D. BUSINESS COMBINATIONS AND ACQUISITIONS

Acquisition of Optimer Pharmaceuticals, Inc.

On October 24, 2013, Cubist completed its acquisition of Optimer, a publicly-held biopharmaceutical company, upon which Optimer became a wholly-owned subsidiary of Cubist. The transaction provided Cubist with an existing commercialized product, DIFICID.

Under the terms of the merger agreement, Cubist purchased 100% of the issued and outstanding shares of Optimer common stock for: (i) $10.75 per share in cash plus (ii) one transferable contingent value right, or CVR, per share, which entitles the holder to receive an additional cash payment of up to $5.00 per CVR upon achievement of certain sales milestones for a maximum, undiscounted potential CVR payout of $253.9 million. The CVRs are registered for trading on the NASDAQ Global Select Market under the symbol "CBSTZ" and contingent consideration is recorded as a liability and measured at fair value based upon the market price of the CVR on the day of valuation. See Note F., "Fair Value Measurements," for additional information.

The acquisition-date fair value of the consideration transferred is as follows:

	Total Acquisition- Date Fair Value

	(in thousands)
Cash transferred	$	569,452
Contingent consideration (CVRs)		115,634


Total consideration transferred	$	685,086

Prior to the acquisition, Cubist had a $25.0 million equity interest in Optimer in the form of non-voting senior preferred stock resulting from an interim financing arrangement. Cash transferred in the table above is comprised of $544.5 million in acquisition date payments and the $25.0 million of non-voting preferred stock. In addition, the acquisition-date fair value of total consideration transferred above excludes approximately $7.2 million of cash payments made to settle nonvested equity awards of Optimer pursuant to the merger agreement, which was recognized as stock-based compensation expense in the postcombination period ended December 31, 2013. The total $7.2 million charge was comprised of $1.8 million of research and development expense and $5.4 million of selling, general and administrative expense.

The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

	October 24, 2013

	(in thousands)
Cash	$	31,466
Investments		42,067
Inventory		32,000
DIFICID intangible asset		561,000
Contract intangible asset		36,000
Deferred tax assets		116,199
Goodwill		108,631
Other assets acquired		15,942


Total assets acquired		943,305


Deferred tax liabilities		(224,110	)
Other liabilities assumed		(34,109	)


Total liabilities assumed		(258,219	)


Total net assets acquired	$	685,086

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from October 24, 2013, the acquisition date.

The fair value of the DIFICID intangible asset was determined using an income approach, including a discount rate of 14.5% applied to the projected cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value. The DIFICID intangible asset will be amortized to cost of product revenues over its expected useful life of approximately 14 years. The fair value of the contract intangible asset relates to a collaborative research and license agreement with Cempra, Inc., or Cempra, under which Cubist may receive certain milestone payments if certain macrolide and ketolide antibiotic product candidates are developed by Cempra and may receive royalty payments based on a percentage of any net sales of licensed products. The fair value of the contract intangible asset was determined using an income approach, including a discount rate of 16.0% applied to the projected cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value. The contract intangible asset will be amortized to research and development expense over its expected life of approximately 11 years.

The deferred tax assets of $116.2 million are primarily related to federal NOL carryforwards and federal research tax credits. See Note O., "Income Taxes," for additional information. The deferred tax liability of $224.1 million primarily relates to the temporary differences associated with the DIFICID intangible asset, which is not deductible for tax purposes.

Goodwill is calculated as the difference between the acquisition-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed, and is not expected to be deductible for income tax purposes. Goodwill is recorded as an indefinite-lived asset and is not amortized but tested for impairment on an annual basis or when indications of impairment exist.

The operating results of Optimer for the period from October 24, 2013, to December 31, 2013, including revenues and an operating loss of $14.7 million and $11.0 million, respectively, have been included in the Company's consolidated financial statements as of and for the year ended December 31, 2013. The Company incurred a total of $12.4 million in transaction costs in connection with the acquisition, which were included in selling, general and administrative expenses within the consolidated statements of income for the year ended December 31, 2013.

The following supplemental unaudited pro forma information presents Cubist's financial results as if the acquisition of Optimer had occurred on January 1, 2012 (in thousands):

	For the Years Ended December 31,

	2013			2012
	(unaudited)
Total revenues, net	$	1,101,824		$	1,004,641
Net (loss) income	$	(91,973	)	$	26,100

The above unaudited pro forma information was determined based on the historical GAAP results of Cubist and Optimer. The unaudited pro forma consolidated results are not necessarily indicative of what the Company's consolidated results of operations actually would have been if the acquisition was completed on January 1, 2012. The unaudited pro forma consolidated net (loss) income includes pro forma adjustments relating to the following significant recurring and non-recurring items directly attributable to the business combination:

(i)

elimination of $34.3 million of transaction costs for both Cubist and Optimer from the year ended December 31, 2013, and inclusion of these transaction costs in the year ended December 31, 2012;

(ii)

elimination of $7.2 million of stock-based compensation expense related to the acceleration of vesting of previously unvested Optimer awards in connection with the acquisition from the year ended December 31, 2013, and inclusion of this charge in the year ended December 31, 2012;

(iii)

additional amortization of the DIFICID and contract intangible assets acquired of $35.6 million and $44.0 million for the years ended December 31, 2013 and 2012, respectively;

(iv)

elimination of $21.6 million of expense related to restructuring charges from the year ended December 31, 2013, and inclusion of these restructuring charges in the year ended December 31, 2012;

(v)

elimination of intercompany revenues related to Cubist's co-promotion of DIFICID of $12.3 million and $23.2 million for the years ended December 31, 2013 and 2012, respectively;

(vi)

additional interest expense related to the 2018 Notes and 2020 Notes, which were used to fund the acquisition, of $29.7 million and $41.5 million for the years ended December 31, 2013 and 2012, respectively; and

(vii)

the tax effect of the unaudited pro forma consolidated net income and adjustments for the year ended December 31, 2013 and 2012.

Acquisition of Trius Therapeutics, Inc.

On September 11, 2013, Cubist completed its acquisition of Trius, a publicly-held biopharmaceutical company, upon which Trius became a wholly-owned subsidiary of Cubist. The transaction provided Cubist with an existing late-stage product candidate, tedizolid phosphate.

Under the terms of the merger agreement, Cubist purchased 100% of the issued and outstanding shares of Trius common stock for: (i) $13.50 per share in cash plus (ii) one non-transferable CVR per share, which entitles the holder to receive an additional cash payment of up to $2.00 per CVR upon achievement of certain sales milestones for a maximum, undiscounted potential CVR payout of $108.4 million. The CVRs may not be sold, assigned, transferred, pledged, encumbered or disposed of, subject to limited exceptions. Contingent consideration is recorded as a liability and measured at fair value based on significant unobservable inputs. See Note F., "Fair Value Measurements," for additional information.

The acquisition-date fair value of the consideration transferred is as follows:

	Total Acquisition- Date Fair Value

	(in thousands)
Cash transferred, including transaction costs	$	695,710
Contingent consideration (CVRs)		4,603


Total consideration transferred	$	700,313

Cubist paid $13.7 million in transaction costs on behalf of Trius, which are included as cash transferred in total consideration transferred in the table above. The acquisition-date fair value of total consideration transferred above excludes approximately $22.7 million of primarily cash payments made to settle nonvested equity awards of Trius pursuant to the merger agreement, which was recognized as stock-based compensation expense in the postcombination period ended December 31, 2013. The total $22.7 million charge was comprised of $11.0 million of research and development expense and $11.7 million of selling, general and administrative expense.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition :

	September 11, 2013

	(in thousands)
Cash	$	22,697
Investments		39,513
IPR&D		659,000
Deferred tax assets		92,567
Goodwill		160,257
Other assets acquired		5,522


Total assets acquired		979,556


Deferred tax liabilities		(248,884	)
Other liabilities assumed		(30,359	)


Total liabilities assumed		(279,243	)


Total net assets acquired	$	700,313

The purchase price allocation was prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. During 2013, the Company recorded measurement period adjustments that resulted in an immaterial change to the purchase price allocation. The purchase price allocation is subject to change as additional information becomes available. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from September 11, 2013, the acquisition date.

The fair value of the acquired IPR&D asset relates to tedizolid phosphate. The fair value was determined using an income approach, including a discount rate of 9.5%, applied to the probability-adjusted cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value.

The deferred tax assets of $92.6 million primarily relate to federal NOL carryforwards, capitalized research and development costs and federal research tax credits. See Note O., "Income Taxes," for additional information. The deferred tax liabilities of $248.9 million primarily relate to the temporary differences associated with acquired IPR&D, which is not deductible for tax purposes.

The operating results of Trius for the period from September 12, 2013, to December 31, 2013, including revenues and an operating loss of $2.0 million and $23.4 million, respectively, have been included in the Company's consolidated financial statements as of and for the year ended December 31, 2013. The Company incurred a total of $10.2 million in transaction costs in connection with the acquisition, excluding costs paid on behalf of Trius. These transaction costs were included in selling, general and administrative expenses within the consolidated statements of income for the year ended December 31, 2013.

The following supplemental unaudited pro forma information presents Cubist's financial results as if the acquisition of Trius had occurred on January 1, 2012 (in thousands):

	For the Years Ended December 31,

	2013			2012
	(unaudited)
Total revenues, net	$	1,054,442		$	938,460
Net (loss) income	$	(28,312	)	$	75,594

The above unaudited pro forma information was determined based on the historical GAAP results of Cubist and Trius. The unaudited pro forma consolidated results are not necessarily indicative of what the Company's consolidated results of operations actually would have been if the acquisition was completed on January 1, 2012. The unaudited pro forma consolidated net (loss) income includes pro forma adjustments relating to the following significant non-recurring items directly attributable to the business combination:

(i)

elimination of $24.9 million of transaction costs for both Cubist and Trius from the year ended December 31, 2013, and inclusion of these costs in the year ended December 31, 2012;

(ii)

elimination of $22.7 million of stock-based compensation expense related to the acceleration of vesting of previously unvested Trius awards in connection with the acquisition from the year ended December 31, 2013, and inclusion of this charge in the year ended December 31, 2012;

(iii)

elimination of $9.4 million of expense related to Trius severance and retention agreements from the year ended December 31, 2013, and inclusion of these charges in the year ended December 31, 2012;

(iv)

the tax effect of the unaudited pro forma consolidated net income and adjustments for the year ended December 31, 2013 and 2012; and

(v)

reclassification of certain Trius revenues related to research and development expense reimbursement to research and development expense of $4.1 million and $15.1 million for the year ended December 31, 2013 and 2012, respectively, in accordance with Cubist accounting policy.

Acquisition of Adolor Corporation

On December 12, 2011, Cubist acquired 100% of the outstanding shares of common stock of Adolor for cash consideration of $220.8 million and contingent consideration with an acquisition-date fair value of $110.2 million. Adolor's assets included an existing commercialized product, ENTEREG, and rights to an additional clinical-stage product candidate, bevenopran.

The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value, with the remaining purchase price recorded as goodwill.

Of the identifiable intangible assets acquired through the Company's acquisition of Adolor, $117.4 million related to the IPR&D asset, bevenopran. The fair value as of December 31, 2013, is approximately $43.4 million as a result of impairment charges recognized since the date of acquisition. See Note I., "Goodwill, IPR&D and Other Intangible Assets, Net," for additional information. The Company also recorded $163.3 million of finite-lived intangible assets related to the rights to ENTEREG, which is amortized to cost of product revenues over its expected useful life.

The Company incurred a total of $8.1 million in transaction costs in connection with the acquisition, which were included in selling, general and administrative expenses within the consolidated statements of income for the year ended December 31, 2011. The operating results of Adolor for the period from December 12, 2011, to December 31, 2011, including revenues of $2.6 million, have been included in the Company's consolidated financial statements for the year ended December 31, 2011.

The following supplemental unaudited pro forma information presents Cubist's financial results as if the acquisition of Adolor had occurred on January 1, 2010 (in thousands):

	For the Year Ended December 31, 2011

	(unaudited)
Total revenues, net	$	809,416
Net income	$	29,147

The above unaudited pro forma information was determined based on the historical GAAP results of Cubist and Adolor. The unaudited pro forma consolidated results are not necessarily indicative of what the Company's consolidated results of operations actually would have been if the acquisition was completed on January 1, 2010. The unaudited pro forma consolidated net income includes pro forma adjustments relating to the following significant recurring and non-recurring items directly attributable to the business combination:

(i)

inclusion of $20.2 million of additional cost of product revenues related to the amortization of the ENTEREG intangible asset and the fair value step-up of ENTEREG inventory sold during the years ended December 31, 2011;

(ii)

elimination of $13.1 million of transaction costs for both Cubist and Adolor and $9.3 million of restructuring charges for the year ended December 31, 2011, which are directly attributable to the transaction; and

(iii)

the tax effect of the unaudited pro forma consolidated net income and adjustments for the year ended December 31, 2011.