This document contains and incorporates by reference ''forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. In some cases, these statements can be identified by the use of forward-looking terminology such as ''may," ''will," ''could," ''should," ''would," ''expect," ''anticipate," ''continue" or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition, or state trends and known uncertainties or other forward-looking information. You are cautioned that forward-looking statements are based on current expectations and are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including the risks and uncertainties described or discussed in the section entitled "Risk Factors" in this Quarterly Report. The forward-looking statements contained and incorporated herein represent our judgment as of the date of this Quarterly Report, and we caution readers not to place undue reliance on such statements. The information contained in this Quarterly Report is provided by us as of the date of this Quarterly Report, and, except as required by law, we do not undertake any obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise.

Forward-looking statements in this Quarterly Report include, without limitation, statements regarding:

† our expectations regarding our financial performance, including revenues, expenses, gross margins, capital expenditures and income taxes;

† our expectations regarding the commercialization of CUBICIN® (daptomycin for injection);

† our expectations regarding the strength of our intellectual property portfolio protecting CUBICIN and our patent infringement lawsuit against Teva Parenteral Medicines, Inc., or Teva, and its affiliates in connection with the February 9, 2009, notification to us by Teva that it has submitted an Abbreviated New Drug Application, or ANDA, to the U.S. Food and Drug Administration, or FDA, seeking approval to market a generic version of CUBICIN before the expiration of the patents covering CUBICIN;

† our expectations regarding the impact of ordinary course legal proceedings;

† our expectations regarding our drug candidates, including the development, regulatory review and commercial potential of such drug candidates and the costs and expenses related thereto;

† the continuation of our collaborations and our other significant agreements and our ability to establish and maintain successful manufacturing, supply, sales and marketing, distribution and development collaborations and other arrangements;

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

† the liquidity and credit risk of securities, particularly auction rate securities, that we hold as investments;

† our expectations regarding our agreement with AstraZeneca Pharmaceuticals, LP, or AstraZeneca;

† the impact of new accounting pronouncements; and

† our future capital requirements, capital expenditures and our ability to finance our operations, debt obligations and capital requirements.

Many factors could affect our actual financial results and could cause these actual results to differ materially from those in these forward-looking statements. These factors include the following:

† the level of acceptance of CUBICIN by physicians, patients, third-party payors and the medical community;

† any changes in the current or anticipated market demand or medical need for CUBICIN, including as a result of the economic downturn in the U.S. and around the world;

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

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

† an adverse result in the litigation that we filed against Teva to defend and/or assert our patents in connection with Teva's February 2009 notification to us that it has submitted an ANDA to the FDA seeking approval to market a generic version of CUBICIN and the expense and management time commitment associated with the litigation;

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

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

† our ability to successfully work with AstraZeneca with respect to promoting and supporting MERREM® I.V. (meropenem for injection) in the U.S., particularly in relation to establishing baseline sales under our commercial services agreement, and similar market and competitive factors with respect to MERREM in the U.S. as those described above with respect to CUBICIN;

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

† the impact of the results of ongoing or future trials for drug candidates that we are currently developing or may develop in the future;

† the impact of the results of ongoing or future trials for drug candidates that we are currently developing that are being or will be conducted by our collaborators and others for indications that we do not have rights to but are, nonetheless, in human populations that are of relevance to our developmental activities;

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

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

† our ability to discover, acquire or in-license drug candidates, the costs related thereto, and the high level of competition from other companies that are also seeking to discover, acquire and in-license the same or similar drug candidates;

† our ability to develop and achieve commercial success, and secure sufficient quantities of supply for such development and commercialization, for our existing and future drug candidates, particularly as we are managing multiple programs and opportunities and continue to seek to maximize the commercial success of CUBICIN and MERREM I.V.;

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

† whether the FDA accepts proposed clinical trial protocols in a timely manner for additional studies of CUBICIN or any other drug candidate we seek to initiate or continue testing in clinical trials;

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

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

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

† our dependence upon collaborations and alliances, particularly our ability to work effectively with our partners and our partners' ability to meet their obligations and perform effectively under our agreements;

†          our ability to finance our operations;



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

† our ability to protect our proprietary technologies; and

† a variety of risks common to our industry, including ongoing regulatory review, public and investment community perception of the industry, statutory or regulatory changes including with respect to federal and state taxation, and our ability to attract and retain talented employees.

Overview

This Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is provided in addition to the accompanying condensed consolidated financial statements and footnotes to assist the reader in understanding our results of operations, financial condition and cash flows. We have organized the MD&A as follows:

† Overview: This section provides a summary of our business, our performance during the three and nine months ended September 30, 2009, and our strategic initiatives.

† Results of Operations: This section provides a review of our results of operations for the three and nine months ended September 30, 2009 and 2008.

† Liquidity and Capital Resources: This section provides a summary of our financial condition, including our sources and uses of cash, capital resources, commitments and liquidity.

† Commitments and Contingencies: This section provides a summary of our material legal proceedings and commitments and contingencies that are outside our normal course of business, as well as our commitment to make potential future milestone payments to third parties as part of our various business agreements.

† Critical Accounting Policies and Estimates: This section describes our critical accounting policies and the significant judgments and estimates that we have made in preparing our condensed consolidated financial statements, as well as recently issued accounting pronouncements that we have not yet adopted.

We are a biopharmaceutical company headquartered in Lexington, Massachusetts, focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. Such products are used primarily in hospitals but also may be used in acute care settings including home-infusion and hospital outpatient clinics.

We had a total of $519.8 million in cash and cash equivalents and investments as of September 30, 2009, as compared to $417.9 million as of December 31, 2008. Our net income for the three months ended September 30, 2009, was $25.4 million, or $0.44 and $0.42 per basic and diluted share, respectively. Our net income for the three months ended September 30, 2008, was $25.0 million, or $0.44 per basic and diluted share.

Our net income for the nine months ended September 30, 2009, was $56.9 million, or $0.99 and $0.98 per basic and diluted share, respectively. Our net income for the nine months ended September 30, 2008, was $33.4 million, or $0.59 and $0.58 per basic and diluted share, respectively. As of September 30, 2009, we had an accumulated deficit of $261.6 million.

Net income for the three and nine months ended September 30, 2008, has been adjusted pursuant to the adoption of new accounting guidance for convertible debt with a cash conversion option, from net income of $27.9 million and $46.8 million for the three and nine months ended September 30, 2008, respectively, as previously reported, to net income of $25.0 million and $33.4 million for the three and nine months ended September 30, 2008, respectively. See Note F., "Debt," in the accompanying notes to the condensed consolidated financial statements for more information.

CUBICIN. We derive substantially all of our revenues from CUBICIN, which we launched in the U.S. in November 2003 and currently commercialize on our own in the U.S. CUBICIN is a once-daily, bactericidal, intravenous, or I.V., antibiotic with activity against methicillin-resistant S. aureus, or MRSA, and has been used in the treatment of more than an estimated 800,000 patients with serious infections caused by Gram-positive pathogens such as MRSA. CUBICIN is approved in the U.S. for the treatment of complicated skin and skin structure infections, or cSSSI, caused by Staphylococcus aureus, or S. aureus,and certain other Gram-positive bacteria, and for S. aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis, or RIE, caused by methicillin-susceptible and methicillin-resistant isolates. In the European Union, or EU, CUBICIN is approved for the treatment of complicated skin and soft tissue infections, or cSSTI, where the presence of susceptible Gram-positive bacteria is confirmed or suspected and for RIE due to S. aureus bacteremia and S. aureus bacteremia associated with RIE or cSSTI.

Our net product revenues from worldwide product sales of CUBICIN for the three and nine months ended September 30, 2009, were $141.6 million and $385.1 million, respectively, as compared to $110.6 million and $299.9 million for the three and nine months ended September 30, 2008, respectively. We expect both net product sales of CUBICIN in the U.S. and our revenues from CUBICIN sales outside the U.S. to continue to increase due primarily to increased vial sales, market penetration into a large and growing market, and price increases we and our international partners may implement. Future sales of CUBICIN are, to a large extent, dependent upon our ability to compete successfully with the products of current and future competitors, the growth of the market for CUBICIN, our ability to secure sufficient quantities of CUBICIN to meet demand, and our ability to obtain, maintain and enforce U.S. and foreign patent protection for CUBICIN.

On February 9, 2009, we received a Paragraph IV Certification Notice Letter from Teva notifying us that it has submitted an ANDA to the FDA for approval to market a generic version of CUBICIN. Teva's notice letter advised that it is seeking FDA approval to market daptomycin for injection, the active ingredient in CUBICIN, prior to the expiration of U.S. Patent Nos. 6,468,967 and 6,852,689, which expire on September 24, 2019, and U.S. Patent No. RE39,071, which expires on June 15, 2016. Each of these patents is listed in the FDA's list of "Approved Drug Products with Therapeutic Equivalence Evaluations," also known as the Orange Book. The notice letter further stated that Teva is asserting that claims in the referenced patents are not infringed and/or invalid. On March 23, 2009, we filed a patent infringement lawsuit against Teva, Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries Ltd. in response to the ANDA filing. The complaint, which was filed in the U.S. District Court for the District of Delaware, alleges infringement of the referenced patents. Under current U.S. law, the filing of the lawsuit automatically prevents the FDA from approving the ANDA for 30 months from our receipt of Teva's Paragraph IV notification letter on February 9, 2009, unless the court enters judgment in favor of Teva in less than 30 months or finds that a party has failed to cooperate reasonably to expedite the lawsuit. We are confident in our intellectual property portfolio protecting CUBICIN, including the patents listed in the Orange Book. It is possible that additional third parties may seek to market generic versions of CUBICIN in the U.S. by filing an ANDA.

MERREM I.V. In July 2008, we entered into an exclusive agreement with AstraZeneca to promote and provide other support in the U.S. for MERREM I.V., an established (carbapenem class) I.V. antibiotic. Under the agreement, we promote and support MERREM I.V. using our existing U.S. acute care sales and medical affairs organizations. AstraZeneca will continue to provide marketing and commercial support for MERREM I.V. We recognize revenues from this agreement as service revenues. The agreement establishes a baseline annual payment by AstraZeneca to us of $20.0 million, received in quarterly increments, to be adjusted up or down by a true-up payment or refund at the end of the year based on actual U.S. sales of MERREM I.V. exceeding or falling short of an established annual baseline sales amount, subject to a minimum annual payment of $6.0 million. We recognize revenues related to this agreement over each annual period of performance based on the minimum annual payment amount that we can receive under the agreement with AstraZeneca. We assess the amount of revenue we recognize at the end of each quarterly period to reflect our actual performance against the annual baseline sales amount that could not be subject to adjustment based on future quarter performance. Amounts received in excess of revenue recognized are included in deferred revenues. We are also entitled to earn a percentage of the gross profit on sales exceeding the annual baseline sales amount. The revenue for any such sales over the baseline amount will be recognized upon Cubist's receipt of an annual report from AstraZeneca, which is expected to be received annually one quarter in arrears. Service revenues from MERREM I.V. of $1.5 million and $9.0 million for the three and nine months ended September 30, 2009, respectively, represent (i) the minimum payment amounts of $1.5 million and $4.5 million that we are entitled for the three and nine months ended September 30, 2009, respectively, for 2009 performance, under the agreement with AstraZeneca; and (ii) a $4.5 million payment reflecting the percentage of gross profit that we received during the first quarter for sales exceeding the 2008 annual baseline sales amount, which was recorded in the first quarter of 2009. We do not currently expect to achieve the full year 2009 annual baseline sales amount. As a result, we expect that service revenues related to 2009 U.S. sales of MERREM I.V. will be less than the $20.0 million baseline annual payment. Based on our 2009 sales expectations, we also do not expect to receive any gross profit percentage payment for 2009 sales in the first quarter of 2010. In addition, given anticipated market conditions for carbapenems and the potential impact of the June 2010 expiration of the composition of matter patent for MERREM I.V. in the U.S., we are currently working with AstraZeneca to determine the baseline sales amount for 2010, or a shorter agreed upon period. However, we cannot assure you that we will be able to reach an agreement with AstraZeneca on the baseline sales amount, which may result in early termination of the agreement.

Product Pipeline. We are building a pipeline of acute care therapies through licensing and collaboration agreements as well as by progressing into clinical development compounds that we have developed internally.

In January 2009, we entered into a collaboration agreement with Alnylam Pharmaceuticals, Inc., or Alnylam, for the development and commercialization of Alnylam's RNA interference, or RNAi, inhibitors as potential therapy for the treatment of respiratory syncytial virus, or RSV, infection, an area of high unmet medical need. The RSV-specific RNAi therapeutic program includes ALN-RSV01, for which we recently completed a Phase 2 trial for the treatment of RSV infection in adult lung transplant patients, as well as several other potent and specific second generation RNAi-based RSV inhibitors in pre-clinical studies.

In December 2008, we submitted an Investigational New Drug Application, or IND, with the FDA for each of the following two drug candidates: CB-182,804, in development as I.V. antibiotic therapy for multi-drug-resistant Gram-negative infections; and CB-183,315, in development as oral antibiotic therapy for Clostridium difficile associated diarrhea, or CDAD. An IND is the filing stage preparatory to clinical trials. Following appropriate FDA review procedures, we began dosing humans in separate Phase 1 clinical trials with each of CB-182,804 and CB-183,315 in February 2009.

In April 2008, we entered into a license and collaboration agreement with Dyax Corp., or Dyax, pursuant to which we obtained an exclusive license for the development and commercialization of the I.V. formulation of Dyax's ecallantide compound for the prevention of blood loss during surgery in North America and Europe. We initially are studying ecallantide as a potential treatment for the prevention of blood loss during on-pump cardiac surgery, or CTS, which includes coronary artery bypass graft and heart valve and replacement procedures. In March 2009, we began a Phase 2 dose-ranging trial, CONSERV™ 1, assessing three different doses of ecallantide in CTS patients at relatively low risk of bleeding. In July 2009, we began a Phase 2 trial, CONSERV 2, assessing a high dose of ecallantide in CTS patients undergoing procedures associated with a higher risk of bleeding.

Results of Operations for the Three Months Ended September 30, 2009 and 2008



Revenues



The following table sets forth revenues for the three months ended September 30,
2009 and 2008:



                                    Three months ended September 30,
                                        2009                  2008         % Change
                                              (in millions)
U.S. product revenues, net       $            137.7     $          109.2         26 %
International product revenues                  3.9                  1.4        175 %
Service revenues                                1.5                  1.4          6 %
Other revenues                                  0.4                  0.4         14 %
Total revenues, net              $            143.5     $          112.4         28 %

Product Revenues, net

Cubist's net revenues from sales of CUBICIN, which consists of U.S. product revenues, net, and international product revenues, were $141.6 million in the three months ended September 30, 2009, and $110.6 million in the three months ended September 30, 2008, an increase of $31.0 million, or 28%. Gross U.S. revenues from sales of CUBICIN totaled $150.9 million and $116.3 million for the three months ended September 30, 2009 and 2008, respectively. The $34.7 million increase in gross U.S. revenues was primarily due to increased vial sales of CUBICIN in the U.S., which resulted in higher gross revenues of $24.8 million, as well as price increases for CUBICIN in October 2008 and June 2009, which resulted in $9.9 million of additional gross U.S. revenues. Gross U.S. product revenues are offset by allowances for sales returns, Medicaid rebates, chargebacks, discounts and wholesaler management fees of $13.2 million and $7.1 million for the three months ended September 30, 2009 and 2008, respectively. The increase in allowances against gross product revenue was primarily driven by increases in chargebacks and Medicaid rebates due to increased U.S. sales of CUBICIN, as well as the price increases described above. International product revenues of $3.9 million and $1.4 million for the three months ended September 30, 2009 and 2008, respectively, consisted primarily of CUBICIN product sales to, and royalty payments based on CUBICIN net sales in the EU from, Novartis AG, or Novartis, our EU partner for CUBICIN.

Service Revenues

Service revenues for the three months ended September 30, 2009, were $1.5 million as compared to $1.4 million for the three months ended September 30, 2008. Service revenues relate to our exclusive agreement with AstraZeneca to promote and provide other support in the U.S. for MERREM I.V. These service revenues represent the minimum payment amount that we are entitled to with respect to this period under our agreement with AstraZeneca, which is described in the overview section of this MD&A.

Costs and Expenses



The following table sets forth costs and expenses for the three months ended
September 30, 2009 and 2008:



                               Three months ended
                                 September 30,
                                2009         2008     % Change
                                 (in millions)
Cost of product revenues     $      30.8    $  23.5         31 %
Research and development            35.5       28.6         24 %
Sales and marketing                 18.9       22.2        -15 %
General and administrative          12.8        9.4         38 %
Total costs and expenses     $      98.0    $  83.7         17 %

Cost of Product Revenues

Cost of product revenues were $30.8 million and $23.5 million in the three months ended September 30, 2009 and 2008, respectively. Included in our cost of product revenues are royalties owed on net sales of CUBICIN under our license agreement with Eli Lilly & Company, or Eli Lilly, costs to procure, manufacture and distribute CUBICIN, and the amortization expense related to certain intangible assets. To the extent that we incur incremental costs related to service revenues, these amounts would also be included in the cost of product revenues. Our gross margin for the three months ended September 30, 2009 and 2008, was 78% and 79%, respectively. The increase in cost of product revenues of $7.2 million during the three months ended September 30, 2009, as compared to the three months ended September 30, 2008, is primarily attributable to the increase in sales of CUBICIN in the U.S.

Research and Development Expense

Total research and development expense in the three months ended September 30, 2009, was $35.5 million as compared to $28.6 million in the three months ended September 30, 2008, an increase of $6.9 million, or 24%. The increase in research and development expenses was due primarily to (i) an increase of $5.4 million in clinical trial expenses due to the higher number of studies that we are conducting; (ii) an increase of $2.3 million in collaboration expense primarily related to our agreement with Alnylam; and (iii) an increase of $1.4 million in salaries and other employee benefits due to an increase in headcount. These increases were offset by a $2.8 million decrease in process development expenses.

Sales and Marketing Expense

Sales and marketing expense in the three months ended September 30, 2009, was $18.9 million as compared to $22.2 million in the three months ended September 30, 2008, a decrease of $3.3 million, or 15%. The decrease in sales and marketing expense is primarily related to a decrease in employee-related expenses, including travel and entertainment, as well as a decrease in marketing expense.

General and Administrative Expense

General and administrative expense in the three months ended September 30, 2009, was $12.8 million as compared to $9.4 million in the three months ended September 30, 2008, an increase of $3.5 million, or 38%. The increase is primarily due to an increase in professional services and consulting charges, including legal costs associated with the patent infringement litigation with Teva and its affiliates.

Other Income (Expense), net


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