<Page>
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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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
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)
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 / /
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes /X/ No/ /
As of November 7, 2003 there were 39,974,268 shares outstanding of Cubist's
common stock, $0.001 par value per share.
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<Page>
CUBIST PHARMACEUTICALS, INC.
INDEX
<Table>
<Caption>
ITEM PAGE
NUMBER NUMBER
- ------ ------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002.........2
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and 2002..................................................................3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
2003 and 2002................................................................................4
Notes to the Condensed Consolidated Unaudited Financial Statements...........................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........12
Item 3. Quantitative and Qualitative Disclosures about Market Risk .....................................18
Item 4. Controls and Procedures.........................................................................18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................19
Signatures.................................................................................................20
</Table>
1
<Page>
ITEM 1. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
CUBIST PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
September 30, December 31,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 40,481 $ 53,551
Short-term investments ............................................. 33,766 94,154
Inventory .......................................................... 1,288 --
Prepaid expenses and other current assets .......................... 3,325 1,463
------------- ------------
Total current assets ............................................. 78,860 149,168
Property and equipment, net .......................................... 45,955 48,268
Intangible assets, net ............................................... 20,089 9,925
Restricted cash ...................................................... -- 3,250
Long-term investments ................................................ 6,568 3,515
Other assets ......................................................... 6,246 7,396
------------- ------------
Total assets ..................................................... $ 157,718 $ 221,522
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ................................................... $ 3,689 $ 9,600
Accrued clinical trial expenses .................................... 371 284
Accrued expenses ................................................... 17,132 3,664
Accrued interest ................................................... 3,781 2,341
Current portion of long-term debt .................................. 2,000 2,011
Current portion of capital lease obligations ....................... 118 --
------------- ------------
Total current liabilities ........................................ 27,091 17,900
Deferred revenue ..................................................... 2,500 2,500
Long-term debt, net of current portion ............................... 206,000 208,022
Long-term capital lease obligations, net of current portion .......... 222 --
------------- ------------
Total liabilities ................................................ 235,813 228,422
Stockholders' deficit:
Preferred stock, non-cumulative; convertible, $.001 par value;
authorized 5,000,000 shares; no shares issued and
outstanding ...................................................... -- --
Common stock, $.001 par value; authorized 50,000,000
shares; 30,871,167 and 28,702,035 shares issued and
outstanding as of September 30, 2003 and December 31, 2002,
respectively ..................................................... 31 29
Additional paid-in capital ........................................... 265,792 253,519
Accumulated deficit .................................................. (343,918) (260,448)
------------- ------------
Total stockholders' deficit ...................................... (78,095) (6,900)
------------- ------------
Total liabilities and stockholders' deficit .................... $ 157,718 $ 221,522
============= ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
2
<Page>
CUBIST PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Total revenues ................................... $ -- $ 5,752 $ 357 $ 10,399
Operating expenses:
Research and development ....................... 11,887 14,569 41,131 43,601
Sales and marketing ............................ 5,822 1,699 11,905 4,989
General and administrative ..................... 13,157 3,997 21,805 13,289
------------ ------------ ------------ ------------
Total operating expenses ..................... 30,866 20,265 74,841 61,879
------------ ------------ ------------ ------------
Operating loss ................................... (30,866) (14,513) (74,484) (51,480)
Other income (expense)
Interest income ................................ 393 1,194 1,705 4,195
Interest expense ............................... (3,395) (3,606) (10,221) (10,395)
Other income (expense) ......................... (340) (71) (470) 21
------------ ------------ ------------ ------------
Total other expense, net ..................... (3,342) (2,483) (8,986) (6,179)
------------ ------------ ------------ ------------
Net loss ......................................... $ (34,208) $ (16,996) $ (83,470) $ (57,659)
============ ============ ============ ============
Basic and diluted net loss per common share ...... $ (1.12) $ (0.60) $ (2.80) $ (2.02)
Basic and diluted weighted average number of
common shares .................................... 30,489,890 28,563,321 29,785,705 28,496,901
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
3
<Page>
CUBIST PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<Table>
<Caption>
Nine Months Ended
September 30,
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss ..................................................... $ (83,470) $ (57,659)
Adjustments to reconcile net loss to net cash used for operating
activities:
Loss on the sale of equipment ................................ -- 4
Depreciation and amortization ................................ 4,010 4,323
Amortization of debt issuance costs .......................... 769 389
Amortization of premium on investments ....................... 1,211 --
Impairment loss .............................................. 134 --
Non-cash lease termination costs ............................. 361 --
Stock-based compensation ..................................... 909 1,177
Forgiveness of note receivable related to common stock ....... 50 169
Foreign currency exchange loss, net .......................... 337 2
Changes in assets and liabilities:
Accounts receivable .......................................... -- 102
Prepaid expenses, inventory and other current assets ......... (3,150) (141)
Intangibles and other assets ................................. (2,144) (759)
Accounts payable and accrued expenses ........................ 9,458 (7,771)
Deferred revenue ............................................. -- (7,400)
------------ ------------
Total adjustments ............................................ 11,945 (9,905)
------------ ------------
Net cash used for operating activities ....................... (71,525) (67,564)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment, net ..................... (2,050) (3,439)
Proceeds from sale of equipment .............................. -- 4
Purchases of investments ..................................... (38,589) (127,669)
Maturities and sales of investments .......................... 94,713 144,853
------------ ------------
Net cash provided by investing activities .................... 54,074 13,749
------------ ------------
Cash flows from financing activities:
Issuance of common stock ..................................... 2,814 1,392
Restricted cash .............................................. 3,250 (788)
Repayments of long-term debt ................................. (7,033) (2,381)
Proceeds from term loan borrowings ........................... 5,000 685
Proceeds from sale/leaseback of equipment .................... 407 --
Repayments of capital lease obligations ...................... (67) (470)
------------ ------------
Net cash provided by (used for) financing activities ......... 4,371 (1,562)
------------ ------------
Net decrease in cash and cash equivalents ...................... (13,080) (55,377)
Effect of changes in foreign exchange rates on cash balances ... 10 128
Cash and cash equivalents, beginning of period ................. 53,551 120,322
------------ ------------
Cash and cash equivalents, end of period ....................... $ 40,481 $ 65,073
============ ============
Supplemental non-cash investing and financing activities:
Issuance of common stock to Eli Lilly ........................ $ 8,500 --
Issuance of common stock to ACS Dobfar ....................... -- $ 2,000
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
4
<Page>
CUBIST PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Cubist Pharmaceuticals, Inc., or Cubist, is a biopharmaceutical company
focused on the research, development and commercialization of anti-infective
drugs. On September 12, 2003, the United States Food and Drug Administration
(the FDA) approved Cubicin(TM) (daptomycin for injection) for sale in the United
States. Cubist is headquartered in Lexington, Massachusetts.
B. ACCOUNTING POLICIES
BASIS OF PRESENTATION
These unaudited condensed consolidated financial statements should be
read in conjunction with our Annual Report on Form 10-K for the fiscal year
ended December 31, 2002 and the financial statements and footnotes included
therein. In the opinion of management, the condensed consolidated financial
statements include all adjustments, consisting of only normal recurring
accruals, necessary to present fairly the financial position, results of
operations and cash flows of Cubist and our wholly owned subsidiary. Our
accounting policies are described in the Notes to the Consolidated Financial
Statements in our 2002 Annual Report on Form 10-K and updated, as necessary, in
this Form 10-Q. Interim results are not necessarily indicative of the operating
results for the full year. All sales and marketing departmental expenses have
been reclassified from general and administrative expenses for prior year
financial statements to conform to the 2003 presentation.
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 because potential common shares from stock
options, warrants, convertible debt and notes payable are antidilutive for all
periods presented and are therefore excluded from the calculation. At September
30, 2003 and 2002, options to purchase 5,485,516 and 4,997,934 shares of common
stock, respectively, warrants to purchase 16,459 and 1,478,359 shares of common
stock, respectively, and convertible debt and notes payable convertible into
4,106,450 and 4,106,450 shares of common stock, respectively, were not included
in the computation of diluted net loss per share since their inclusion would be
antidilutive.
COMPREHENSIVE LOSS
Comprehensive loss is comprised of only net loss as there was no other
comprehensive income (loss) for the three and nine months ended September 30,
2003 and 2002, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure." This statement, which
is effective for fiscal years ending after December 15, 2002, amends Statement
of Financial Accounting Standards No. 123 "Accounting for Stock Issued to
Employees" ("SFAS 123") and provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
compensation. In addition, Statement No. 148 amends the disclosure requirements
of Statement No. 123 to require prominent disclosures in both the annual and
interim financial statements about the method of accounting for stock-based
compensation and the effect of the method used on reported results.
Cubist has several stock-based compensation plans. We apply APB Opinion
No. 25 "Accounting for Stock Issued to Employees" in accounting for qualifying
options granted to our employees under our plans and apply SFAS 123 for
disclosure purposes only. The SFAS 123 disclosures include pro forma net loss
and net loss per share as if the fair value-based method of accounting had been
used.
5
<Page>
If compensation for employee options had been determined based on SFAS 123,
Cubist's pro forma net loss, and pro forma net loss per share for the three and
nine months ending September 30, would have been as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(in thousands except per share data)
Reported net loss ................................................ $ (34,208) $ (16,996) $ (83,470) $ (57,659)
Add: Stock-based compensation recorded in net loss, as reported.. 163 123 524 688
Deduct: Total stock-based employee compensation expense determined
under fair value-based method for all awards, net of related tax
effects .......................................................... (5,106) (7,690) (16,416) (31,369)
---------- ---------- ---------- ----------
Pro forma net loss ............................................... $ (39,151) $ (24,563) $ (99,362) $ (88,340)
========== ========== ========== ==========
Reported basic and diluted loss per share ........................ $ (1.12) $ (0.60) $ (2.80) $ (2.02)
Pro forma basic and diluted loss per share ....................... $ (1.28) $ (0.86) $ (3.34) $ (3.10)
</Table>
The fair value of each stock option was estimated on the date of grant
using the Black-Scholes option-pricing model under the accelerated method. The
following weighted-average assumptions were used:
<Table>
<Caption>
2003 2002
------- -------
Expected stock price volatility 100% 100%
Risk free interest rate 3.7% 3.5%
Expected annual dividend yield per share 0% 0%
Expected life of options 7 years 7 years
</Table>
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The new statement
requires that those instruments be classified as liabilities in statements of
financial position. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
30, 2003. The adoption of this statement did not have a material impact on our
consolidated financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement will be effective in fiscal year 2004
for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. We do not expect the adoption of
this statement to have a material impact on our consolidated financial position
or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46,
"Consolidation of Variable Interest Entities," to expand upon and strengthen
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
Until now, one company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 changes that by requiring a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN 46 also requires
disclosures about variable interest entities that the company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003, and to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. The
adoption of FIN 46 had no effect on Cubist's results of operations and financial
position.
6
<Page>
In November 2002, the FASB Emerging Issues Task Force reached consensus
on EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." EITF No. 00-21 addresses the accounting treatment for
arrangements that provide the delivery or performance of multiple products or
services where the delivery of a product, system or performance of services may
occur at different points in time or over different periods of time. EITF No.
00-21 requires the separation of the multiple deliverables that meet certain
requirements into individual units of accounting that are accounted for
separately under the appropriate authoritative accounting literature. EITF No.
00-21 is applicable to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 had no effect on
Cubist's results of operations and financial position as of September 30, 2003.
C. GUARANTEES
In November 2002, the FASB issued FASB Interpretation No. 45, or FIN
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation of
FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No.
34." FIN 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor recognize, at
the inception of a guarantee, a liability for the fair value of certain
guarantees. The initial recognition and measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. Any indemnification provisions entered into prior to December
31, 2002 were grandfathered under the provisions of FIN 45. The adoption of FIN
45 did not have a material effect on Cubist's results of operations and
financial position.
Pursuant to Article 7 of Cubist's Amended and Restated By-Laws, Cubist
has agreed to indemnify any person who is made a party to any action or
threatened with any action as a result of such person's serving or having served
as an officer or director of Cubist or having served, at our request, as an
officer or director of another company. The indemnification does not apply if
the person is adjudicated not to have acted in good faith in the reasonable
belief that his or her actions were in the best interests of Cubist. The
indemnification obligation survives termination of the indemnified party's
involvement with Cubist but only as to those claims arising from such person's
role as an officer or director. The maximum potential amount of future payments
that Cubist could be required to make under the By-Law provision is unlimited;
however, we have director and officer insurance policies that, in most cases,
would limit our exposure and enable us to recover a portion of any future
amounts paid. In addition, Cubist has not made any payments under this
indemnification. The estimated fair value of these indemnification provisions
is minimal and accordingly, we have no liabilities recorded for these
agreements as of September 30, 2003.
Cubist typically includes customary indemnification provisions in its
agreements with other companies in the ordinary course of business, typically
with business partners, contractors, and clinical sites. Under these provisions,
Cubist generally indemnifies and holds harmless the indemnified party for losses
suffered or incurred by the indemnified party as a result of the Company's
activities. These indemnification provisions generally survive termination of
the underlying agreement. The maximum potential amount of future payments Cubist
could be required to make under these indemnification provisions is unlimited.
Cubist has not incurred material costs to defend lawsuits or settle claims
related to these indemnification agreements. As a result, the estimated fair
value of these agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of September 30, 2003.
D. BUSINESS AGREEMENTS
MANUFACTURING, PACKAGING AND DISTRIBUTION AGREEMENTS
Cubist has entered into various manufacturing agreements with ACS
Dobfar SpA, Abbott Laboratories and DSM Capua SpA (these agreements are fully
described in our 2002 Annual Report on Form 10-K) in 2000 and 2001.
During the second quarter of 2003, we entered into a distribution
agreement with Integrated Commercialization Solutions, Inc. or ICS. Per the
agreement, ICS will be the distributor of CUBICIN during the term of the
agreement.
During the third quarter of 2003, Cubist entered into a packaging
agreement with Cardinal Health PTS, Inc., or Cardinal. Per the agreement,
Cardinal will package CUBICIN during the term of the agreement.
Cubist made payments related to the Company's various manufacturing
agreements during the nine months ended September 30, 2003 and September 30,
2002 in the aggregate of $5.2 million (with $960,000 payments for Inventory
and the remaining $4.3 million recorded as research and development expenses)
and $3.3 million (all recorded as research and development expenses)
respectively.
7
<Page>
LICENSING AGREEMENTS
In July 2003, Cubist entered into an amendment to the original license
agreement with Eli Lilly and provided Eli Lilly with 723,619 shares of common
stock valued at $8.0 million, in consideration for a 1% reduction in the royalty
rates under the license agreement. Costs of the royalty reduction have been
recorded as an intangible asset. In September 2003, Cubist issued 38,922 shares
of common stock valued at $0.5 million as a milestone payment to Eli Lilly
related to Cubist receiving FDA approval for the commercial sale of CUBICIN and
recorded the value as an intangible asset. Cubist will amortize the
intangible assets over 13 years, which is the remaining life of the licensing
agreement with Eli Lilly.
On July 31, 2002, Cubist entered into a license agreement with Sandoz
GmbH (formerly known as Biochemie GmbH), or Sandoz, for the exclusive worldwide
rights to CAB-175, a proprietary compound, for the purpose of developing and
commercializing CAB-175. In consideration for such license, we made an upfront
license fee payment upon execution of the license agreement that was recorded as
research and development expense in 2002. We will be required to pay up to $24.0
million in royalties to Sandoz on worldwide sales of any drug developed and
commercialized from any products derived from this license. On July 16, 2003,
Cubist and Sandoz amended the license agreement in order to modify certain
success criteria for studies to be performed by Sandoz under the agreement.
On June 27, 2001, Cubist and Syrrx, Inc., or Syrrx, announced the
formation of an anti-infective drug discovery collaboration. The joint effort
used Syrrx and Cubist technologies for the high-throughput characterization of
novel anti-infective drug targets and rational drug design. As a result of our
decision in the first quarter of 2003 to discontinue our target-based drug
discovery program, or TBDD, the parties ceased work under this collaboration and
terminated the relationship. We recorded an impairment charge of $134,000 during
the nine months ended September 30, 2003, relating to our equity investment in
Syrrx based upon pricing derived from a recent round of financing. Our equity
investment at September 30, 2003, after the impairment charge, was $166,000.
On February 3, 1999, we entered into a research and license agreement
with Novartis Pharma AG, or Novartis, to use our proprietary VITA functional
genomics technology to validate and develop assays for anti-infective targets
and to identify new compounds for development as anti-infective agents. In
exchange for the license, Novartis funded a research program for a period of
four years. In February 2003, the collaboration between Cubist and Novartis
was completed.
On November 7, 1997, we entered into a license agreement with Eli Lilly
and Company, or Eli Lilly, pursuant to which Cubist acquired exclusive worldwide
rights to develop, manufacture and market daptomycin. In exchange for such
license, Cubist paid an upfront license fee and, if certain drug development
milestones were achieved, agreed to pay milestone payments by issuing shares of
common stock to Eli Lilly. In addition, the license agreement required Cubist to
pay royalties to Eli Lilly on worldwide sales of daptomycin. On February 19,
1999, Cubist issued shares of common stock as a milestone payment pursuant to,
and in accordance with, the terms of the license agreement. The value of the
common stock was recorded as research and development expense. On October 6,
2000, Cubist and Eli Lilly terminated the first license agreement and entered
into a new agreement in order to expand the field of the original license. In
December 2002, Cubist issued shares of common stock as a milestone payment to
Eli Lilly related to our filing of a New Drug Application for CUBICIN and
recorded the value of the shares as research and development expense.
During the nine months ended September 30, 2003 and 2002, we made
payments related to our various license agreements (which agreements are fully
described in our 2002 Annual Report on Form 10-K), in the aggregate of $1.5
million, for both periods respectively, which were recorded as research and
development expense.
8
<Page>
E. ACCRUED EXPENSES
Accrued expenses are comprised of the following components:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
(in thousands)
Accrued Payroll $ 2,059 $ 1,453
Accrued Benefit Costs 1,095 111
Accrued Manufacturing Costs 1,407 --
Accrued Lease Termination Costs 8,739 --
Deferred Rent 261 231
Other Accrued Costs 3,571 1,869
------------- -------------
$ 17,132 $ 3,664
============= =============
</Table>
F. ACCRUED CLINICAL TRIAL EXPENSES
Accrued clinical trial expenses are comprised of amounts owed to
third-party clinical research organizations, or CROs, for research and
development work performed on behalf of Cubist. At each period end, we evaluate
the accrued clinical trial expenses balance based upon information received from
each CRO, and ensure that the balance is appropriately stated. The accrued
clinical trial expenses balance of $371,000 at September 30, 2003 represents our
best estimate of amounts owed for clinical trial services performed through
September 30, 2003 based on all information available. Such estimates are
subject to change as additional information becomes available.
G. INVENTORY
Inventories are stated at lower of cost or market with cost determined
under the first-in / first-out ("FIFO") method. The components of inventories
are as follows:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
(in thousands)
Raw materials $ 383 $ --
Work in process 905 --
------------- -------------
Inventories $ 1,288 $ --
============= =============
</Table>
Raw material and work in process inventories will be reviewed for
obsolescence and alternative or future use by reviewing manufacturing plans,
future demand, and market conditions. Should it be determined that any inventory
items have become obsolete, we would record an inventory write-down.
H. INTANGIBLE ASSETS
Intangible assets consisted of the following at September 30, 2003 and
December 31, 2002:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(in thousands)
Patents $ 4,892 $ 4,867
Intellectual property and processes and other intangibles 22,420 11,451
------------- ------------
27,312 16,318
Less: Accumulated amortization - patents (1,575) (1,321)
Accumulated amortization - intellectual property (5,648) (5,072)
------------- ------------
Intangible assets, net $ 20,089 $ 9,925
============= ============
</Table>
9
<Page>
Amortization expense was $369,000 and $373,000 for the three months
ended September 30, 2003 and 2002, and $831,000 and $1,117,000 for the nine
months ended September 30, 2003 and 2002, respectively.
The estimated aggregate amortization expenses for intangible assets
owned as of September 30, 2003 for each of the succeeding years is as follows:
<Table>
<Caption>
(in thousands)
Remainder of 2003 $ 613
2004 2,622
2005 2,605
2006 2,605
2007 2,605
Thereafter 9,039
-------------
$ 20,089
-------------
</Table>
I. CAPITAL AND OPERATING LEASE ARRANGEMENTS
In the first quarter of 2003, Cubist entered into a sale/leaseback
arrangement with General Electric Capital Corporation, or GE Capital, to finance
lab equipment up to the value of $2.0 million. No gain or loss was recorded as a
result of this sale/leaseback. The transaction is accounted for as a capital
lease. During the first quarter of 2003, $407,000 of lab assets had been sold to
GE Capital and leased back to Cubist. The equipment is leased for a period of 42
months. The amount outstanding under capital lease obligations at September 30,
2003 was $340,000.
The Company's UK subsidiary currently leases 18,000 square feet of
commercial office and laboratory space in Slough, England pursuant to a term
lease that expires in April 2005. Cubist has the right to terminate the lease
upon three months notice. In February 2003, the UK subsidiary also leased
approximately 30,000 square feet of additional space in Slough, England. The
term of the new lease is fifteen years. At September 30, 2003, the aggregate
outstanding amount of the UK lease commitments was $22.2 million.
During the third quarter of 2003, Cubist determined that it would not
occupy the new facility in Slough, England and subsequently recorded a lease
termination charge of $9.1 million in September 2003 to general and
administrative expense, representing management's best estimate of the total
loss exposure. The components of the lease termination charge of $9.1 million
recorded were $8.6 million of anticipated lease termination costs, a $1.2
million write off of construction -in -progress costs, $74,000 in other
tenant-related costs, and an elimination of the deferred rent liability of
$850,000 related to the facility's lease term.
The significant components of the lease termination charge are as follows (in
thousands):
LEASE TERMINATION CHARGE
<Table>
<Caption>
Provision for the
Nine Months Ended Non-Cash Accrual as of
September 30, 2003 Write off September 30, 2003
------------------ ------------------ ------------------
Lease termination costs $ 8,665 $ -- $ 8,665
Construction-in-progress costs 1,211 1,211 --
Tenant-related costs 74 -- 74
Elimination of deferred rent (850) (850) --
------------------ ------------------ ------------------
Total charge $ 9,100 $ 361 $ 8,739
================== ================== ==================
</Table>
As a result of Cubist's lease termination plan, an expense was recorded
as an element of general and administrative expenses, within the Unaudited
Condensed Consolidated Statement of Operations at September 30, 2003, in
accordance with SFAS 146 "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires that a liability be recorded for a cost
associated with an exit or disposal activity at its fair value in the period
during which the liability is incurred. The liability for the anticipated lease
termination charge was calculated using probability-weighted cash flows.
Accordingly, cash flows result from Cubist's assumptions and estimates regarding
the potential outcomes of the anticipated lease restructuring, including
contractual rental and build-out commitments, lease buy-out, time to sub-lease
or buy-out the lease, sub-lease rental rates and facility operating costs. As
prescribed by
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SFAS 146, a credit-adjusted risk-free rate was used to discount the estimated
cash flows; this rate was approximately 9% for the period ending September 30,
2003. The expense related to the lease restructuring charge and accrual requires
Cubist to make significant estimates and assumptions. These estimates and
assumptions will be evaluated and adjusted as appropriate for changes in
circumstances. It is reasonably possible that such estimates could change in the
future resulting in additional adjustments, and the effect of any such
adjustments could be material.
J. SUBSEQUENT EVENTS
On October 2, 2003, Cubist signed a License Agreement and a
Manufacturing and Supply Agreement with Chiron Healthcare Ireland Ltd, or
Chiron, for the development and commercialization of CUBICIN in Western and
Eastern Europe, Australia, New Zealand, India and certain Central American,
South American and Middle Eastern countries. Chiron paid Cubist an up-front
licensing fee of $8.0 million, which will be recorded as deferred revenue. Per
the License Agreement, Cubist is entitled to receive from Chiron additional cash
payments of up to $32.0 million upon achievement of certain development and
sales milestones.
On October 2, 2003, Cubist also entered into a Stock Purchase Agreement
with Chiron pursuant to which Chiron purchased $10 million of our common stock
at a 50% premium. The premium paid will be allocated to the License and
Manufacturing and Supply Agreements and will be accounted for as part of the
up-front payment.
On October 21, 2003, Cubist announced the completion of the sale of
8,571,410 million shares of common stock at $10.50 per share which includes
1,118,010 shares sold as a result of the exercise, in full, by the underwriters
of their option to purchase additional shares of our common stock. Gross
proceeds from the stock offering totaled approximately $90.0 million. Proceeds
to Cubist, net of $5.4 million in underwriters' commissions and discounts,
totaled $84.6 million.
On November 4, 2003, Cubist announced the shipment of the first
commercial orders of CUBICIN.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report 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
Prospectus Supplement filed on October 16, 2003. The forward-looking statements
contained herein represent our judgment as of the date of this quarterly report,
and we caution readers not to place undue reliance on such statements. Except as
required under the federal securities laws and the rules and regulations of the
SEC, we do not have any intention or obligation to update publicly any forward
- -looking statements after the distribution of this quarterly report, whether as
a result of new information, future events, changes in assumptions, or
otherwise.
Forward-looking statements include information concerning possible or
assumed future results of our operations, including, but not limited to,
statements regarding:
- the acceptance of daptomycin by physicians, patients, third party
payors and the medical community;
- whether we will receive, and the potential timing of, regulatory
approvals or clearances to market daptomycin for additional
indications and other potential products;
- our expectations regarding clinical trials and development time
lines;
- our ability to manufacture daptomycin on a commercial scale;
- our ability to successfully develop satisfactory sales and
marketing capabilities;
- our ability to use our research and development and technology
platforms and methods to identify potential product candidates;
- our expectations regarding selection of clinical development
candidates;
- our expectation regarding our ability to further identify, develop
and commercialize products in the current years;
- the continuation of our collaborations with our partners and our
ability to establish and maintain successful manufacturing, sales
and marketing, distribution and development collaborations;
- our future capital requirements and our ability to finance our
operations;
- the timing of new product launches; and
- 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:
- our ability to secure regulatory approvals for additional
indications for daptomycin, foreign regulatory approvals of
daptomycin and regulatory approvals of our other drug candidates;
- our ability to conduct successful clinical trials in a timely
manner;
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- the acceptance of daptomycin by physicians, patients, third party
payors and the medical community;
- competition, particularly with respect to daptomycin;
- our ability to develop satisfactory sales and marketing
capabilities;
- our ability to manufacture daptomycin on a commercial scale;
- our dependence upon pharmaceutical and biotechnology
collaborations;
- our ability to finance our operations;
- costs resulting from product liability claims;
- our ability to protect our proprietary technologies;
- our ability to discover or in-license drug candidates and develop
and achieve commercial success for drug candidates;
- risks relating to international operations;
- risks relating to key employees, including new members of
management;
- risks relating to strategic acquisitions; and
- a variety of risks common to our industry, including but not
limited to, ongoing regulatory review, litigation relating
intellectual property, and legislative or regulatory changes.
Cubist(R), and CUBICIN(TM) are our trademarks. This quarterly report
contains trademarks and trade names of other companies.
OVERVIEW
Cubist Pharmaceuticals, Inc., or Cubist, is a biopharmaceutical company
focused on the research, development and commercialization of anti-infective
drugs.
CUBICIN, our flagship drug, was approved on September 12, 2003, by the
FDA for sale in the United States. CUBICIN, the brand name for daptomycin for
injection, is approved for the treatment of complicated skin and skin structure
infections, or cSSSI, caused by certain Gram-positive bacteria. CUBICIN is the
first antibiotic from a new class of anti-infectives called lipopeptides. Under
laboratory conditions, CUBICIN exhibits rapid bactericidal activity against most
clinically significant Gram-positive bacteria, including multi-drug resistant
bacteria.
In July 2002, we acquired the exclusive worldwide rights to develop and
commercialize CAB-175. CAB-175 is an investigational cephalosporin antibiotic in
early-stage clinical development and has demonstrated IN VITRO activity against
most clinically relevant Gram-positive and Gram-negative bacteria, including
important resistant species. In June 2003, we began a multi-dose Phase 1 trial
in the United States for CAB-175 following the filing of an Investigational New
Drug application, or IND.
We have also acquired the worldwide rights to research, develop,
manufacture and sell an oral version of ceftriaxone. Intravenous ceftriaxone is
a third-generation cephalosporin that has demonstrated a broad spectrum of
bactericidal antimicrobial activity against Gram-positive and Gram-negative
bacteria. We have developed capsule versions enabling oral delivery of
ceftriaxone and are continuing pre-clinical studies to determine the suitability
of these formulations for human clinical development.
In addition to our clinical and pre-clinical development programs, we
are also pursuing multiple opportunities in new drug discovery. Focused
exclusively in the anti-infective space, we utilize a variety of technologies to
identify novel compounds and molecules with broad spectra of activity against
bacterial pathogens. Efforts are underway using natural product sources and
screening methods to discover novel antimicrobial drugs. Our "10M Challenge"
program challenges our scientists to screen through 10 million unique microbes
during 2003. Using proprietary screening
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technologies, we aim to accelerate the discovery of new antibiotics isolated
from approximately 25,000 soil samples collected by our employees throughout
2002. Our natural product technologies also provide proprietary methods for
generating improved versions of existing drugs by altering the metabolic
pathways responsible for their production, which are focused on the discovery of
daptomycin-like peptides, with a goal of creating a "next-generation"
daptomycin.
Since our incorporation, we have experienced significant net losses.
Through September 30, 2003, we have an accumulated deficit of $344 million. We
expect to incur significant additional operating losses over the next several
years due to the implementation of manufacturing, distribution, marketing and
sales capabilities as well as continued research and development efforts,
pre-clinical testing and clinical trials.
RESULTS OF OPERATIONS
TOTAL REVENUES
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ ------------------------------------
% %
2003 2002 CHANGE 2003 2002 CHANGE
---------- ---------- ---------- ---------- ---------- ----------
(in millions)
Novartis - Collaboration Revenues $ -- $ 0.9 (100)% $ 0.3 $ 2.4 (88)%
Gilead Sciences - License Fee -- 4.6 (100)% -- 7.4 (100)%
SBIR Grants -- 0.3 (100)% 0.1 0.6 (83)%
---------- ---------- ---------- ---------- ---------- ----------
Total Revenues $ -- $ 5.8 (100)% $ 0.4 $ 10.4 (96)%
========== ========== ========== ========== ========== ==========
</Table>
The decrease in revenues in the three and nine months ended September
30, 2003 as compared to the same period in 2002 was mainly attributable to the
mutual termination, in September 2002, of a European commercialization agreement
with Gilead Sciences, as well as the completion of a research collaboration with
Novartis in February 2003.
TOTAL OPERATING EXPENSES
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
% %
2003 2002 CHANGE 2003 2002 CHANGE
---------- ---------- -------- ---------- ---------- --------
(in millions)
Research and Development $ 11.9 $ 14.6 (18)% $ 41.1 $ 43.6 (6)%
Sales and Marketing 5.8 1.7 241% 11.9 5.0 138%
General and Administrative 13.2 4.0 230% 21.8 13.3 64%
---------- ---------- -------- ---------- ---------- --------
Total Operating Expenses $ 30.9 $ 20.3 53 % $ 74.8 $ 61.9 21%
========== ========== ======== ========== ========== ========
</Table>
The decrease in research and development for the three and nine months
ended September 30, 2003, as compared to the same periods of the prior year,
was due to a $1.1 million decrease in manufacturing expenses during the three
months ended September 30, 2003 related to manufacturing resources being
utilized for the production of commercial inventory as compared to these same
resources being used for the development and validation of the manufacturing
process for the three and nine months ended September 30, 2002. The decrease
is also due to the termination of our TBDD research group, in the first three
months of 2003, which resulted in an expense reduction of $0.7 million and
$1.3 million for the three and nine months ended September 30, 2003,
respectively. The decrease is also attributable to a $1.5 million payment
made in July 2002 to Sandoz for the exclusive worldwide rights to CAB-175.
The increase in sales and marketing expense for the three and nine
months ended September 30, 2003 as compared to the same periods of 2002 was
mainly due to the hiring of a national sales force, which increased the expense
by $3.0 million and $4.4 million, respectively. General marketing cost increases
of $1.0 million and $2.4 million for the three and nine months of 2003,
respectively, were due to product-launch related activities. Sales and marketing
costs are expected to increase over the next year as activity in these areas
ramp up related to the product launch in the fourth quarter of 2003.
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<Page>
General and administrative expense growth for the three and nine months
ended September 30, 2003, over the same periods in 2002, was mainly due to
lease termination charges of $9.1 million recorded in the third quarter of
2003 related to management's decision to cease use of the new facility in
Slough, UK. The termination charge assumes a weighted-average of future cash
flows from several buyout and sublease scenarios representing management's
best estimate of possible outcomes.
The significant components of the lease termination charge are as follows (in
thousands):
LEASE TERMINATION CHARGE
<Table>
<Caption>
Provision for the
Nine Months Ended Non-Cash Accrual as of
September 30, 2003 Write off September 30, 2003
------------------ ------------------ ------------------
Lease termination costs $ 8,665 $ -- $ 8,665
Construction-in-progress costs 1,211 1,211 --
Tenant-related costs 74 -- 74
Elimination of deferred rent (850) (850) --
------------------ ------------------ ------------------
Total charge $ 9,100 $ 361 $ 8,739
================== ================== ==================
</Table>
As a result of Cubist's lease termination plan, an expense was recorded
as an element of general and administrative expenses, within the Unaudited
Condensed Consolidated Statement of Operations at September 30, 2003, in
accordance with SFAS 146 "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires that a liability be recorded for a cost
associated with an exit or disposal activity at its fair value in the period
during which the liability is incurred. The liability for the anticipated lease
termination charge was calculated using probability-weighted cash flows.
Accordingly, cash flows result from Cubist's assumptions and estimates regarding
the potential outcomes of the anticipated lease restructuring, including
contractual rental and build-out commitments, lease buy-out, time to sub-lease
or buy-out the lease, sub-lease rental rates and facility operating costs. As
prescribed by SFAS 146, a credit-adjusted risk-free rate was used to discount
the estimated cash flows; this rate was approximately 9% for the period
ending September 30, 2003. The expense related to the lease restructuring
charge and accrual requires Cubist to make significant estimates and
assumptions. These estimates and assumptions will be evaluated and adjusted
as appropriate for changes in circumstances. It is reasonably possible that
such estimates could change in the future resulting in additional
adjustments, and the effect of any such adjustments could be material.
TOTAL OTHER EXPENSE, NET
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- --------------------------------------
% %
2003 2002 CHANGE 2003 2002 CHANGE
---------- ---------- ---------- ---------- ---------- ----------
(in millions)
Interest Income $ 0.4 $ 1.2 (67)% $ 1.7 $ 4.2 (60)%
Interest Expense (3.4) (3.6) (6)% (10.2) (10.4) (2)%
Other Income (Expense) (0.3) (0.1) 200 % (0.5) 0.0 (100)%
---------- ---------- ---------- ---------- ---------- ----------
Total Other Expense, Net $ (3.3) $ (2.5) 32 % $ (9.0) $ (6.2) 45 %
========== ========== ========== ========== ========== ==========
</Table>
The decreases in interest income for the three and nine months ended
September 30, 2003 as compared to the same periods of the prior year was due
primarily to the decrease in cash, cash equivalents and investments during
the periods in 2003, as well as lower average yields on invested funds.
Interest expense for the third quarter of 2003 was $3.4 million
compared to $3.6 million in the same period of 2002, a decrease of $200,000 or
6%. This decrease was due primarily to our current term loan having a lower
interest rate than the term loan it replaced.
The decrease in other income (expense) for the nine months ended
September 30, 2003 was due primarily to an impairment charge of $134,000 in the
first quarter of 2003 relating to an equity investment in Syrrx, as well as a
reduction in gains from sales of fixed assets of $221,000.
LIQUIDITY AND CAPITAL RESOURCES
Currently, Cubist requires cash to fund our working capital needs, to
purchase capital assets, and to pay our debt service, including principal,
interest and capital lease obligations. Historically, we have funded our cash
requirements through the following methods:
- payments from our strategic collaborators including license
fees, sponsored research funding and research grants;
- equity and debt financings;
- equipment financings; and
- interest earned on invested capital.
In the future, we expect to continue to fund our cash requirements from
these sources as well as sales of Cubicin. We anticipate sustained cash outflows
in the next year relating to the continued development and commercialization of
daptomycin and the continued development of our other drugs, CAB-175 and oral
ceftiaxone.
Our total cash, cash equivalents and investments at September 30, 2003
was $80.8 million compared to $151.2 million, excluding restricted cash, at
December 31, 2002. Based on the cash raised via our agreement with Chiron and
our equity financing, both described in Item 1. Note I (Subsequent Events), we
now believe that our existing cash, cash equivalents, investments and cash flows
from revenues will be sufficient to fund our operating expenses, debt
obligations, milestone payments under our collaborative agreements and capital
requirements under our current business plan through the first half of 2005.
On March 7, 2003, we filed a shelf registration statement on Form S-3
to register the offering on a delayed or continuous basis of $75.0 million of
common stock. The registration statement became effective on June 23, 2003. On
October 21, 2003, we completed the sale of 8,571,410 shares of common stock at
$10.50 per share. Net cash proceeds from this offering were $84.6 million.
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<Page>
In April 2003, we entered into a term loan under which we may borrow up
to $5.0 million. Advances under this facility are to be repaid over a 24-month
period, commencing on June 30, 2003. Interest on the borrowings accrues at the
bank's LIBOR rate plus a margin of 2.75% (3.88% at September 30, 2003).
Borrowings under the facility are collateralized by all of our assets other than
intellectual property and real estate. During the second quarter of 2003, we
drew down the entire $5.0 million under this facility. During the nine months
ended September 30, 2003, we paid down $1.0 million of our loan balance.
Therefore, the outstanding borrowings under this facility totaled $4.0 million
at September 30, 2003.
During the first quarter of 2003, we entered into a leasing arrangement
with GE Capital to finance lab equipment up to the value of $2.0 million. No
gain or loss was recorded as a result of this sale/leaseback. The transaction is
accounted for as a capital lease. During the first nine months of 2003, $407,000
of lab assets were sold to GE Capital and were leased back to Cubist. The
equipment is leased for a period of 42 months. The amount outstanding under
capital lease obligations at September 30, 2003 was $340,000.
CASH FLOWS
Cubist used $71.5 million of cash for operating activities for the nine
months ended September 30, 2003 and $67.6 million for the comparable period
in 2002. The use of operating cash was offset by a non-cash lease termination
charge of $361,000 and a Syrrx equity investment value impairment charge of
$134,000. The non-cash offset for depreciation and amortization of property
and equipment and intangible assets was $4.0 million. The change in prepaid
expenses, inventory, and other current assets of $3.2 million represents use
of cash relating to the production of inventory, which commenced in the third
quarter of 2003. The use of cash to increase the amount of inventory on hand
is a trend that is foreseen through the end of fiscal year 2004, in order to
support the commercial sales of CUBICIN. Overall, the principal use of cash
for operating activities in both 2003 and 2002 was to fund our operating
expenses as we progressed from a research and development company to a
commercial pharmaceutical company.
Investing activities provided $54.1 million and $13.7 million of cash
for the nine months ended September 30, 2003 and 2002. Maturities of long and
short-term investments provided the principal source of funds while purchases of
marketable securities accounted for the largest use of cash for investing
activities.
Through September 30, 2003, Cubist provided net cash from financing
activities of $4.4 million. The primary source of cash was the release of $3.3
million of restricted cash upon the pay down of our previous term loan. In
addition, we received $5.0 million in cash from our new term loan and $2.8
million from issuing common stock. The primary use of cash for the nine-month
period was the repayment of $7.0 million in debt obligations.
COMMITMENTS AND CONTINGENCIES
Our major outstanding contractual obligations relate to convertible
notes, a term loan and our facilities leases.
The aggregate outstanding principal of our convertible notes was $204.0
million as of September 30, 2003. These notes consist of $165.0 million of
5 1/2% convertible subordinated notes due in 2008, and $39.0 million of 8 1/2%
senior convertible notes due in 2005. Both the convertible subordinated notes
and the senior convertible notes require semi-annual interest payments through
maturity.
The aggregate outstanding amount of the contractual obligations and
commercial commitments is $395.3 million as of September 30, 2003. These
obligations and commitments represent maximum payments based on current
operating forecasts. Certain of the commitments could be reduced if changes to
our operating forecast occur in the future.
Our UK subsidiary leases 18,000 square feet of commercial office and
laboratory space in Slough, England pursuant to a term lease that expires in
April 2005. We have the right to terminate the lease upon three months notice.
In February 2003, the UK subsidiary also leased approximately 30,000 square feet
of additional space in Slough, England, for a term of fifteen years. The
aggregate outstanding amount of the UK lease commitments is $22.2 million. In
September 2003, we decided not to occupy the additional facility and we are
pursuing options for the future of this additional space including subleasing
and buyout of the lease. Accordingly, we have recorded a lease termination
charge of $9.1 million to general and administrative expenses, representing
management's best estimate of the total loss exposure on the additional
facility's lease.
The following table summarizes our contractual obligations and
commercial commitments as of September 30, 2003 and the effect such obligations
and commitments are expected to have on our liquidity and cash flow in the
future periods:
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<Table>
<Caption>
LAST THREE
MONTHS OF 2008 AND
2003 2004 2005 2006 2007 THEREAFTER TOTAL
--------- --------- --------- --------- --------- ---------- ---------
(IN MILLIONS)
CONTRACTUAL OBLIGATIONS:
Senior convertible notes ...... $ -- $ 3.3 $ 42.3 $ -- $ -- $ -- $ 45.6
Subordinated convertible notes. 4.5 9.1 9.1 9.1 9.1 174.0 214.9
Term loan ..................... 0.5 2.1 1.5 -- -- -- 4.1
Operating leases .............. 0.1 1.7 1.5 1.4 1.4 15.7 21.8
--------- --------- --------- --------- --------- ---------- ---------
Total contractual obligations $ 5.1 $ 16.2 $ 54.4 $ 10.5 $ 10.5 $ 189.7 $ 286.4
COMMERCIAL COMMITMENTS:
Clinical CRO costs ............ $ 1.5 $ 2.1 $ -- $ -- $ -- $ -- $ 3.6
Manufacturing and distribution. 1.7 7.2 8.8 11.2 13.8 32.8 75.5
Licenses and collaborations ... 1.5 3.6 4.5 2.2 5.2 12.8 29.8
--------- --------- --------- --------- --------- ---------- ---------
Total commercial commitments. $ 4.7 $ 12.9 $ 13.3 $ 13.4 $ 19.0 $ 45.6 $ 108.9
</Table>
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
In our Annual Report on Form 10-K for the year ended December 31, 2002,
we disclosed our critical accounting policies and estimates upon which our
financial statements are derived. There have been no changes to these policies
since December 31, 2002. Readers are encouraged to review these disclosures in
conjunction with the review of this Form 10-Q.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The new statement
requires that those instruments be classified as liabilities in statements of
financial position. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
30, 2003. The adoption of this statement did not have a material impact on our
consolidated financial position or results of operations
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement will be effective in fiscal year 2004
for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. We do not expect the adoption of
this statement to have a material impact on our consolidated financial position
or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 or FIN 46,
"Consolidation of Variable Interest Entities," to expand upon and strengthen
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
Until now, one company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 changes that by requiring a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN 46 also requires
disclosures about variable interest entities that the company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003 and to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. The
adoption of FIN 46 had no effect on our results of operations and financial
position.
In November 2002, the FASB Emerging Issues Task Force reached consensus
on EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." EITF No. 00-21 addresses the accounting
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treatment for arrangements that provide the delivery or performance of multiple
products or services where the delivery of a product, system or performance of
services may occur at different points in time or over different periods of
time. EITF No. 00-21 requires the separation of the multiple deliverables that
meet certain requirements into individual units of accounting that are accounted
for separately under the appropriate authoritative accounting literature. EITF
No. 00-21 is applicable to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 has not had a material
effect on Cubist's results of operations and financial position as of September
30, 2003.
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, 2002, as described in
Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Cubist maintains disclosure controls and procedures designed to ensure
that it is able to collect the information it is required to disclose in the
reports it files with the Securities and Exchange Commission, or the SEC, and to
process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Based on their evaluation of Cubist's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of September 30, 2003, the Chief Executive and Chief Financial
Officers have concluded that such disclosure controls and procedures are
effective to ensure that information required to be disclosed in our periodic
reports filed under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified by the SEC's rules and regulations.
There have been no material changes in Cubist's internal controls over
financial reporting during the quarter ended September 30, 2003.
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PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 2003, we issued 723,619 shares of common stock valued at
$8.0 million to Eli Lilly and Co. in exchange for a 1% reduction in the
royalty obligation to Eli Lilly on commercial sales of CUBICIN. Cubist did
not receive proceeds from this sale.
In September 2003, we issued 38,922 shares of common stock valued at
$0.5 million as a milestone payment to Eli Lilly and Co. related to our receipt
of FDA approval for the commercial sale of CUBICIN. Cubist did not receive
proceeds from this sale.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits have been filed with this report:
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification pursuant to 18 U.S.C Section 1305, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C Section 1305, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Amended and Restated Corporate Governance Guidelines
99.2 Amended and Restated Code of Conduct and Ethics
(b) Reports on Form 8-K
The Company filed the following current report on Form 8-K during the
third quarter of 2003:
Form 8-K filed by Cubist with the Securities and Exchange Commission on
August 7, 2003, pursuant to Item 12 with respect to Cubist's press
release and transcript of the conference call relating to its second
quarter 2003 results.
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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 11, 2003 By:
/S/ David W.J. McGirr
-----------------------------------
David W.J. McGirr,
Senior Vice President and
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
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