- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
- - OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999

__ 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.)

24 EMILY STREET
CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices)

(617) 576-1999
(Registrant's telephone number, including area code)

NONE
(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 12, 1999, there were 20,283,152 shares outstanding of
Cubist's common stock, $0.001 par value per share.

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CUBIST PHARMACEUTICALS, INC.

INDEX

ITEM PAGE
NUMBER NUMBER
- ------ ------

PART I. FINANCIAL INFORMATION

Item 1. Condensed Unaudited Financial Statements

Condensed Balance Sheets as of September 30, 1999
and December 31, 1998............................................................... 3

Condensed Statements of Operations for the three and nine months ended
September 30, 1999 and 1998......................................................... 4

Condensed Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998......................................................... 5

Notes to the Unaudited Condensed Financial Statements............................... 6

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 7

Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 11

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds............................................... 11

Item 6. Exhibits and Reports on Form 8-K........................................................ 12

SIGNATURE............................................................................... 13

PART I -- FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

CUBIST PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(unaudited)

ASSETS
Current Assets:

Cash and cash equivalents ............................... $ 9,304,693 $ 6,463,688
Short-term investments .................................. 506,930 8,692,514
Accounts receivable ..................................... -- --
Prepaid expenses and other current assets ............... 942,410 231,409
------------ ------------
Total current assets ............................... 10,754,033 15,387,611
Property and equipment ....................................... 8,266,676 7,727,821
Less: Accumulated depreciation and amortization ............. (4,807,727) (3,908,054)
------------ ------------
Property and equipment, net ............................. 3,458,949 3,819,767
Long-term investments ........................................ 3,899,333 3,855,336
Other assets ................................................. 50,258 74,238
------------ ------------
Total assets ................................... $ 18,162,573 $ 23,136,952
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................ $ 872,110 $ 460,939
Accrued expenses ........................................ 1,913,176 572,562
Current portion of long-term debt ....................... 234,175 83,957
Current portion of capital lease obligations ............ 562,277 625,450
------------ ------------
Total current liabilities ...................... 3,581,738 1,742,908
Long-term debt, net of current portion ....................... 590,820 16,109
Long-term capital lease obligation, net of current portion ... 872,646 1,292,165
------------ ------------
Total liabilities .............................. 5,045,204 3,051,182
------------ ------------

Commitments

Stockholders' Equity:
Common Stock - $.001 par value; authorized: 50,000,000 shares;
Issued and outstanding 1998 16,642,968 shares;
Issued and outstanding 1999 17,723,586 shares ........... 17,724 16,643
Additional paid-in capital ................................... 59,627,069 54,890,014
Accumulated deficit .......................................... (46,527,424) (34,820,887)
------------ ------------
Total stockholders' equity ..................... 13,117,369 20,085,770
------------ ------------
Total liabilities and stockholders' equity ..... $ 18,162,573 $ 23,136,952
============ ============

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

CUBIST PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS

UNAUDITED

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------

Sponsored research revenues $3,112,503 $373,550 $4,579,378 $1,260,650

Operating expenses:
Research and development 4,865,447 2,491,517 13,791,819 7,760,410
General and administrative 947,097 960,371 2,901,458 2,635,703
------------ ------------ ------------ ------------
Total operating expenses 5,812,544 3,451,888 16,693,277 10,396,113

Interest income 192,717 194,375 666,912 574,491
Interest expense (98,723) (80,776) (259,550) (264,297)
------------ ------------ ------------ ------------

Net loss ($2,606,047) ($2,964,739) ($11,706,537) ($8,825,269)
============ ============ ============ ============
Basic and diluted net loss per common
share ($0.15) ($0.27) ($0.67) ($0.82)
============ ============ ============ ============
Weighted average number of common shares
for basic and diluted net loss per
common share 17,604,971 11,042,603 17,444,373 10,736,550
============ ============ ============ ============

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

CUBIST PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

UNAUDITED

NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
------------ ------------

Cash flows used for operating activities:
Net loss ....................................... $(11,706,537) $ (8,825,269)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................ 942,828 960,378
Common stock issued for technology milestone . 250,000 --
Cashless exercise of warrants ................ 38,330 --
Changes in assets and liabilities:
Accounts receivable ..................... -- 53,333
Prepaid expenses and other current assets (755,016) (46,783)
Other assets ........................... 23,980 39,051
Accounts payable and accrued expenses ... 1,751,785 1,051,866
------------ ------------
Total adjustments ..................... 2,251,907 2,057,845
------------ ------------
Net cash used for operating activities ............ (9,454,630) (6,767,424)

Cash flows from investing activities:
Purchase of equipment .......................... (453,505) (1,336,711)
Leasehold improvements ......................... (85,350) (33,642)
Purchase of short-term investments ............. (754,638) --
Maturities of short-term investments ........... 8,940,222 4,667,775
Maturities of long-term investments ............ -- 6,507,707
------------ ------------
Net cash provided by investing activities ......... 7,646,729 9,805,129
------------ ------------

Cash flows from financing activities:

Issuance of stock .............................. 4,376,669 12,823,001
Proceeds from notes receivable ................. 30,000 10,000
Repayments of debt ............................. (62,571) (158,105)
Proceeds from equipment loan ................... 787,500 913,355
Principal payments of capital lease obligations (482,692) (419,569)
------------ ------------
Net cash provided by financing activities ......... 4,648,906 13,168,682
------------ ------------
Net increase in cash and cash equivalents ......... 2,841,005 16,206,387

Cash and cash equivalents, beginning of period .... 6,463,688 2,837,600
------------ ------------
Cash and cash equivalents, end of period .......... $ 9,304,693 $ 19,043,987
============ ============

Supplemental disclosures of cash flow information:
Cash paid during the period for interest ....... $ 259,550 $ 264,297

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

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

A. NATURE OF BUSINESS

Cubist Pharmaceuticals, Inc. is a specialty biopharmaceutical company
founded in May 1992 and is focused on the research, development and
commercialization of novel antimicrobial drugs to combat serious life
threatening bacterial and fungal infections. Cubist has established multiple
technology licenses and collaborations and has established a network of advisors
and collaborators. Cubist is located in Cambridge, Massachusetts.

B. ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements reflect all
adjustments, consisting of normal recurring adjustments, which are necessary, in
the opinion of management, for a fair presentation of the results of the interim
periods presented. Interim results are not necessarily indicative of results for
a full year. These unaudited condensed financial statements do not include all
information and footnote disclosures required by generally accepted accounting
principles and therefore should be read in conjunction with Cubist's audited
financial statements and related footnotes for the year ended December 31, 1998
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 17,
1999.

NET LOSS PER COMMON SHARE

The net loss per common share is computed based upon the weighted
average number of common shares and common shares and common equivalent shares
(using the treasury stock method) outstanding after certain adjustments
described below. Common equivalent shares are not included in the per share
calculations where the effect of their inclusion would be anti-dilutive. At
September 30, 1999, and 1998 Cubist had 2,051,841 and 1,123,900 options
outstanding, respectively. At September 30, 1999, and 1998 Cubist also had
2,931,980 and 3,119,402 warrants outstanding, respectively.

C. LICENSE AGREEMENT

On February 3, 1999, Cubist entered into a research and license
agreement with Novartis Pharma AG to use Cubist's proprietary VITA-TM-
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 will pay research payments and, if certain scientific and
development milestones are achieved, Novartis will make milestone payments. 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. Upon the signing of the research and license agreement,
Novartis purchased, and Cubist issued to Novartis, 797,488 shares of Common
Stock for a total purchase price of $4.0 million in cash. The proceeds from the
sale of these shares will be primarily used to fund the clinical development of
daptomycin and development of its VITA-TM- technology.

D. SUBSEQUENT EVENT

On October 21, 1999, Cubist completed a private placement financing
with investors and raised approximately $18.8 million (less estimated financing
costs of $1,176,000) by issuing 2,503,333 shares of Common Stock at $7.50 per
share. Cubist has filed an S-3 registration statement to register the resale of
the 2,503,333 shares of Common Stock issued in this financing. The proceeds of
this private offering will be used primarily to fund its Phase III and Phase II
clinical trials of daptomycin and the development of its proprietary genomic
target validation and assay development VITA-TM- technology.

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

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS QUARTERLY
REPORT ON FORM 10-Q MAY CONTAIN "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, INCLUDING, BUT NOT LIMITED TO, (I) STATEMENTS ABOUT THE
ADEQUACY OF CUBIST'S CASH, CASH EQUIVALENTS, OTHER CAPITAL RESOURCES, INTEREST
INCOME, OTHER INCOME AND FUTURE REVENUES DUE UNDER CUBIST'S COLLABORATIVE
AGREEMENTS TO FUND ITS OPERATING EXPENSES AND CAPITAL REQUIREMENTS AS CURRENTLY
PLANNED THROUGH 2000, (II) STATEMENTS ABOUT THE AMOUNT OF CAPITAL EXPENDITURES
THAT CUBIST EXPECTS TO INCUR IN 1999, AND (III) CERTAIN STATEMENTS IDENTIFIED OR
QUALIFIED BY WORDS SUCH AS "LIKELY", "WILL", "SUGGESTS", "MAY", "WOULD",
"COULD", "SHOULD", "EXPECTS", "ANTICIPATES", "ESTIMATES", "PLANS", "PROJECTS",
"BELIEVES", OR SIMILAR EXPRESSIONS (AND VARIANTS OF SUCH WORDS OR EXPRESSIONS).
YOU ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS 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, 1998. 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.

OVERVIEW

Since its incorporation on May 1, 1992 and commencement of operations
in February 1993, Cubist has been engaged in the research, development and
commercialization of novel antimicrobial drugs to combat serious life
threatening bacterial and fungal infections. Cubist has a limited history of
operations and has experienced significant operating losses since inception.
Cubist expects to incur significant additional operating losses over the next
several years and expects cumulative losses to increase substantially due to
expanded research and development efforts, pre-clinical testing and clinical
trials and development of manufacturing, marketing and sales capabilities.

A key element of our strategy is to enhance certain of our drug
discovery and development programs and to fund our capital requirements, in
part, by entering into collaborative agreements with major pharmaceutical
companies. Cubist is a party to collaborative agreements based specifically on
its aminoacyl-tRNA synthetase program with Bristol-Myers Squibb and Merck. Under
these collaborative agreements, we have received research support payments and,
if certain drug development milestones are achieved, are entitled to milestone
payments. In addition, we will be entitled to receive royalties on worldwide
sales of any drug developed and commercialized from these collaborations.

On February 3, 1999, Cubist entered into a research and license
agreement with Novartis Pharma AG to use Cubist's proprietary VITA-TM-
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 will pay us research payments and if certain scientific
and development milestones are achieved, Novartis will make milestone payments.
In addition, Novartis will be required to pay royalties to us on worldwide sales
of any drug developed and commercialized from any products derived from this
collaboration. Upon the signing of the research and license agreement, Novartis
purchased, and Cubist issued to Novartis, 797,488 shares of Common Stock for a
total purchase price of $4.0 million in cash. The proceeds from the sale of
these shares will primarily be used to fund the clinical development of
daptomycin and development of our VITA-TM- technology.

On November 7, 1997, Cubist entered into a license agreement with Eli
Lilly and Co., pursuant to which Cubist acquired exclusive worldwide rights to
develop, manufacture and market daptomycin. In exchange for such license, Cubist
paid to Eli Lilly an upfront license fee in cash, and if certain drug
development milestones are achieved, has agreed to pay milestone payments in
cash or by issuing shares of Common Stock to Eli Lilly. In addition, Cubist will
be required to pay royalties to Eli Lilly on worldwide sales of daptomycin. On
February 19, 1999 Cubist issued to Eli Lilly and Co. 56,948 shares of Cubist
Common Stock as a milestone payment pursuant to, and in accordance with, the
terms of the agreements with the Eli Lilly license agreement. The issuance of
shares was incident to the initiation of Phase III clinical testing of
daptomycin. Daptomycin is a novel, natural product being developed for the
treatment of STAPHYLOCOCCUS AUREUS and enterococcus infections in humans. Cubist
began clinical trials of daptomycin in February of 1999.

On October 21, 1999, we completed a private placement financing with
investors and raised approximately $18.8 million (less estimated financing costs
of $1,176,000) by issuing 2,503,333 shares of Common Stock at $7.50 per share.
We have filed an S-3 registration statement to register the resale of the
2,503,333 shares of Common Stock issued in this financing. The proceeds of this
private offering will be used primarily to fund our Phase III and Phase II
clinical trials of daptomycin and the development of our proprietary genomic
target validation and assay development VITA-TM- technology.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

REVENUES. Total revenues in the three months ended September 30, 1999
were $3,113,000 compared to $374,000 in the three months ended September 30,
1998, an increase of $2,739,000 or 732.4%. The revenue earned in the three
months ended September 30, 1999 consisted of $2,500,000 in research support
funding from the Merck collaboration; $563,000 in research support funding from
the Novartis collaboration and $50,000 in funding from SBIR grants. In the three
months ended September 30, 1998, total revenues consisted of research support
funding from the Bristol-Myers Squibb collaboration; and funding from SBIR
grants.

RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses in the three months ended September 30, 1999 were $4,865,000 compared
to $2,492,000 in the three months ended September 30, 1998, an increase of
$2,373,000 or 95.2%. The increase was largely due to increased consulting and
manufacturing costs related to daptomycin development, and the additional
personnel and purchases required by such development.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses in the three months ended September 30, 1999 were $947,000 compared to
$960,000 in the three months ended September 30, 1998, a decrease of $13,000 or
1.4%.

INTEREST INCOME AND EXPENSE. Interest income in the three months ended
September 30, 1999 was $193,000 compared to $194,000 in three months ended
September 30, 1998, a decrease of $1,000 or .5%. Interest expense in the three
months ended September 30, 1999 was $99,000 as compared to $81,000 during the
three months ended September 30, 1998.

NET LOSS. The net loss during the three months ended September 30, 1999
was $2,606,000 compared to $2,965,000 during the three months ended September
30, 1998, a decrease of $358,000 or 12.1%. The decrease was primarily due to
increased revenues associated with the Merck collaboration.

NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

REVENUES. Total revenues in the nine months ended September 30, 1999
were $4,579,000 compared to $1,261,000 in the nine months ended September 30,
1998, an increase of $3,318,000 or 263.1%. The revenue recognized in the nine
months ended September 30, 1999 consisted of $2,500,000 in research support
payments from the Merck collaboration; $1,479,000 from the Novartis
collaboration; $500,000 from the Bristol-Myers Squibb collaboration and $100,000
in SBIR grants. In the nine months ended September 30, 1998, revenues consisted
of research support payments from the Bristol-Myers Squibb and Merck
collaborations; and in SBIR grants. The increase was due to revenues associated
with the Novartis research and license agreement and the Merck collaboration.

RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses in the nine months ended September 30, 1999 were $13,792,000 compared
to $7,760,000 in the nine months ended September 30, 1998, an increase of
$6,032,000 or 77.7%. The increase was largely due to increased costs related to
daptomycin development, and the additional personnel and purchases that are
required by such development.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses in the nine months ended September 30, 1999 were $2,901,000 compared to
$2,636,000 in the nine months ended September 30, 1998, an increase of $265,000
or 10.1%. The increase was primarily due to increased costs related to investor
and public relations.

INTEREST INCOME AND EXPENSE. Interest income in the nine months ended
September 30, 1999 was $667,000 compared to $574,000 in the nine months ended
September 30, 1998, an increase of $93,000 or 16.2%. The increase in interest
income was due primarily to a higher average cash, cash equivalent and
investment balances during the nine months ended September 30, 1999 as compared
to the nine months ended September 30, 1998. Interest expense in the nine months
ended September 30, 1999 was $260,000 as compared to $264,000 during the nine
months ended September 30, 1998.

NET LOSS. The net loss during the nine months ended September 30, 1999
was $11,707,000 compared to $8,825,000, an increase of $2,882,000 or 32.7%. The
increase was primarily due to the additional expenses incurred to support the
advancement of Cubist's internal research and development programs as well as
increased revenue from such stage of research support funding.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations through the sale of
equity securities, equipment financing, sponsored research revenues, license
revenues and interest earned on invested capital. The total cash, cash
equivalent and investments balance at September 30, 1999 was $13,711,000
compared to $19,012,000 at December 31, 1998.

Since inception through September 30, 1999, Cubist had invested an
aggregate of $8,267,000 (of which $167,000 was invested during the three months
then ended) in property and equipment, primarily in laboratory equipment under
capital leases. The obligations under capital leases at September 30, 1999 were
$1,435,000. Minimum annual principal payments due under capital leases total
$843,000 in 1999. Principal payments are scheduled to decline each year until
expiration in 2002. Cubist made principal payments under its capital lease
obligations of $483,000 in the nine months ended on September 30, 1999. We
expect our capital expenditures in 1999 to be approximately $800,000 consisting
of laboratory and other equipment purchases.

On February 3, 1999, Cubist entered into a research and license
agreement with Novartis Pharma AG to use Cubist's proprietary VITA-TM-
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 will pay Cubist research payments and if certain
scientific and development milestones are achieved, Novartis will make milestone
payments. 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. Upon the signing of the research and license
agreement, Novartis purchased, and Cubist issued to Novartis, 797,488 shares of
Common Stock for a total purchase price of $4.0 million in cash. The proceeds
from the sale of these shares will be primarily used to fund the clinical
development of daptomycin and development of its VITA-TM- technology.

On October 21, 1999, Cubist completed a private placement financing
with investors and raised approximately $18.8 million (less estimated financing
costs of $1,176,000) by issuing 2,503,333 shares of Common Stock at $7.50 per
share. We have filed an S-3 registration statement to register the resale of the
2,503,333 shares of Common Stock issued in this financing. The proceeds of this
private offering will be used primarily to fund our Phase III and Phase II
clinical trials of daptomycin and the development of our proprietary genomic
target validation and assay development VITA-TM- technology.

The additional funds from the sale of shares in the private
placement, together with existing cash resources and its existing capital
resources, interest income and future revenues due under the Novartis,
Bristol-Myers Squibb and Merck collaborative agreements will be sufficient to
fund its operating expenses and capital requirements as currently planned
through 2000. The actual cash requirements of Cubist 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 the Novartis, Bristol-Myers Squibb and Merck
collaborative agreements will be sufficient to fund our operating expenses and
capital requirements during that period. Cubist will need to raise substantial
additional capital to fund its operations from and after January 1, 2001 and
intends to seek such additional funding through public or private financing or
collaborative or other arrangements with corporate partners.

RECENT PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities", which was amended by SFAS No. 137 and is effective for
fiscal years beginning after June 15, 2000. The statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Adoption of this standard is not expected to have a material impact on the
financial position or results of operations of Cubist.

YEAR 2000 READINESS

The "Year 2000" issue generally describes the various problems which
may result from the improper processing of dates and date-sensitive
calculations. Computers and other equipment containing computer-related
components (such as programmable logic controllers and other embedded systems)
using two digits to identify the year in a date may not be able to distinguish
between dates in the 20th century versus the 21st century. Because computer and
microprocessor use is so widespread, the issue has become a societal concern,
the impact of which is not yet known.

Cubist has completed the assessment of its critical computer systems
and embedded systems and believes them to be Year 2000 compliant. Although
Cubist believes its critical systems are Year 2000 compliant, there can be no
assurances that other defects will not be discovered in the future. Cubist
believes that any failure of its non-critical systems to be Year 2000 compliant
will not have a material adverse effect on it.

In addition to Cubist's critical systems, Cubist relies on third party
service providers and suppliers (i.e., payroll services company,
telecommunications companies, banks and utility companies and contract
manufacturers) in the conduct of its business, and it recognizes that there may
be potential exposure to Year 2000-related business disruptions as a result.
Cubist has contacted its significant service providers and contract
manufacturers and has obtained assurances from some that they are addressing
Year 2000 issues in a prudent fashion. Others have not replied in any fashion,
but none have informed Cubist of material Year 2000 issues. Cubist is unable to
control whether the firms and suppliers it does business with currently, and in
the future, will have systems which are Year 2000 compliant. Cubist's operations
could be adversely affected to the extent that firms and suppliers would be
unable to provide services, materials or products.

To the extent that Year 2000 compliance assurances are not given by
its third party service providers and suppliers, Cubist intends to devise
contingency plans to address any potential negative effects in the event of the
unavailability of services, materials or products. If necessary, Cubist may
increase inventory levels of materials and products prior to December 1999 as a
contingency against possible disruption of supply. Nevertheless, a contingency
plan devised by Cubist may not prevent a business interruption caused by one or
more of its third party service providers or suppliers, and the failure of any
such contingency plan to do so may have a material adverse effect on Cubist.

Expenditures to date have not been material and have consisted solely
of the time of certain company personnel. Cubist does not currently expect that
future costs of completing the assessment will be material.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Cubist owns financial instruments that are sensitive to market risks as
part of its investment portfolio. The investment portfolio is used to preserve
our capital until it is required to fund operations, including research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. Cubist does not own derivative financial instruments in
its investment portfolio. The investment portfolio contains instruments that are
subject to the risk of a decline in interest rates.

Interest Rate Risk - our investment portfolio includes investment grade
debt instruments. These bonds are subject to interest rate risk, and could
decline in value if interest rates fluctuate. Due to the short duration and
conservative nature of these instruments, Cubist does not believe that it has a
material exposure to interest rate risk.

PART II -- OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Cubist's Registration Statement on Form S-1 (Reg. No. 333-6795) in
connection with its initial public offering of Common Stock was declared
effective by the Securities and Exchange Commission on October 25, 1996. On
October 25, 1996, Cubist also filed another Registration Statement on Form
S-1 (Reg. No. 333-5880) with the SEC pursuant to Rule 462 (b) promulgated
under the Securities Act of 1933, as amended. For ease of reference and
clarity, the two registration statements referred to in this paragraph and
referred to in the following paragraphs collectively as the "IPO Registration
Statement" registered 2,875,000 shares of Cubist's Common Stock under the
Securities Act.

The aggregate initial public offering proceeds for all 2,875,000 shares
of Common Stock registered by the IPO Registration Statement was $17,250,000.
The net proceeds to Cubist from such issuance and distribution, after deducting
the aggregate amount of related expenses (including underwriting discounts and
commissions) paid by Cubist were $15,153,000.

Through September 30, 1999 Cubist spent $10,386,000 of the $15,153,000
net proceeds received for the following uses and in the following amounts per
use: $427,000 in construction of plant, building and facilities; $2,349,000 for
repayment of indebtedness; $7,491,000 for working capital. All amounts spent by
Cubist for such uses, other than payment of salaries to directors and officers
of Cubist, consisted of direct payments to persons or entities, none of which
was a director or officer of Cubist, holder of 10 percent or more of any class
of equity securities of Cubist or other affiliate of Cubist. Cubist holds the
remaining $4,767,000 of the net proceeds in cash, cash equivalents, and
investments.

On October 21, 1999, we completed a private placement financing with by
issuing 2,503,333 shares of Common Stock at $7.50 per share and an aggregated
offering price of $18,744,997.50 (less estimated financing costs of $1,176,000).
We have filed an S-3 registration statement to register the resale of the
2,503,333 shares of Common Stock issued in this financing. An exemption from
registration is claimed pursuant to Section 4(2) of the Securities Act of 1933,
as amended, and Rule 506 promulgated thereunder.

During the three months ended September 30, 1999, Cubist issued 122,310
shares of Common Stock upon the exercise of 135,556 warrants issued in
connection with the private placement financing completed on September 23, 1998.
Such warrants are exercisable at $2.25 per share or pursuant to a standard
cashless net issue provision. Of the 122,310 shares issued, 80,000 shares were
issued for an aggregate purchase price of $180,000 and 42,310 shares were issued
upon cashless net issue exercise pursuant to which the holders of such warrants
surrendered the right to acquire 13,246 additional shares of Common Stock. An
exemption from registration is claimed pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1 - Registration Rights Agreement, dated as of October 15,
1999 between the Company and each person listed on Exhibit A
thereto.

27 -- Financial Data Schedule

(b) Reports on Form 8-K

A report on Form 8-K was filed by Cubist on July 30, 1999,
describing a shareholder rights plan adopted by Cubist.

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, 1999 By: /s/ Thomas A. Shea
-----------------------------------------
Thomas A. Shea,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)