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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21379
CUBIST PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3192085
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
65 HAYDEN AVENUE
LEXINGTON, MASSACHUSETTS 02421
(Address of principal executive offices)
(781) 860-8660
(Registrant's telephone number, including area code)
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of November 7, 2002 there were 28,563,321 shares outstanding of Cubist's
common stock, $0.001 per value per share.
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CUBIST PHARMACEUTICALS, INC.
INDEX
<Table>
<Caption>
ITEM PAGE
NUMBER NUMBER
- ------ ------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Unaudited Financial Statements
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001............ 3
Consolidated Statements of Operations for the three months ended September 30,
2002 and 2001 and nine months ended September 30, 2002 and 2001..................... 4
Consolidated Statements of Cash Flows for the nine months ended September 30,
2002 and 2001........................................................................ 5
Notes to the Consolidated Unaudited Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 17
Item 4. Controls and Procedures.................................................................. 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................................................ 18
Item 6. Exhibits and Reports on Form 8-K......................................................... 18
</Table>
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CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 65,072,747 $ 120,322,157
Short-term investments................................................. 82,044,090 68,514,144
Accounts receivable, prepaid expenses and other current assets......... 1,559,082 1,502,334
--------------- --------------
Total current assets............................................... 148,675,919 190,338,635
Property and equipment, net................................................. 48,521,085 48,056,157
Intangible assets, net...................................................... 4,282,683 5,632,659
Restricted cash............................................................. 4,038,375 3,250,000
Long-term investments....................................................... 23,584,304 54,298,378
Other assets................................................................ 13,627,605 13,258,366
--------------- --------------
Total assets....................................................... $ 242,729,971 $ 314,834,195
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 2,017,437 $ 7,336,002
Accrued clinical trial expenses........................................ 2,562,513 6,409,682
Accrued expenses....................................................... 4,930,010 7,156,775
Accrued interest....................................................... 3,781,250 2,143,309
Deferred revenue....................................................... - 5,600,000
Current portion of long-term debt...................................... 2,011,161 3,206,760
Current portion of capital lease obligations........................... 4,045 473,725
--------------- --------------
Total current liabilities.......................................... 15,306,416 32,326,253
Deferred revenue............................................................ 2,500,083 4,300,080
Long-term debt, net of current portion...................................... 208,525,111 208,707,284
--------------- --------------
Total liabilities.................................................. 226,331,610 245,333,617
Stockholders' equity:
Preferred stock, non-cumulative; convertible, $.001 par value;
Authorized 5,000,000 shares; no shares issued and outstanding
2002 and 2001 -- --
Common stock, $.001 par value; authorized 50,000,000 shares; 28,563,321
and 28,298,566 shares issued and outstanding as of
September 30, 2002 and December 31, 2001, respectively 28,563 28,298
Additional paid-in capital.................................................. 252,065,719 247,508,469
Accumulated deficit......................................................... (235,695,921) (178,036,189)
--------------- --------------
Total stockholders' equity......................................... 16,398,361 69,500,578
--------------- --------------
Total liabilities and stockholders' equity.................... $ 242,729,971 $ 314,834,195
=============== ==============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS.
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CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Research and development revenue $ 4,864,803 $ 4,494,263 $ 8,012,282 $ 8,818,471
Related party research and development revenue 887,500 595,000 2,386,874 1,998,800
-------------- -------------- -------------- --------------
Total revenue 5,752,303 5,089,263 10,399,156 10,817,271
Operating expenses:
Research and development 13,883,690 13,500,489 41,357,166 46,490,152
General and administrative 6,381,792 5,426,220 20,522,310 14,343,950
-------------- -------------- -------------- --------------
Total operating expenses 20,265,482 18,926,709 61,879,476 60,834,102
Interest income 1,194,272 1,514,046 4,194,704 5,836,116
Interest expense (3,605,851) (1,038,989) (10,395,288) (3,237,724)
Other income (expense) (71,071) (190,818) 21,172 (569,379)
-------------- -------------- -------------- --------------
Net loss $ (16,995,829) $ (13,553,207) $ (57,659,732) $ (47,987,818)
============== ============== ============== ==============
Basic and diluted net loss per common share $ (0.60) $ (0.48) $ (2.02) $ (1.71)
============== ============== ============== ==============
Weighted average number of common shares for basic
and diluted net loss per common share 28,563,321 28,147,182 28,496,901 28,030,297
============== ============== ============== ==============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS.
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CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
2002 2001
--------------- ---------------
Cash flows used for operating activities:
Net loss..................................................... $ (57,659,732) $ (47,987,818)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Loss (gain) on the sale of equipment......................... 4,109 (2,000)
Gain on the sale of investments.............................. -- (83,835)
Depreciation and amortization................................ 4,323,294 4,202,032
Amortization of debt issuance costs.......................... 390,649
Amortization of premium on investments....................... 2,233,219 --
Disposal of leasehold improvements........................... -- 336,933
Amortization of deferred compensation........................ 410,264
Stock based compensation..................................... 767,086 --
Forgiveness of note receivable related to Common Stock....... 168,750 --
Realized foreign exchange (gain) loss, net................... 2,189 --
Changes in assets and liabilities:
Accounts receivable.......................................... 101,704 289,006
Prepaid expenses and other current assets.................... (141,817) 1,289,814
Other assets................................................. (759,887) (6,688,254)
Accounts payable and accrued expenses........................ (7,770,466) 2,619,921
Deferred revenue............................................. (7,399,997) 8,799,998
--------------- ---------------
Total adjustments............................................ (7,670,903) 11,332,994
--------------- ---------------
Net cash used for operating activities....................... (65,330,635) (36,654,824)
--------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment.......................... (3,439,041) (9,501,759)
Proceeds from the sale of equipment.......................... 3,800 2,000
Purchases of investments..................................... (128,005,161) (9,028,107)
Maturities of investments.................................... 142,956,070 53,890,747
--------------- ---------------
Net cash provided by investing activities.................... 11,515,668 35,362,881
--------------- ---------------
Cash flows from financing activities:
Issuance of Common Stock and warrants, net................... 1,392,037 2,135,134
Restricted cash.............................................. (788,375) (869,181)
Repayments of long-term debt ................................ (2,380,670) --
Proceeds from long-term debt................................. 685,182 --
Principal payments of capital lease obligations.............. (469,730) (388,660)
--------------- ---------------
Net cash (used for) provided by financing activities......... (1,561,556) 877,293
--------------- ---------------
Net decrease in cash and cash equivalents........................ (55,376,523) (414,650)
Effect of changes in foreign exchange rates on cash balances..... 127,113 (211,425)
Cash and cash equivalents, beginning of period................... 120,322,157 46,940,277
--------------- ---------------
Cash and cash equivalents, end of period......................... $ 65,072,747 $ 46,314,202
=============== ===============
Supplemental non-cash investing and financing activities:
Issuance of common stock upon conversion of long-term debt 2,171,004
Issuance of common stock to ACS.............................. $ 2,000,000 --
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS.
5
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CUBIST PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Cubist Pharmaceuticals, Inc. is focused on the research, development and
commercialization of novel antimicrobial drugs to combat serious and
life-threatening infections. Cubist has established multiple technology licenses
and collaborations and has established a network of advisors and collaborators.
Cubist is headquartered in Lexington, Massachusetts.
B. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated unaudited financial statements include the
accounts of Cubist and its wholly owned subsidiaries. All significant
intercompany amounts and transactions have been eliminated. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation are reflected in the interim
periods presented. These unaudited consolidated financial statements do not
include all information and footnote disclosures required by accounting
principles generally accepted in the United States of America and therefore
should be read in conjunction with Cubist's audited financial statements and
related footnotes for the year ended December 31, 2001 which are included in
Cubist's Annual Report on Form 10-K. Such Annual Report on Form 10-K was filed
with the Securities and Exchange Commission on March 29, 2002.
NET LOSS PER COMMON SHARE
Basic net loss per share is computed using the weighted average number
of shares of common stock outstanding. Diluted net loss per share does not
differ from basic net loss per share since potential common shares from stock
options and warrants are antidilutive for all periods presented and are
therefore excluded from the calculation. At September 30, 2002 and 2001, options
to purchase 4,997,934 and 3,713,279 shares of common stock, respectively,
warrants to purchase 1,478,359, and 1,578,359 shares of common stock,
respectively, and convertible debt and notes payable convertible into 4,106,450
and 610,687 shares of common stock, respectively, were not included in the
computation of diluted net loss per share since their inclusion would be
antidilutive.
RESTRICTED CASH
Restricted cash is being held in accordance with our term loan
agreement and our IHMA license agreement.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002." SFAS No. 145 eliminates SFAS No. 4 "Reporting
Gains and Losses from Extinguishment of Debt" which required companies to
classify gains or losses from the extinguishment of debt as extraordinary items,
net of tax. As a result of this new SFAS, gains and losses from extinguishment
of debt should be classified as extraordinary items only if they meet the
criteria in APB Opinion No. 30 "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." This pronouncement has
not had a material impact on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which nullifies EITF Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, whereas EITF No. 94-3 had
allowed the liability to be recorded at the commitment date of an exit plan. We
are required to adopt the provisions of SFAS 146 effective for exit or disposal
activities initiated after December 31, 2002. It is not anticipated that this
pronouncement will have a material impact on the Company's financial
statements.
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C. RESEARCH AND DEVELOPMENT AGREEMENTS
In June 2000, Cubist entered into a services agreement with DSM, an
affiliated company of DSM Capua, under which DSM agreed to provide supervisory
and advisory services to Cubist relating to the equipping of the manufacturing
facility at DSM Capua. Cubist also entered into a manufacturing and supply
agreement with DSM Capua under which DSM Capua agreed to manufacture and supply
to Cubist bulk daptomycin drug substance for commercial purposes. Under the
manufacturing and supply agreement, DSM Capua is required to prepare its
manufacturing facility in Italy to manufacture bulk daptomycin drug substance in
accordance with the FDA's requirements for good manufacturing practices, or GMP
standards. Under the services agreement, Cubist will make a series of scheduled
payments to DSM over a five-year period, beginning in 2000, to reimburse DSM for
certain costs of approximately $8,200,000 to be incurred by DSM Capua in
connection with the scale-up and construction of its manufacturing facility.
Through September 30, 2002, Cubist has reimbursed $5,995,000 of these costs to
DSM Capua. These costs are being recorded as other assets and will begin to be
amortized upon the completion of the facility and the commencement of
manufacturing daptomycin for commercial purposes. In addition, in consideration
for the implementation of the Cubist technology in the facility by DSM Capua,
Cubist agreed to make milestone payments of $1,400,000 to DSM if specific phases
of technical development of the scaled-up manufacturing process to be used in
this facility were completed within specified periods of time. This obligation
has been fully accrued as of June 30, 2002 and Cubist has incurred expenses of
$164,000 and $246,000 in the nine months ended September 30, 2002 and 2001,
respectively. Upon determination by the FDA that the manufacturing facility
complies with GMP standards, Cubist will purchase bulk daptomycin drug
substance from DSM subject to minimum annual quantity requirements over a
five-year period.
In February 1999, Cubist entered into a research and license agreement
with Novartis to use Cubist's proprietary VITA functional genomics technology to
validate and develop assays for antiinfective targets and to identify new
compounds for development as antiinfective agents. In exchange for the license,
Novartis purchased 797,448 shares of Cubist's common stock for $4 million and
agreed to fund a research program for three years. If certain scientific and
development milestones were achieved, Novartis agreed to make milestone payments
to Cubist. In addition, Novartis will be required to pay royalties to Cubist on
worldwide sales of any drug developed and commercialized from any products
derived from this collaboration. Cubist recorded revenue of $2,387,000 and
$1,938,000 in the nine months ended September 30, 2002 and 2001, respectively,
for research and development revenues and milestone payments earned under this
agreement. In February 2002, Cubist announced a one year extension of the
collaborative research agreement with Novartis. In July 2002, Cubist announced
the achievement of a fourth milestone, the delivery of another validated target
and high-throughput screening assay to be used in antiinfective drug discovery
for which it received payment and recorded revenue of $250,000 in August 2002.
On July 31, 2002, Cubist entered into a license agreement with
Biochemie GmbH, for the exclusive worldwide rights to CAB-175, a proprietary
compound, for the purpose of developing and commercializing CAB-175. CAB-175
is a new chemical entity belonging to a sub-class of cephalosporins called
azomethines. The CAB-175 compound is an antibiotic. Therefore, the license
agreement does not have any applications other than to allow Cubist to
develop an antibiotic drug candidate. Cubist made a license fee payment of
$1,500,000 upon execution of the agreement, which was recorded as an expense
in the third quarter of 2002, and could pay up to an additional $26,000,000
under the agreement if certain clinical and regulatory milestones are
achieved. In addition, Cubist will be required to pay royalties to Biochemie
on worldwide sales of any drug developed and commercialized from any products
derived from CAB-175.
On November 22, 2000, Cubist and IHMA signed a license agreement to
utilize IHMA's expertise and experience in "bridge" oral drug delivery
techniques to research, develop and commercialize oral forms of ceftriaxone.
In exchange for such license, Cubist paid an undisclosed upfront license fee,
which was recorded as research and development expense in 2000, and if
certain drug development milestones are achieved, Cubist will pay milestone
payments. Cubist has paid IHMA $1,573,000 in milestone payments, a portion of
which is held in escrow, subject to certain disbursement events. These escrow
payments are classified as restricted cash.
In January 2001, Cubist and Gilead Sciences, Inc. signed a licensing
agreement for the exclusive rights to commercialize Cidecin and an oral
formulation of daptomycin in 16 European countries following regulatory
approval. Gilead paid Cubist up-front licensing fees of $10,000,000 for Cidecin
and
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$3,000,000 for an oral formulation of daptomycin, which were recorded to
deferred revenue and were being recognized over the life of the development
period of 2 years and 5 years, respectively. In September 2002, Cubist and
Gilead mutually agreed to terminate their licensing agreement. As a result of
the mutual termination, Cubist recognized $2,000,000 in revenue for achieving
two milestones and immediately recognized the non-refundable $1,700,000 fee
remaining in deferred revenue related to the Cidecin license fee of which
$1,250,000 would have been recognized in the fourth quarter of 2002 and reduced
to zero the deferred revenue refundable balance of $2,000,000 related to the
oral daptomycin license fee. Revenue of $5,400,000 and $4,200,000, relating to
the Gilead agreement, was recognized in the nine months ended September 30, 2002
and 2001, respectively.
STOCKHOLDERS' EQUITY
NOTES RECEIVABLE FROM RELATED PARTIES
In September 1999, Cubist accepted a promissory note from a Senior Vice
President in consideration for 50,000 shares of restricted common stock issued
to him. The aggregate principal amount of this note at December 31, 2001 was
$168,750 and was reflected in stockholders' equity as a reduction to
paid-in-capital. This note had an annual interest rate of 4% and was to become
due on September 25, 2002. The terms of the note provided for the note to be
forgiven in three equal annual installments of $168,750, commencing September
2000 contingent upon the Senior Vice President's continued employment. As part
of the Senior Vice President's termination of employment on March 15, 2002, the
third installment was forgiven and the note was cancelled. In addition, the
vesting of unvested stock options was accelerated and an associated expense of
$767,000 was recognized in the nine months ended September 30, 2002.
OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive loss and net loss for the three months ended September
30, 2002 and the nine months ended September 30, 2002 are the same.
D. INTANGIBLE ASSETS
In June 2001, FASB issued SFAS 141, Business Combinations, and SFAS 142,
Goodwill and Other Intangible Assets, collectively referred to as the
"Standards." SFAS 141 supersedes APB No. 16, Business Combinations. The
provisions of SFAS 141 (i) require that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001, (ii) provide
specific criteria for the initial recognition and measurement of intangible
assets apart from goodwill, and (iii) require that amortized negative goodwill
be written off immediately as an extraordinary gain instead of being deferred
and amortized. SFAS 141 also requires that upon adoption of SFAS 142, a company
reclassify the carrying amounts of certain intangible assets into or out of
goodwill, based on certain criteria. SFAS 142 supersedes APB 17, Intangible
Assets, and is effective for fiscal years beginning after December 15, 2001.
SFAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. The provisions of SFAS 142 (i) prohibit
the amortization of goodwill and indefinite-lived intangible assets, (ii)
require that goodwill and indefinite-lived intangible assets be tested annually
for impairment (and in interim periods if certain events occur indicating that
the carrying value of goodwill and/or indefinite-lived intangible assets may be
impaired), (iii) require that reporting units be identified for the purpose of
assessing potential future impairments of goodwill, and (iv) remove the
forty-year limitation on the amortization period of intangible assets that have
finite lives.
SFAS 142 requires that goodwill be tested annually for impairment using
a two-step process. The adoption of SFAS 142 did not impact the Company as
Cubist did not have any goodwill at January 1, 2002.
We reviewed intangible assets subject to amortization in accordance
with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" and determined in conjunction with
closing the Canadian operations that certain patents relating to Cubist's
Canadian operation should be written off as of June 30, 2002, as these
patents had no realizable value due to lack of usefulness. As a result, an
associated expense of $202,000 has been included in general and
administrative expense for the nine months ended September 30, 2002.
Intangible assets at September 30, 2002 are comprised of patents in the
amount of $3,648,049, net of accumulated amortization of $1,216,355, and other
intangibles in the amount of $634,634, net of accumulated amortization of
$4,752,998. Intangible assets at December 31, 2001, are comprised of patents
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in the amount of $4,102,445, net of accumulated amortization of $1,006,169 and
other intangibles in the amount of $1,530,214, net of accumulated amortization
of $3,228,124.
E. ACCRUED CLINICAL TRIAL EXPENSES
Accrued clinical trial expenses are comprised of amounts owed to third party
Clinical Research Organizations (CRO) for research and development work
performed on behalf of the Company. 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. During
the third quarter of 2002, based upon current information received from each
CRO, the Company reversed previously recorded accrued clinical trial expense
of $1,845,927 by crediting Research and Development expense. Accordingly, the
remaining accrued clinical trial expense balance of $2,562,513 at September
30, 2002 represents the Company's best estimate of amounts owed for clinical
trial services performed thru September 30, 2002 based on all information
available. Such estimates are subject to changes as additional information
becomes available.
FORWARD-LOOKING STATEMENTS
THIS DOCUMENT CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. IN SOME CASES, THESE STATEMENTS CAN BE IDENTIFIED BY THE
USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "COULD," "SHOULD,"
"WOULD," "EXPECT," "ANTICIPATE," "CONTINUE" OR OTHER SIMILAR WORDS. THESE
STATEMENTS DISCUSS FUTURE EXPECTATIONS, CONTAIN PROJECTIONS OF RESULTS OF
OPERATIONS OR OF FINANCIAL CONDITION, OR STATE TRENDS AND KNOWN UNCERTAINTIES OR
OTHER FORWARD-LOOKING INFORMATION. YOU ARE CAUTIONED THAT FORWARD-LOOKING
STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND ARE INHERENTLY UNCERTAIN.
ACTUAL PERFORMANCE AND RESULTS OF OPERATIONS MAY DIFFER MATERIALLY FROM THOSE
PROJECTED OR SUGGESTED IN THE FORWARD-LOOKING STATEMENTS DUE TO CERTAIN RISKS
AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THE RISKS AND UNCERTAINTIES
DESCRIBED OR DISCUSSED IN THE SECTION "RISK FACTORS" IN CUBIST'S ANNUAL REPORT
ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001. THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN REPRESENT CUBIST'S JUDGMENT AS OF THE DATE OF THIS
QUARTERLY REPORT ON FORM 10-Q, AND CUBIST CAUTIONS READERS NOT TO PLACE UNDUE
RELIANCE ON SUCH STATEMENTS.
FORWARD-LOOKING STATEMENTS INCLUDE INFORMATION CONCERNING POSSIBLE OR ASSUMED
FUTURE RESULTS OF OUR OPERATIONS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS
REGARDING:
- - OUR ABILITY TO USE OUR RESEARCH AND DEVELOPMENT AND TECHNOLOGY PLATFORMS TO
IDENTIFY POTENTIAL PRODUCT CANDIDATES;
- - OUR EXPECTATIONS REGARDING SELECTION OF CLINICAL DEVELOPMENT CANDIDATES;
- - OUR EXPECTATIONS REGARDING CLINICAL TRIALS AND DEVELOPMENT TIME LINES;
- - WHETHER WE WILL RECEIVE, AND THE POTENTIAL TIMING OF, REGULATORY APPROVALS OR
CLEARANCES TO MARKET POTENTIAL PRODUCTS;
- - THE CONTINUATION OF OUR COLLABORATIONS WITH OUR PARTNERS;
- - OUR ABILITY TO MANUFACTURE PRODUCTS ON A COMMERCIAL SCALE;
- - OUR EXPECTATION REGARDING OUR ABILITY TO COMMERCIALIZE PRODUCTS IN THE COMING
YEARS;
- - OUR FUTURE CAPITAL REQUIREMENTS AND OUR ABILITY TO FINANCE OUR OPERATIONS;
- - THE TIMING OF NEW PRODUCT LAUNCHES; AND
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- - OUR EXPECTATIONS REGARDING BUSINESS CONDITIONS GENERALLY AND GROWTH IN THE
BIOPHARMACEUTICAL INDUSTRY AND OVERALL ECONOMY.
MANY FACTORS COULD AFFECT OUR ACTUAL FINANCIAL RESULTS, AND COULD CAUSE THESE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THESE FORWARD-LOOKING
STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING:
- - UNANTICIPATED INCREASES IN FINANCING AND OPERATING COSTS;
- - GENERAL ECONOMIC OR BUSINESS CONDITIONS BEING LESS FAVORABLE THAN EXPECTED;
- - LEGISLATIVE OR REGULATORY CHANGES ADVERSELY AFFECTING CUBIST OR THE
BIOPHARMACEUTICAL INDUSTRY GENERALLY;
- - OUR INABILITY TO FURTHER IDENTIFY, DEVELOP AND ACHIEVE COMMERCIAL SUCCESS FOR
NEW PRODUCTS AND TECHNOLOGIES;
- - THE POSSIBILITY OF DELAYS IN THE RESEARCH AND DEVELOPMENT NECESSARY TO SELECT
DRUG DEVELOPMENT CANDIDATES AND DELAYS IN CLINICAL TRIALS;
- - THE RISK THAT RESEARCH AND DEVELOPMENT MAY NOT RESULT IN MARKETABLE PRODUCTS;
- - THE RISK THAT WE MAY BE UNABLE TO SUCCESSFULLY FINANCE AND SECURE REGULATORY
APPROVAL OF AND MARKET OUR DRUG CANDIDATES;
- - OUR DEPENDENCE UPON PHARMACEUTICAL AND BIOTECHNOLOGY COLLABORATIONS;
- - THE LEVELS AND TIMING OF PAYMENTS UNDER OUR COLLABORATIVE AGREEMENTS;
- - UNCERTAINTIES ABOUT OUR ABILITY TO OBTAIN NEW CORPORATE COLLABORATIONS AND
ACQUIRE NEW TECHNOLOGIES ON SATISFACTORY TERMS, IF AT ALL;
- - OUR ABILITY TO MANUFACTURE PRODUCTS ON A COMMERCIAL SCALE; AND
- - OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGIES.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since our incorporation on May 1, 1992 and commencement of operations in
February 1993, we have been engaged in the research, development and
commercialization of novel antimicrobial drugs to combat serious and
life-threatening infections. We have a limited history of operations and have
experienced significant net losses since inception. We had an accumulated
deficit of $235.7 million through September 30, 2002. We expect to incur
significant additional operating losses over the next several years and expect
cumulative losses to increase due to expanded research and development efforts,
pre-clinical testing and clinical trials, and the development of manufacturing,
marketing and sales capabilities.
In June 2000, we entered into a services agreement with DSM, an
affiliated company of DSM Capua, under which DSM agreed to provide supervisory
and advisory services to us relating to the equipping of the manufacturing
facility at DSM Capua. We also entered into a manufacturing and supply agreement
with DSM Capua under which DSM Capua agreed to manufacture and supply to us bulk
daptomycin drug substance for commercial purposes. Under the terms of the
manufacturing and supply agreement, DSM Capua is required to
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prepare its manufacturing facility in Italy to manufacture bulk daptomycin
drug substance in accordance with GMP standards. Under the terms of the
services agreement, we will make a series of scheduled payments to DSM over a
five-year period, beginning in 2000, to reimburse DSM for certain costs of
approximately $8,200,000 to be incurred by DSM Capua in connection with the
scale-up and construction of its manufacturing facility. Through September
30, 2002, we have reimbursed $5,995,000 of these costs to DSM Capua. These
costs are being recorded as other assets and will begin to be amortized upon
completion of the facility and commencement of manufacturing daptomycin for
commercial purposes. In addition, in consideration for the implementation of
our technology in the facility by DSM Capua, we agreed to make milestone
payments of $1,400,000 to DSM if specific phases of technical development of
the scaled-up manufacturing process to be used in this manufacturing facility
are completed within specified periods of time. We have incurred expenses of
$164,000 and $246,000 in the nine months ended September 30, 2002 and 2001,
respectively. Upon completion of the preparation of DSM Capua's manufacturing
facility and a determination by the FDA that the manufacturing facility
complies with GMP standards, we will purchase bulk daptomycin drug substance
from DSM subject to minimum annual quantity requirements over a five-year
period.
In January 2001, we and Gilead Sciences, Inc. signed a licensing
agreement for the exclusive rights to commercialize Cidecin and an oral
formulation of daptomycin in 16 European countries following regulatory
approval. Gilead paid us up-front licensing fees of $10,000,000 for Cidecin and
$3,000,000 for an oral formulation of daptomycin, which were recorded to
deferred revenue and were being recognized over the life of the development
period of two years and five years, respectively. In September 2002, we and
Gilead mutually agreed to terminate their licensing agreement. As a result of
the mutual termination, we recognized $2,000,000 in revenue for achieving two
milestones and immediately recognized the non-refundable $1,700,000 fee
remaining in deferred revenue related to the Cidecin license fee of which
$1,250,000 would have been recognized in the fourth quarter of 2002 and reduced
to zero the deferred revenue refundable balance of $2,000,000 related to the
oral daptomycin license fee. Revenue of $5,400,000 and $4,200,000 was recognized
in the nine months ended September 30, 2002 and 2001, respectively, relating to
the Gilead agreement.
In April 2001, we achieved the first milestone in our collaboration with
Gilead following the successful completion of Study 9901, our pivotal Phase III
trial examining the safety and efficacy of Cidecin in the treatment of
complicated skin and soft tissue infection, or cSST, caused by Gram-positive
bacteria, and Gilead paid us a $1,250,000 million milestone fee which was
recognized as revenue in the nine months ended September 30, 2001.
On July 31, 2002, we entered into a license agreement with Biochemie
GmbH, for the exclusive worldwide rights to CAB-175, a proprietary compound,
for the purpose of developing and commercializing CAB-175. CAB-175 is a new
chemical entity belonging to a sub-class of cephalosporins called
azomethines. The CAB-175 compound is an antibiotic. Therefore, the license
agreement does not have any applications other than to allow Cubist to
develop an antibiotic drug candidate. We made a license fee payment of
$1,500,000 upon execution of the agreement, which was recorded as an expense
in the third quarter of 2002, and could pay up to an additional $26,000,000
under the agreement if certain clinical and regulatory milestones are
achieved. In addition, we will be required to pay royalties to Biochemie on
worldwide sales of any drug developed and commercialized from any products
derived from CAB-175.
On November 22, 2000, we and IHMA signed a license agreement to utilize
IHMA's expertise and experience in "bridge" oral drug delivery techniques to
research, develop and commercialize oral forms of ceftriaxone. In exchange for
such license, we paid an undisclosed upfront license fee, which was recorded as
research and development expense in 2000, and if certain drug development
milestones are achieved, we will pay milestone payments. We paid IHMA $1,573,000
in milestone payments, a portion of which is held in escrow subject to
certain disbursement events. These escrow payments are classified as
restricted cash.
While we do not currently maintain cost accounting systems to accurately
track costs on an individual project basis, based on an estimated average
full-time equivalent basis, we estimate that in the nine months ended September
30, 2002, we incurred costs in an approximate aggregate amount of $2,587,000 in
connection with all of our research collaborations which generated approximately
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$2,387,000 of revenue in the aggregate in the nine months ended September 30,
2002; and based on an estimated average full-time equivalent basis, we estimate
that in the nine months ended September 30, 2001, we incurred costs in an
approximate aggregate amount of $1,932,000 in connection with all of our
research collaborations which generated approximately $1,999,000 of revenue in
the aggregate in the nine months ended September 30, 2001.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
RESEARCH AND DEVELOPMENT REVENUES. Total research and development
revenues in the three months ended September 30, 2002 were $4,865,000 compared
to $4,494,000 in the three months ended September 30, 2001, an increase of
$371,000 or 8.3%. The revenue earned in the three months ended September 30,
2002, consisted of $2,600,000 in license fee and $2,000,000 in milestone
revenue, both from Gilead, and $265,000 in funding from SBIR grants. The
research and development revenues earned in the three months ended September 30,
2001 consisted of $1,400,000 in license fee revenue from Gilead, $3,000,000 in
milestone revenue from Gilead and $94,000 in funding from SBIR grants.
RELATED PARTY RESEARCH AND DEVELOPMENT REVENUES. Total related party
research and development revenues in the three months ended September 30, 2002,
were $888,000 compared to $595,000 in the three months ended September 30, 2001,
an increase of $293,000 or 4.9%. The related party research and development
revenues earned in the three months ended September 30, 2002, consisted of
$638,000 in research support funding and a $250,000 milestone payment from the
Novartis collaboration. The related party research and development revenues
earned in the three months ended September 30, 2001, consisted of $563,000 in
research support funding from the Novartis collaboration and $32,000 in research
support funding from the Xenova collaboration.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses in the three months ended September 30, 2002, were $13,884,000
compared to $13,500,000 in the three months ended September 30, 2001, an
increase of $384,000 or 2.8%. The increase was largely due to a license fee
payment of $1,500,000 made to Biochemie GmbH for the exclusive worldwide
rights to CAB-175, a milestone payment to IHMA of $785,000 offset by a
reversal of our previously accrued clinical trial expense of $1,800,000
arising from the difference of the current estimate of amounts owed to
clinical research organizations and prior estimates of amounts owed.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
in the three months ended September 30, 2002, were $6,382,000 compared to
$5,426,000 in the three months ended September 30, 2001, an increase of $956,000
or 17.6%. A total of $821,000 or 85.9% of the increase was due to costs of
increased staffing, expansion of the senior management team and training and
consulting expenses. Increased pre-marketing costs associated with our
anticipated commercial product launch were $135,000 or 14.1% of the increase.
INTEREST INCOME AND EXPENSE. Interest income in the three months ended
September 30, 2002, was $1,194,000 compared to $1,514,000 in the three months
ended September 30, 2001, a decrease of $320,000 or 21.1%. The decrease in
interest income was due primarily to significantly lower interest rates and
significantly lower average cash, cash equivalents and investment balances
during the three months ended September 30, 2002, as compared to the three
months ended September 30, 2001. Interest expense in the three months ended
September 30, 2002 was $3,606,000 as compared to $1,039,000 during the three
months ended September 30, 2001, an increase of $2,567,000 or 266.7%. The
increase in interest expense was primarily due to the issuance of 5 1/2%
convertible subordinated notes during the fourth quarter of 2001 in the amount
of $165,000,000.
OTHER INCOME (EXPENSE). Other expense in the three months ended
September 30, 2002 was $71,000, compared to other expense of $191,000 in the
three months ended September 30, 2001. The decrease in other expense was
primarily due to no foreign exchange loss recorded for the current quarter.
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NET LOSS. The net loss during the three months ended September 30, 2002
was $16,996,000 compared to $13,553,000 during the three months ended September
30, 2001, an increase of $3,443,000 or 25.4%. The increase was primarily due to
increased interest expense of $2,567,000 due to the issuance of 5 1/2%
convertible subordinated notes in the fourth quarter of 2001 and a license fee
payment of $1,500,000 in July 2002 made to Biochemie GmbH for the exclusive
worldwide rights to CAB-175.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
RESEARCH AND DEVELOPMENT REVENUES. Total research and development
revenues in the nine months ended September 30, 2002, were $8,012,000 compared
to $8,818,000 in the nine months ended September 30, 2001, a decrease of
$869,000 or 89.8 %. The revenue recognized in the nine months ended September
30, 2002, consisted of $5,400,000 in license fee and $2,000,000 in milestone
revenue, both from Gilead and $612,000 in SBIR grants. In the nine months ended
September 30, 2001, revenues consisted of $4,200,000 in license fee revenue and
$4,250,000 in milestone revenue from Gilead and $368,000 in funding from SBIR
and other grants.
RELATED PARTY RESEARCH AND DEVELOPMENT REVENUES. Total related party
research and development revenues in the nine months ended September 30, 2002,
were $2,387,000 compared to $1,999,000 in the nine months ended September 30,
2001, an increase of $388,000 or 19.4%. The related party research and
development revenues earned in the nine months ended September 30, 2002
consisted of $1,887,000 in research support funding and $500,000 in milestone
payments from the Novartis collaboration. The related party research and
development revenues earned in the nine months ended September 30, 2001
consisted of $1,938,000 in research support funding and $61,000 in research
support funding from the Xenova collaboration.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses in the nine months ended September 30, 2002, were $41,357,000 compared
to $46,490,000 in the nine months ended September 30, 2001, a decrease of
$5,133,000 or 11.0%. The decrease was largely due to decreased clinical trial
costs including a reversal of our accrued clinical trial expense of $1,800,000
arising from the difference of the current estimate of amounts owed to clinical
research organizations and prior estimates of amounts owed, partially offset by
a license fee payment of $1,500,000 made to Biochemie GmbH for the exclusive
worldwide rights to CAB-175.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
in the nine months ended September 30, 2002, were $20,522,000 compared to
$14,344,000 in the nine months ended September 30, 2001, an increase of
$6,178,000 or 43.1%. The increase was largely due to non-cash stock-based
compensation expense of $767,000, costs related to increased staffing levels,
expansion of the senior management team and training and consulting totaling
$2,857,000 of the increase, and increased pre-marketing costs of $2,554,000 of
the increase associated with our anticipated commercial product launch.
INTEREST INCOME AND EXPENSE. Interest income in the nine months ended
September 30, 2002, was $4,195,000 compared to $5,836,000 in the nine months
ended September 30, 2001, a decrease of $1,641,000 or 28.1%. The decrease in
interest income was due primarily to lower average cash, cash equivalents and
investment balances and significantly lower interest rates during the nine
months ended September 30, 2002, as compared to the nine months ended September
30, 2001. Interest expense in the nine months ended September 30, 2002 was
$10,395,000 as compared to $3,238,000 during the nine months ended September 30,
2001, an increase of $7,157,000 or 221.0%. The increase in interest expense was
primarily due to the issuance of 5 1/2% convertible subordinated notes during
the fourth quarter of 2001 in the amount of $165,000,000.
OTHER INCOME (EXPENSE). Other expense in the nine months ended
September 30, 2002, was $21,173 compared to other expense of $569,000 in the
nine months ended September 30, 2001. The decrease in other expense was
primarily due to no foreign exchange gain or loss recorded for the current
quarter.
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NET LOSS. The net loss during the nine months ended September 30, 2002,
was $57,660,000 compared to $47,988,000 during the nine months ended September
30, 2001, an increase of $9,672,000 or 20.2%. The increase was primarily due to
increased interest expense of $7,157,000 due to the issuance of 5 1/2%
convertible subordinated notes during the fourth quarter of 2001 in the amount
of $165,000,000 and decreased interest income due to significantly lower
interest rates and significantly lower cash, cash equivalents and investment
balances.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through the sale of
equity securities, convertible debt securities, equipment financing, sponsored
research revenues, license revenues and interest earned on invested capital. Our
total cash, cash equivalents and investments balance, excluding restricted cash,
at September 30, 2002 was $170,701,000 compared to $243,135,000 at December 31,
2001.
Net cash used in operating activities was $67,600,000 in the first
nine months of 2002 and $36,700,000 in the first nine months of 2001. Our
loss was $57,700,000 for the first nine months of 2002 and $48,000,000 for
the first nine months of 2001. For the nine months ended September 30, 2002,
net cash used in operating activities reflects the net loss adjusted for
non-cash items totaling $9,000,000; which consisted primarily of depreciation
and amortization expense of $4,300,000, stock-based compensation of $767,000,
a decrease in accounts payable and accrued expenses of 7,800,000, and a
decrease in deferred revenue of $7,400,000. The decrease in accounts payable
and accrued expenses relates to CRO expenses and an equity contribution of
$2,000,000 to ACS which was accrued at December 31, 2001. The decrease in
deferred revenue is due to the recognition of revenue of an upfront licensing
fee payment received from Gilead. For the nine months ended September 30,
2001, net cash used in operating activities reflects the net loss adjusted
for depreciation and amortization of $4,200,000, increases in other assets,
accounts payable and accrued expenses totaling $9,300,000 and an increase in
deferred revenue of $8,800,000 from an upfront licensing fee payment received
from Gilead.
Net cash provided by investing activities was $13,700,000 and
$35,400,000 in the first nine months of 2002 and 2001, respectively. Net cash
provided by investing activities in the first nine months of 2002 included
$17,200,000 for maturities of investments, net of purchases and $3,400,000 for
capital expenditures. During the first nine months of 2001, cash of $44,900,000
was provided by the net maturity of investments and $9,500,000 was used for
capital expenditures.
During the nine months ended September 30, 2002, and 2001, we received
cash proceeds of approximately $1,300,000 and $2,100,000, respectively, from the
issuance of common stock upon the exercise of stock options.
During March 1999, we entered into a term loan agreement with a bank
under which we may borrow up to $1,500,000 to finance fixed asset purchases.
In March 2000, we increased our term loan by $2,000,000 to finance leasehold
improvements and fixed asset purchases. Advances under this facility are to
be repaid over a 36-month period, commencing on March 31, 2000. Interest on
the borrowings is at the bank's LIBOR rate (4.105% at September 30, 2002).
In September 2001, we increased our term loan by $6,500,000 to finance
leasehold improvements and fixed asset purchases for the new corporate
headquarters building. Borrowings under the facility are collateralized by
all capital equipment purchased with the funds under this term loan and a
minimum cash collateral amount of $3,250,000. This cash collateral amount is
reflected as restricted cash. In April 2002, the term loans were consolidated
and are being repaid over a 48-month period. At September 30, 2002,
borrowings outstanding totaled $6,536,272. During the nine months ended
September 30, 2002, we drew down $685,182 under this facility.
COMMITMENTS AND CONTINGENCIES
Our major outstanding contractual obligations relate to our convertible
notes, our term loans and our facilities leases. Our facilities lease expense in
future years will decrease as we purchased a new corporate headquarters in 2000.
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The aggregate outstanding principal of our convertible notes is $204.0
million. These notes consist of $165.0 million of 5 1/2% convertible
subordinated notes due 2008, and $39.0 million of 8 1/2% senior convertible
notes due 2005. Both the convertible subordinated notes and the senior
convertible notes require semi-annual interest payments through maturity.
The aggregate outstanding amount of our commercial commitments is
$73.4 million. These commitments represent maximum payments based on current
operating forecasts. Certain of these commitments could be lessened if
changes to our operating forecast occur in the future.
THE FOLLOWING SUMMARIZES CUBIST'S CONTRACTUAL OBLIGATIONS AND COMMERCIAL
COMMITMENTS AS OF SEPTEMBER 30, 2002 AND THE EFFECT SUCH OBLIGATIONS AND
COMMITMENTS ARE EXPECTED TO HAVE ON OUR LIQUIDITY AND CASH FLOW IN THE FUTURE
PERIODS:
<Table>
<Caption>
LAST THREE 2008
MONTHS AND
2002 2003 2004 2005 2006 2007 THEREAFTER
---------- ---------- ---------- ---------- ---------- ---------- ----------
(In millions)
CONTRACTUAL OBLIGATIONS:
Senior convertible notes ...... $ 0.8 $ 3.3 $ 3.3 $ 42.3 $ -- $ -- $ --
Subordinated convertible notes. 2.3 9.1 9.1 9.1 9.1 9.1 174.1
Term loan ..................... 0.6 2.3 2.2 2.1 -- -- --
Operating leases .............. 0.2 0.9 2.0 2.0 2.0 2.0 17.5
----------------------------------------------------------------------------------------
Total contractual obligations $ 3.9 $ 15.6 $ 16.6 $ 55.5 $ 11.1 $ 11.1 $ 191.6
========================================================================================
COMMERCIAL COMMITMENTS:
Clinical CRO costs ............ $ 1.6 $ 11.1 $ 7.3 $ -- $ -- $ -- $ --
Manufacturing ................. -- 2.0 1.1 1.8 0.7 0.7 2.2
Licenses and collaborations ... 1.8 4.6 3.4 4.0 1.0 7.8 22.3
----------------------------------------------------------------------------------------
Total commercial commitments $ 3.4 $ 17.7 $ 11.8 $ 5.8 $ 1.7 $ 8.5 $ 24.5
========================================================================================
</Table>
In July 2002, Cubist entered into a license agreement with Biochemie
GmbH to develop and commercialize a certain proprietary compound. The agreement
requires Cubist to make future payments upon the achievement of certain
milestones, including the completion of clinical trials and the approval of a
licensed product by regulatory authorities. The aggregate maximum future
milestone payments under the contract are $26.0 million and may be paid, if
incurred, over the next 7 years. These payments are reflected in licenses and
collaborations above.
We believe that our existing cash resources, existing capital resources,
projected interest income and future revenues due under our collaborative
agreements will be sufficient to fund our operating expenses and capital
requirements as currently planned through the next 18 months. Our actual cash
requirements may vary materially from those now planned and will depend on
numerous factors. We cannot be sure that our existing cash, cash equivalents,
other capital resources, interest income and future revenues due under our
collaborative agreements will be sufficient to fund our operating expenses and
capital requirements during that period.
CRITICAL ACCOUNTING POLICIES
In our Form 10-K for the year ended December 31, 2001, our most
critical accounting policies and estimates upon which our financial
statements were derived were identified as those relating to revenue
recognition, accrued clinical trial expenses, investments, intangible and
long-lived assets and income taxes. We reviewed our policies and determined
that such policies remain our most critical accounting policies
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for the quarter and nine months ended September 30, 2002. We did not make any
changes to such policies during the quarter. During this quarter we reduced the
balance in our accrued clinical trial expense by approximately $1,800,000
related to expenses from our contract research partner for the management of our
cSST and community-acquired pneumonia Phase III trials. During the current
quarter it was determined that previously recorded expenses would not be
incurred. It is anticipated that the final reconciliation between actual costs
for the program and the related accrual will be performed in the fourth quarter.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002." SFAS No. 145 eliminates SFAS No. 4 "Reporting
Gains and Losses from Extinguishment of Debt," which required companies to
classify gains or losses from the extinguishment of debt as an extraordinary
item, net of tax. As a result of this new SFAS, gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in APB Opinion No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
This pronouncement has not had a material impact on the Company's financial
statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS146) which nullifies EITF
Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred,
whereas EITF No. 94-3 had allowed the liability to be recorded at the commitment
date of an exit plan. The Company is required to adopt the provisions of SFAS
146 effective for exit or disposal activities initiated after December 31, 2002.
It is not anticipated that this pronouncement will have a material impact on
the Company's financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in information affecting our market
risk since the end of the fiscal year ended December 31, 2001 as described in
Item 7A of our Form 10-K for the year ended December 31, 2001, filed with the
Securities and Exchange Commission on March 29, 2002, and through September 30,
2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
ensure that it is able to collect the information it is required to disclose in
the reports it files with the Securities and Exchange Commission, or the
Commission, and to process, summarize and disclose this information within the
time periods specified in the rules of the Commission. Based on their evaluation
of Cubist's disclosure controls and procedures which took place as of a date
within 90 days of the filing date of this report, the Chief Executive and Chief
Financial Officers believe that these controls and procedures are effective to
ensure that Cubist is able to collect, process and disclose the information it
is required to disclose in the reports it files with the SEC within the required
time periods.
The Company also maintains a system of internal controls designed to
provide reasonable assurance that transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets; access to assets is permitted only in accordance with management's
general or specific authorization; and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Since the date of the most recent evaluation of our internal controls
by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
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PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 26, 2001, we completed the private placement of $125 million
of 5 1/2% convertible subordinated notes (less estimated financing costs of
$4,055,096). The offering was made through initial purchasers to qualified
institutional buyers under Rule 144A of the Securities Act. The notes are
convertible at any time prior to maturity into common stock at a conversion
price of $47.20 per share, subject to adjustment upon certain events. Interest
is payable on each November 1 and May 1, beginning May 1, 2002. In addition, on
December 28, 2001, the initial purchasers exercised their option to purchase an
additional $40.0 million of 5 1/2% convertible subordinated notes (less
estimated financing costs of $827,320). The offering was made through the same
initial purchasers to qualified institutional buyers under Rule 144A of the
Securities Act. The notes are convertible at any time prior to maturity into
common stock at a conversion price of $47.20 per share, subject to adjustment
upon certain events. Interest is payable on each November 1 and May 1, beginning
May 1, 2002. The notes mature on November 1, 2008. The notes are subordinated to
our senior indebtedness.
Proceeds from the Rule 144A offering will be used to advance the
clinical trials and commercialization strategy of Cubist's investigational
antibiotic Cidecin, our oral ceftriaxone pre-clinical program, our CAB-175
pre-clinical program, our research programs and for working capital and general
corporate purposes.
On January 31, 2002, we issued 62,558 shares of common stock to ACS
Dobfar, SpA in connection with a certain manufacturing and supply agreement,
dated as of September 30, 2001. The issuance and sale of such shares of common
stock was made in reliance on Regulation S of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits have been filed with this report:
99.1 Certification pursuant to 18 U.S.C Section 1305, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C Section 1305, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
A current report on Form 8-K was filed by Cubist with the Securities
and Exchange Commission on September 9, 2002 with respect to the
termination of the licensing agreement with Gilead Sciences.
A current report on Form 8-K was filed by Cubist with the Securities
and Exchange Commission on September 10, 2002 pursuant to Item 9 with
respect to release of the transcript of the webcast conference call
relating to the termination of the licensing agreement with Gilead
Sciences.
A current report on Form 8-K was filed by Cubist with the Securities
and Exchange Commission on September 19, 2002 pursuant to Item 9 with
respect to release of the transcript of the conference call hosted by
Pacific Growth Equities, Inc.
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SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CUBIST PHARMACEUTICALS, INC.
November 12, 2002 By: /s/ Thomas A. Shea
--------------------------------
Thomas A. Shea,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
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CERTIFICATION
I, Scott M. Rocklage, Ph.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cubist
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Scott M. Rocklage
- -----------------------------------------
Scott M. Rocklage, Ph.D.
Chairman and Chief Executive Officer
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CERTIFICATION
I, Thomas A. Shea, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cubist
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Thomas A. Shea
- -------------------------------------------
Thomas A. Shea
Vice President, Finance and Administration
and Chief Financial Officer
21