.

        (a)   This Agreement will bind and inure to the benefit of the parties hereto and their respective heirs, successors, and permitted assigns.

        (b)   Except to the extent otherwise provided or permitted elsewhere in this Agreement, Parent shall not sell or license the rights to develop, make, use and sell any Contingent Payment Product without the consent of the Holders Representative (which consent shall not be unreasonably withheld or delayed); provided, however, that the consent of the Holders Representative shall not be required (i) in the case of any such sale, license or other transfer to any of Parent's Affiliates or Subsidiaries, provided such Affiliate or Subsidiary signs an instrument of accession hereto in which it agrees to be bound by and adhere to all of Parent's obligations hereunder with respect to the rights so transferred, (ii) in connection with (x) a merger or consolidation of Parent or sale of all or substantially all of the assets of Parent (provided that the acquiror agrees in writing to be bound by the obligations of Parent under this Agreement), (y) a merger or consolidation of any Affiliate or Subsidiary of Parent referred to in the foregoing clause (i) of this Section 11.3(b) (provided that the acquiror agrees in writing to be bound by the obligations of such Affiliate or Subsidiary under this Agreement, and further provided that if such Affiliate or Subsidiary is the licensee or transferee of all of Parent's rights to develop, make, use and sell all Contingent Payment Products, []*) or (z) a sale, license or other transfer of all of Parent's rights to develop, make, use and sell all Contingent Payment Products, provided that []*, and must agree in writing to be bound by the obligations of Parent under this Agreement with respect to such Contingent Payment Product, (iii) a sale, license or other transfer of Parent's right to develop, make, use or sell any Section 6.9 Contingent Payment Product, provided that []*, (iv) a sale or assignment of Parent's right to develop, make, use or sell any Contingent Payment Product that is not a Section 6.9 Contingent Payment Product, provided that []*, or (v) a license of Parent's rights to develop, use and sell any Contingent Payment Product for the treatment of a Non-HCV Indication, provided that (1) []*, and (2) if such Contingent Payment Product is also being developed or commercialized by Parent for the treatment of infections caused by HCV, []*; and further provided, that (A) in the event of any sale or assignment described in clauses (iii) and (iv) above, the buyer or assignee shall have agreed in writing to be bound by all of the obligations of Parent under this Agreement with respect to the Contingent Payment Product sold or assigned, and (B) in the event of any license described in clauses (iii) and (v), []*. Parent shall not sell or license the rights to develop, make, use and sell any Contingent Payment Product except in strict compliance with the foregoing restrictions, and any attempt to do so will be void. Any license by Parent of the rights to develop, make, use and sell any Contingent Payment Product shall not release Parent from any of its obligations under this Agreement with respect to such Contingent Payment Product.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

90

        (c)   None of the Company, the Holders Representative or the Participating Holders, shall have the right to assign any rights or delegate any obligations under this Agreement without the consent of the Parent; provided, however, that the consent of the Parent shall not be required other than, in the case of the Holders Representative and the Participating Holders, any assignment or delegation by (i) the Holders Representative to any of the Participating Holders of any rights or obligations of the Holders Representative under this Agreement (other than any assignment or delegation by the Holders Representative or any Participating Holder of any rights or obligations under Section 6.10 hereof) or (ii) any of the Participating Holders as permitted under Section 3.3(b). Parent shall have the right to assign any rights or delegate any obligations under this Agreement without the consent of the Holders Representatives or the Participating Holders, provided that (x) any such assignment or delegation does not violate or breach any of the provisions of Section 11.3(b) and (y) any such assignment or delegation shall not release Parent from its obligations under this Agreement.

        (d)   Nothing in this Agreement is intended to or will confer any rights or remedies on any person other than the parties hereto and their respective heirs, successors, and permitted assigns; provided however, that, if, but only if, the Merger is consummated, the provisions in Section 3 hereof concerning the payment of the Merger Consideration for the Company Stock, Company Options and Common Warrants are intended, and shall be, for the benefit of the Participating Holders as third party beneficiaries, provided further that Participating Holder rights shall only be exercised by the Holders Representative on behalf of such Participating Holders.

        11.4    Notices.    All notices, requests, payments, instructions, or other documents to be given hereunder will be in writing or by written telecommunication, and will be deemed to have been duly given if (i) delivered personally (effective upon delivery), (ii) mailed by registered or certified mail, return receipt requested, postage prepaid (effective five (5) business days after dispatch), (iii) sent by a reputable, established courier service that guarantees next business day delivery (effective the next business day), or (iv) sent by telecopier followed within 24 hours by confirmation by one of the foregoing methods (effective upon receipt of the telecopy in complete, readable form), addressed as follows (or to such other address as the recipient party may have furnished to the sending party for the purpose pursuant to this section):

        (a)   If to Parent, Merger Sub, and/or (after the Effective Time), the Surviving Corporation to:

Cubist Pharmaceuticals, Inc.
65 Hayden Avenue
Lexington, Massachusetts 02421
Attention:    Chief Executive Officer
Telecopier No.: 781-861-0566

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

91

with a copy sent at the same time and by the same means to:

Cubist Pharmaceuticals, Inc. 65 Hayden Avenue Lexington, Massachusetts 02421 Attention:    General Counsel Telecopier No.: 781-861-0566
and
Bingham McCutchen LLP 150 Federal Street Boston, Massachusetts 02110
Attention:	Julio E. Vega, Esq.
	Matthew J. Cushing, Esq.
Telecopier No.: (617) 951-8736

        (b)   If to the Company (before the Effective Time) to:

Illumigen Biosciences Inc.
201 Elliott Ave. West, Suite 500
Seattle, Washington 98119
Attention:    Charles Magness
Telecopier No.: (206) 378-0408

        (c)   If to the Company (after the Effective Time) or to the Holders Representative to:

IB Securityholders, LLC,
Attn: Donald J. Elmer c/o Pacific Horizon Ventures
701 Fifth Avenue, Suite 4970
Seattle, Washington 98104
Telecopier No.: (206) 682 1181

with a copy sent at the same time and by the same means to:

DLA Piper US LLP
701 Fifth Avenue, Suite 7000
Seattle, Washington 98104-7044
Attention:    John M. Steel
Telecopier No.: (206) 839-4801

Heller Ehrman LLP
701 Fifth Avenue, Suite 6100
Seattle, Washington 98104-7098
Attention:    Greg Papciak
Telecopier No. (206) 515-8885

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

92

        11.5    Disclosure in Schedules.    For purposes of this Agreement, with respect to any matter that is clearly disclosed on any Schedule of the Parent Disclosure Schedule or the Company Disclosure Schedule, as the case may be, in such a way as to make its relevance to the information called for by another Section of this Agreement or another Schedule of Parent Disclosure Schedule or the Company Disclosure Schedule, as the case may be, readily apparent, such matter shall be deemed to have been disclosed in response to such other Section, notwithstanding the omission of any appropriate cross-reference thereto; provided, however, that each of Parent and the Company hereby covenants to make a good faith diligent effort to make all appropriate cross-references within and to any and all Schedules of Parent Disclosure Schedule and the Company Disclosure Schedule, respectively.

        11.6    Counterparts.    This Agreement may be executed by the parties in separate counterparts, each of which when so executed and delivered will be an original, but all of which together will constitute one and the same agreement. In pleading or proving this Agreement, it will not be necessary to produce or account for more than one such counterpart.

        11.7    Captions.    The captions of sections or subsections of this Agreement are for reference only and will not affect the interpretation or construction of this Agreement.

        11.8    Equitable Relief.    Each of the parties hereby acknowledges that any breach by it of its obligations under this Agreement would cause substantial and irreparable damage to the parties, and that money damages would be an inadequate remedy therefor, and accordingly, acknowledges and agrees that each other party will be entitled to an injunction, specific performance, and/or other equitable relief to prevent the breach of such obligations.

        11.9    Construction.    The language used in this Agreement is the language chosen by the parties to express their mutual intent, and no rule of strict construction will be applied against any party.

        11.10    Waivers.    No waiver of any breach or default hereunder will be valid unless in a writing signed by the waiving party. No failure or other delay by any party exercising any right, power, or privilege hereunder will be or operate as a waiver thereof, nor will any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power, or privilege.

        11.11    Entire Agreement.    This Agreement, together with the exhibits and schedules hereto and the other agreements, instruments, certificates, and other documents referred to herein as having been or to be executed and delivered in connection with the transactions contemplated hereby (including, without limitation, the Confidentiality Agreement, the Escrow Agreement and the LLC Agreement), contains the entire understanding and agreement among the parties, and supersedes any prior understandings or agreements among them, or between or among any of them, with respect to the subject matter hereof.

        11.12    Governing Law.    This Agreement will be governed by and interpreted and construed in accordance with the internal laws of Commonwealth of Massachusetts, as applied to contracts under seal made, and entirely to be performed, within the Commonwealth of Massachusetts, and without reference to principles of conflicts or choice of laws, except as to matters concerning the internal affairs of any of the corporation or entity parties hereto which shall be governed by the corporate laws of their respective jurisdictions of incorporation or organization.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

93

        11.13    Mediation and Arbitration.

        (a)   In the event of any dispute, controversy, or claim arising out of, relating to, or in connection with this Agreement, or the breach, termination, or validity thereof, other than a dispute subject to appraisal under Section 2.7(k) or litigation under 11.14 hereof, a party wishing to commence arbitration shall first serve notice on the proposed respondent that a dispute has arisen and demand that mediation commence. The mediation shall last no longer than sixty (60) days and shall be conducted pursuant to the CPR Mediation Procedure then in effect. Each party shall pay its own expenses incurred in connection with such mediation, and the fees and expenses of the mediator shall be divided evenly between the parties. Notwithstanding anything else contained herein, any party to such mediation shall have the right to commence arbitration at any time after the expiration of sixty (60) days after service of such demand for mediation under this subsection. Any disputes concerning compliance with or a party's right to commence arbitration under this Section 11.13(a) shall be finally settled by arbitration pursuant to Section 11.13(b) below.

        (b)   Any dispute, controversy, or claim arising out of, relating to, or in connection with this Agreement, or the breach, termination, or validity thereof, other than a dispute subject to appraisal under Section 2.7(k) or litigation under Section 11.14 hereof, if not settled by mediation pursuant to Section 11.13(a) above, shall be finally settled by arbitration conducted in accordance with the CPR Rules for Non-Administered Arbitration in effect at the time of the arbitration, except as they may be modified herein or by mutual agreement of the parties. The arbitration shall be conducted by three arbitrators, and the seat shall be Boston, Massachusetts.

        (c)   In such arbitration, the arbitration tribunal shall have the authority to order such production of documents as may reasonably be requested by either party or by the tribunal itself, taking into account the needs of the parties and the desirability of making discovery efficient and cost-effective.

        (d)   During such arbitration, a party may request a reasonable number of depositions of party witnesses, not exceeding three depositions per side. Each deposition shall be limited to one day of seven hours unless otherwise agreed by the parties or ordered by the tribunal for good cause.

        (e)   This agreement to arbitrate and any proceedings hereunder shall be governed by Title 9, United States Code. Any proceeding to confirm, enforce, vacate or modify the award may be brought only in a federal or state court located in Suffolk County, Massachusetts; each party submits to the jurisdiction of any such court in such proceeding and irrevocably waives any objection to venue in such court and any objection that such court is an inconvenient forum; and judgment on the award may be entered by such court. In any such proceeding brought in such court, each party irrevocably consents to service of process by the mailing of copies thereof by certified mail, postage prepaid, to such party's addresses for notices pursuant to Section 11.4 hereof. The judgment of such court may be enforced by any court of competent jurisdiction.

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

94

        (f)    A request by a party to a court of competent jurisdiction for interim measures necessary to preserve the party's rights, including attachments or injunctions, shall not be deemed incompatible with, or a waiver of, the agreement to mediate or arbitrate contained in this Section 11.13.

        (g)   If the arbitration relates to Damages the amount of which is in pending litigation with a third party, the arbitration shall be stayed until (i) such amount is ascertained in the litigation with the third party or (ii) both of the parties to the arbitration agree to proceed with the arbitration notwithstanding the pendency of the litigation with the third party.

        11.14    Jurisdiction and Venue of Suits Arising From Section 6.9 or 6.10 or Breach Thereof.    Notwithstanding any other provision of this Agreement, any dispute, controversy or claim arising from or under Section 6.9 or 6.10 of this Agreement or from the breach of either of those sections shall not be subject to arbitration under this Agreement. The parties hereto agree that any action or proceeding arising from Section 6.9 or 6.10 of this Agreement or from the breach of either of those sections shall be instituted only in a state or federal court located in Suffolk County, Massachusetts. Each party hereby irrevocably submits to the jurisdiction of such court and irrevocably waives any objection to venue in such court and any objection that such court is an inconvenient forum.

        11.15    Publicity.    Upon the execution and delivery of this Agreement by all parties hereto, Parent and Company shall each issue a press release in the form of the joint press release attached hereto as Exhibit K (the "Initial Press Release"). From the date of this Agreement through the Effective Time, no public release or announcement following the Initial Press Release concerning the transactions contemplated by this Agreement shall be issued by a party without the prior consent of the other party (which consent shall not be unreasonably withheld or delayed), except as such release or announcement as may be required by law or the rules or regulations of any applicable securities exchange, in which case the party required to make the release or announcement shall allow the other party reasonable time to comment on such release or announcement in advance of such issuance; provided, however, that each of the parties may make internal announcements to their respective employees that are consistent with the parties' prior public disclosures regarding the transactions contemplated by this Agreement; provided, further, that the Company may communicate with the holders of Company Common Stock, Company Preferred Stock, Company Options and Common Warrants, as well as certain third parties, to the extent necessary to obtain the consents and approvals contemplated by this Agreement.

        11.16    Use of Illumigen Name.    Parent agrees that the Holders Representative shall be permitted to use of the word "Illumigen" in its legal name immediately after the Effective Time.

        11.17    Amendment.    This Agreement may not be amended, modified, changed, waived or supplemented except by a writing duly executed by Parent, Merger Sub and the Company; provided however, that any amendment, modification, change, waiver or supplement to any provision or provisions of this Agreement at any time subsequent to the time the Company Shareholders approve this Agreement may be effected and implemented if, but only if, such amendment, modification, change, waiver or supplement is set forth in a written instrument or agreement duly executed by Parent and the Holders Representative.

[Signature Page Follows]

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

95

        IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement and Plan of Merger under seal as of the date first above written.

PARENT:	CUBIST PHARMACEUTICALS, INC.
	By:	/s/ Michael W. Bonney
		Name:	Michael W. Bonney
		Title:	President and Chief Executive Officer
MERGER SUB:	EDISON MERGER CORP.
	By:	/s/ Michael W. Bonney
		Name:	Michael W. Bonney
		Title:	President
COMPANY:	ILLUMIGEN BIOSCIENCES, INC.
	By:	/s/ Donald J. Elmer
		Name:	Donald J. Elmer
		Title:	Chief Executive Officer
HOLDERS REPRESENTATIVE:	IB SECURITYHOLDERS, LLC
	By:	/s/ Donald J. Elmer
		Name:	Donald J. Elmer
		Title:	Manager
	By:	/s/ Charles L. Magness
		Name:	Charles L. Magness
		Title:	Manager

[Signature Page to Merger Agreement]

*

Confidential Treatment Requested. Omitted portions filed with the Commission.

QuickLinks

Exhibit 10.37

EX-14.1

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 14.1

[CUBIST LOGO]                        Cubist Employee Policy                        CODE OF CONDUCT AND ETHICS

Introduction

        Cubist Pharmaceuticals, Inc., and its affiliates (together "Cubist" or the "Company") is committed to conducting business with a high degree of integrity. This Code of Conduct and Ethics is your guide to applicable laws and regulations as well as key policies and procedures that provide guidance for conducting business in a legal and ethical manner. It does not cover every situation that may arise, but establishes important standards, principles, and rules to guide the actions of all employees and Directors. All employees and Directors must act in accordance with the Code and seek to avoid even the appearance of improper behavior. The Code should also be provided to and followed by consultants to the Company.

        If a law conflicts with a policy in this Code, you must comply with the law; however, if a local custom or policy conflicts with this Code, you must comply with the Code. If you have any questions about these conflicts, you should seek advice from: (i) your Vice President, (ii) any director-level or higher employee in Human Resources, (iii) any director-level or higher employee in the Law Department, or (iv) the Chief Compliance Officer.

        If you have a question about the Code or want to report a violation or suspected violation, you may call the Company's internal Compliance Helpline at 781-860-8600.

        If you want to report a violation or suspected violation of this Code anonymously, including, for example, violations relating to accounting, internal accounting controls, or auditing matters or violations by an Executive Officer of the Company, you may call the Company's external Corporate Responsibility Hotline at 1-888-690-3869 or on the web at www.silentwhistle.com.

        Directors must report violations or suspected violations of the Code to the Board of Directors.

A good basis for deciding when to get advice is to ask yourself whether the conduct might be embarrassing to the Company or the persons involved if the details were fully disclosed to the public by the media.

        Violations of the standards in this Code will subject you to disciplinary action up to and including termination.

Section 1.    Compliance with Laws, Rules and Regulations

        Obeying the law, both in letter and in spirit, is the foundation on which this Company's ethical standards are built. All employees and Directors must respect and obey the laws of the jurisdictions in which we operate. Although not all employees and Directors are expected to know the details of these laws, it is important to know enough to determine when to seek advice from: (i) your Vice President, (ii) any director-level or higher employee in Human Resources, (iii) any director-level or higher employee in the Law Department, or (iv) the Chief Compliance Officer.

1

        The Company holds information and training sessions and has put in place various policies and procedures in order to promote compliance with laws, rules and regulations, including insider-trading laws. Each department head is responsible for ensuring that his/her employees attend all mandatory training sessions that are related to compliance with laws, rules and regulations applicable to his/her job functions.

Section 2.    Conflicts of Interest

        All employees and Directors are expected to make decisions in the best interest of the Company, and not for personal gain, and therefore are required to avoid "conflicts of interest."

        A "conflict of interest" exists when a person's private interest interferes in any way with the interests of the Company. A conflict can arise when an employee or Director takes actions or has interests that may make it difficult to perform his or her Company responsibilities objectively and effectively. Conflicts of interest may also arise when an employee or Director, or members of his or her family, receives personal benefits as a result of his or her position in the Company. Loans to, or guarantees of obligations of, employees or Directors and their family members may create conflicts of interest.

        It is almost always a conflict of interest for a Company employee to work simultaneously for a competitor, customer, supplier, or vendor. Employees are not allowed to work for a competitor in any capacity, including as a consultant or board member. The best policy is to avoid any direct or indirect business connection with customers, suppliers, or competitors, except on the Company's behalf.

        Directors must comply with the Conflict of Interest provisions set forth in the Amended and Restated Corporate Governance Guidelines.

        Conflicts of interest may not always be clear-cut. If you have a question whether a situation poses a conflict of interest, you should seek advice from: (i) your Vice President, (ii) any director-level or higher employee in Human Resources, (iii) any director-level or higher employee in the Law Department, or (iv) the Chief Compliance Officer. Any employee who becomes aware of a conflict or potential conflict should bring it to the attention of: (i) his or her Vice President, (ii) any director-level or higher employee in Human Resources, (iii) any director-level or higher employee in the Law Department, or (iv) the Chief Compliance Officer.

Section 3.    Insider Trading

        Employees and Directors who have access to confidential information are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of the Company's business. All non-public information about the Company should be considered confidential information. To use non-public information for personal financial benefit or to "tip" others who might make an investment decision on the basis of this information is not only unethical but also illegal. If you have any questions, please refer to the Company's Policy on Insider Trading and Confidentiality, and then ask the Law Department.

2

Section 4.    Corporate Opportunities

        Employees and Directors are prohibited from exploiting for their personal advantage opportunities that are discovered through the use of corporate property, information, or position without the consent of the Board of Directors. No employee or Director may use corporate property, information, or position for personal gain, and no employee or Director may compete with the Company directly or indirectly. Employees and Directors owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises.

Section 5.    Competition and Fair Dealing

        We seek to outperform our competition fairly and honestly. We seek competitive advantages through superior performance, never through unethical or illegal business practices. Stealing proprietary information, possessing trade secret information that was obtained without the owner's consent, or inducing such disclosures by past or present employees of other companies is prohibited. Each employee and Director should endeavor to respect the rights of and deal fairly with the Company's customers, suppliers, competitors, vendors, and their employees. No employee or Director should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice.

        Drug development is highly competitive, and it is the policy of the Company to compete aggressively, but fairly. A major part of this commitment to compete fairly is a commitment to abide fully by the antitrust laws. In general, these complex laws prohibit any form of agreement or understanding—whether formal, informal, express, or implied—that unreasonably reduces competition and business rivalry. Our commitment in this regard also prohibits any unfair or untrue disparagement of a Company competitor.

        All suppliers, vendors and contractors should be selected on the basis of written competitive bids if the amount of the services or goods to be provided is significant. Employees should check with Purchasing to determine if a competitive bid is required.

        The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain unfair advantage with customers. Gifts or entertainment should not ever be offered, given, provided to any customer, supplier, or vendor, or accepted from any customer, supplier, or vendor by any Company employee or Director, or family member of an employee or Director unless it: (1) is not a cash gift, (2) is consistent with customary business practices, (3) is not excessive in value, (4) cannot be construed as a bribe or payoff, (5) does not violate any laws or regulations, and (6) is offered in compliance with applicable Company policies and procedures.

        It is the policy of the Company to comply with health care "fraud and abuse" laws. This includes Federal and State anti-kickback laws that prohibit offering or giving kickbacks or other improper inducements to healthcare professionals, which includes anyone who may be in a position to purchase or prescribe or to arrange for or recommend the purchase or prescription of the Company's products. Any arrangements with healthcare professionals, including, for example, gifts, research grants, and business courtesies, must comply with applicable laws, Company policies, and procedures, which are available from the Compliance Department.

3

        If you are uncertain about offering or accepting a gift or business entertainment, you should seek advice from: (i) your Vice President, (ii) any director-level or higher employee in Human Resources, (iii) any director-level or higher employee in the Law Department, or (iv) the Chief Compliance Officer.

Section 6.    Discrimination and Harassment

        The diversity of the Company's employees is a tremendous asset. We are firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any discrimination or harassment of any kind. Please refer to Cubist's "Policy Against Sexual Harassment in the Workplace" for additional information and guidance.

Section 7.    Health and Safety

        The Company strives to provide each employee with a safe and healthful work environment. Each employee has responsibility for maintaining a safe and healthy workplace for all employees by following safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions.

        The Company will not tolerate violence and threatening behavior. Employees should report to work in condition to perform their duties, free from the influence of illegal drugs or alcohol. The Company will not tolerate the use of illegal drugs in the workplace or on the Company's property. Please see the Company's policies for further guidance.

Section 8.    Record-Keeping

        All business records must be recorded accurately and truthfully. The Company follows the accepted accounting rules and controls set forth by the U.S. Securities and Exchange Commission and the Financial Accounting Standards Board. The Company requires honest and accurate recording and reporting of information in all circumstances, and without exception. The Company requires that its certified public accountants have access to any and all information necessary for them to conduct audits properly.

        Business expense accounts must be documented and recorded accurately. If you are not sure whether a certain expense is legitimate, ask your supervisor or the Controller. Rules and guidelines are available from the Controller.

        All of the Company's books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Company's transactions and must conform both to applicable legal requirements and to the Company's system of internal controls. Unrecorded or "off the books" funds or assets should not be maintained unless permitted by applicable law or regulation and approved in writing by the Chief Financial Officer.

        Business records and communications often become public, and should not contain exaggeration, derogatory remarks, guesswork, or inappropriate characterizations of people and companies. This applies equally to e-mail, internal memos, and formal reports. Records should always be retained or destroyed according to the Company's record retention policies. In accordance with those policies, in the event of litigation or governmental investigation, threatened or known, please consult with a director-level or higher employee in the Law Department.

4

Section 9.    Confidentiality

        Employees and Directors must maintain the confidentiality of confidential information entrusted to them by the Company, including confidential information that the Company has received from a third party, except when disclosure is authorized by a director-level or higher employee in the Law Department, or required by laws or regulations. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Company or its customers, if disclosed. It also includes information that suppliers, customers, and other third parties have entrusted to the Company. The obligation to preserve confidential information continues even after employment ends.

Section 10.    Protection and Proper Use of Company Assets

        All employees and Directors should endeavor to protect the Company's assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on the Company's profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. Company equipment should not be used for non-Company business, though incidental personal use may be permitted. The obligation of employees and Directors to protect the Company's assets includes its proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks, and copyrights, as well as business, marketing and service plans, engineering and manufacturing ideas, designs, databases, records, salary information and any unpublished financial data and reports. Unauthorized use or distribution of this information would violate Company policy. It could also be illegal and result in civil or even criminal penalties. Please see the Company's policies on IT usage and confidentiality for further guidance.

Section 11.    Payments to Government Personnel

        The U.S. Foreign Corrupt Practices Act prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. It is strictly prohibited to make payments to government officials of any country.

        In addition, the U.S. government has a number of laws and regulations regarding the provision of business gratuities to U.S. government personnel, including, for example, employees of Medicare, Medicaid, and the Veterans Administration. The promise, offer or delivery to an official or employee of the U.S. government of a gift, favor or other gratuity in violation of these rules would not only violate Company policy but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules.

        The Company does not contribute, directly or indirectly, to any political campaign or party.

        Employees and Directors are not prohibited from making personal political contributions to candidates or parties of their choice, but may not use Company expense accounts to pay for any political contributions, seek any other form of company reimbursement, nor use company facilities or company assets for the benefit of any party or candidate, including an employee or Director individually running for office.

Section 12.    Misrepresentations and False Statements

        Employees and Directors must never make a deliberate misrepresentation concerning the Company or its business operations. No employee or Director shall create, or assist another in creating, a false or misleading entry on the Company's books or business records.

5

Section 13.    Responding to Government Requests

        It is the Company's policy to cooperate with all reasonable requests from Governmental agencies concerning the Company's business operations. Employees and Directors are expected to respond truthfully to Governmental inquiries. All government inquiries, whether initiated by telephone, subpoena, or other request, must be immediately communicated to a director-level or higher member of the Law Department before taking any action.

6

Section 14.    Compliance Procedures

        We must all work to ensure prompt and consistent action against violations of this Code. However, in some situations it may be difficult to know right from wrong. Since we cannot anticipate every situation that will arise, it is important that we have a way to approach a new question or problem. These are the steps to keep in mind:

•

Make sure you have all the facts.  In order to reach the right solutions, we must be as fully informed as possible.



•

Ask yourself. What specifically am I being asked to do? Does it seem unethical or improper? This will enable you to focus on the specific question you are faced with and the alternatives you have. Use your judgment and common sense; if something seems unethical or improper, it probably is.



•

Clarify your responsibility and role.  In most situations, there is shared responsibility. Are your colleagues informed? It may help to get others involved and discuss the problem.



•

Discuss the problem with your supervisor.  This is the basic guidance for all situations. In many cases, your supervisor will be more knowledgeable about the question and will appreciate being brought into the decision-making process. Remember that it is your supervisor's responsibility to help you solve problems.



•

Seek help from Company resources.  In the rare case where it may not be appropriate to discuss an issue with your supervisor, or where you do not feel comfortable approaching your supervisor with your question, discuss it with any director-level or higher employee of Human Resources, any director-level or higher employee in the Law Department or the Chief Compliance Officer.



•

Always ask first, act later.  If you are unsure of what to do in any situation, seek guidance before you act.

7

Section 15.    Reporting Violations or Suspected Violations

Employees must promptly report any violations or suspected violations of this Code or any illegal activities they observe. Reports may be made in confidence and without fear of retaliation.

        Reports can be made to your Vice President, (ii) any director-level or higher employee in Human Resources, (iii) any director-level or higher employee in the Law Department, or (iv) the Chief Compliance Officer.

        You may also report violations or suspected violations by calling the Company's internal Compliance Helpline at 781-860-8600 or the Company's external Corporate Responsibility Hotline at 888-690-3869 or on the web at www.silentwhistle.com. Calls to the external Corporate Responsibility Hotline may be made anonymously if you prefer. The Company does not permit retaliation of any kind against employees for good faith reports of ethical violations.

        All employees are expected to cooperate in internal investigations of misconduct.

        Employees are encouraged to seek advice from: (i) their respective Vice President, (ii) any director-level or higher employee in Human Resources, (iii) any director-level or higher employee in the Law Department, or (iv) the Chief Compliance Officer about observed illegal or unethical behavior and, when in doubt, about the best course of action in a particular situation.

        Directors must report any observed illegal or unethical behavior to the Board of Directors.

        We take all reports of misconduct seriously. We will confidentially investigate all alleged misconduct to determine if any law, regulation, policy or procedure has been violated.

Section 16.    No Retaliation

        The Company will not retaliate in any manner, including, but not limited to, discharging, demoting, suspending, threatening, harassing, or otherwise discriminating against an employee who reports in good faith violations or suspected violations of this Code, including, but not limited to, accounting fraud or securities law violations.

8

Section 17.    Waivers of the Code of Business Conduct and Ethics

        While some standards in this Code require strict application and exceptions or waivers are not allowed, others do allow for waivers. Any waiver of this Code for Executive Officers or Directors may be made only by the Board of Directors and will be promptly disclosed as required by law or Nasdaq regulation.

        Employees other than Executive Officers who believe they may merit a waiver should first consult their supervisor. If the supervisor agrees that a waiver is warranted, the supervisor should forward the request to the Chief Compliance Officer. The Chief Compliance Officer and CEO will jointly approve or disapprove the request.

9

QuickLinks

Exhibit 14.1

EX-23.1

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-134623, 333-134559, 333-120678, 333-119371, 333-109734, 333-103660, 333-108023, 333-75862, 333-64943, 333-32186, 333-123152, 333-54142, 333-96365 and 333-90137) and Form S-8 (Nos. 333-14845, 333-148454, 333-136937, 333-118065, 333-106388, 333-101908, 333-99739, 333-65385, 333-65383, 333-60168, 333-60152, 333-54140, 333-49522, 333-32178, 333-25707, 333-124210, 333-126225 and 333-132248) of Cubist Pharmaceuticals, Inc. of our report dated February 29, 2008 relating to the financial statements, financial statements schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 29, 2008

QuickLinks

Exhibit 23.1

EX-31.1

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 31.1

CERTIFICATION

I, Michael W. Bonney, certify that:

1.

I have reviewed this annual report on Form 10-K of Cubist Pharmaceuticals, Inc.;

2.

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

3.

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

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 29, 2008 /s/  MICHAEL W. BONNEY Michael W. Bonney
President and Chief Executive Officer

QuickLinks

Exhibit 31.1

EX-31.2

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 31.2

CERTIFICATION

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

1.

I have reviewed this annual report on Form 10-K of Cubist Pharmaceuticals, Inc.;

2.

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

3.

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

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 29, 2008 /s/  DAVID W.J. MCGIRR David W.J. McGirr
Senior Vice President and Chief Financial Officer

QuickLinks

Exhibit 31.2

EX-32.1

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

        In connection with the Annual Report of Cubist Pharmaceuticals (the "Company") on Form 10-K for the period ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael W. Bonney, President and Chief Executive Officer of Cubist, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Cubist.

February 29, 2008
/s/  MICHAEL W. BONNEY Michael W. Bonney
President and Chief Executive Officer

QuickLinks

Exhibit 32.1

EX-32.2

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

        In connection with the Annual Report of Cubist Pharmaceuticals (the "Company") on Form 10-K for the period ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David W.J. McGirr, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Cubist.

February 29, 2008
/s/  DAVID W.J. MCGIRR David W.J. McGirr
Senior Vice President and Chief Financial Officer

QuickLinks

Exhibit 32.2