The following discussion should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Annual Report on Form 10-K. See also "Cautionary Note Regarding Forward-Looking Statements."

Introduction

This Management's Discussion and Analysis, or MD&A, is provided in addition to the accompanying 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:

º •
º Overview: This section provides a summary of our performance during the years ended December 31, 2012, 2011 and 2010, as well as our business and strategic initiatives that could cause our actual results to differ materially from the results that we expect.

º •
º Results of Operations: This section provides a review of our results of operations for the years ended December 31, 2012, 2011 and 2010.

º •
º 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.

º •
º Commitments and Contingencies: This section provides a summary of our material legal proceedings and commitments and contingencies, as well as our commitment to make potential future payments to third parties as part of our various business agreements.

º •
º 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 consolidated financial statements.

º •
º Recent Accounting Pronouncements: This section provides a summary of recently issued accounting pronouncements.

Overview

Cubist's strategic intent is to become the leading global biopharmaceutical company focused on discovering, developing and commercializing therapies for acutely ill patients-those in treatment for serious but acute illnesses for days or weeks in hospitals or outpatient acute care settings.

Revenue Growth

We derive most of our revenues from our I.V. antibiotic, CUBICIN, which we currently commercialize on our own in the U.S. Our worldwide net product revenues represent net U.S. product revenues of CUBICIN and, beginning in December 2011, ENTEREG, as well as international product revenues, which relate to the payments we receive from international distributors in connection with their commercialization of CUBICIN. The cash flow generated from sales of CUBICIN for the treatment of patients with certain serious infections caused by Gram-positive bacteria, including MRSA, funds important investments to drive our future growth. Our total revenue growth for the year ended December 31, 2012, as compared to the year ended December 31, 2011, includes contributions from:

º •
º CUBICIN net U.S. product revenues, which increased 16% to $809.2 million primarily due to an increase of approximately 5% in vial shipments and CUBICIN price increases;

º •
º International product revenues from sales of CUBICIN by our ex-U.S. marketing partners, which increased 38% to $50.5 million;

º •
º ENTEREG net U.S. product revenues, which were $40.2 million. We re-launched ENTEREG, the first and only FDA-approved therapy to accelerate the time for GI recovery following bowel resection surgery, in January 2012, following our acquisition of Adolor in December of 2011; and

º •
º Service revenues of $23.2 million under our co-promotional agreement with Optimer for the launch of its acute care therapeutic, DIFICID. In 2012, service revenues included a payment of $5.0 million for the achievement of an annual sales target under the terms of the co-promotion agreement and a $3.5 million payment representing a portion of Optimer's gross profits on net sales of DIFICID in the U.S. that exceeded the annual sales target for the first sales year. Our two-year agreement with Optimer will expire in July 2013.

Late-Stage Clinical Pipeline

During 2012, we advanced our clinical pipeline as we sought to leverage the acute care-focused business model we have created. As of December 31, 2012, we were enrolling patients in Phase 3 clinical trials for three product candidates. Two of these late-stage product candidates, assuming successful clinical trial results and approvals, would be used to treat hospitalized patients with serious infections:

º •
º Ceftolozane/tazobactam-an I.V. antibiotic in development as a potential treatment for certain infections caused by Gram-negative bacteria including Pseudomonas aeruginosa. We are currently conducting ongoing, global Phase 3 clinical trials in cUTI and cIAI, which began in 2011. Pseudomonas aeruginosa has been cited as a pathogen of concern by the U.S. Congress as well as the IDSA due to the levels of multi-drug-resistance which exist in many hospitals. The FDA recently designated ceftolozane/tazobactam as a Qualified Infectious Disease Product, or QIDP. As a result of this qualification, ceftolozane/tazobactam is eligible for certain incentives, including an accelerated review period upon filing of an NDA, and if ceftolozane/tazobactam is ultimately approved by the FDA, a five-year extension of Hatch-Waxman exclusivity.

º •
º Surotomycin-an oral antibiotic in development as a potential treatment for CDAD. We began Phase 3 clinical trials of surotomycin in July 2012. CDAD is a serious disease in the U.S. and many parts of the world, with significant levels of recurrence associated with increasing risk of mortality. Data from our Phase 2 clinical trial, as announced in 2011, demonstrated that treatment with surotomycin reduced recurrence by more than 50% when compared with standard of care, oral vancomycin. In late 2012, the FDA designated surotomycin as a QIDP, and as a result, surotomycin is also eligible for the same incentives as ceftolozane/tazobactam, as discussed above.

º •
º Bevenopran-an oral therapy in development as a potential treatment for OIC, which we acquired in connection with our acquisition of Adolor in December 2011. We began a Phase 3 long-term safety study of bevenopran in OIC in late 2012. OIC is the most common side effect for patients undergoing long-term treatment with opioids to relieve chronic pain, such as serious back pain. We expect to begin enrollment in Phase 3 efficacy trials of bevenopran in patients with OIC in the first half of 2013. Assuming clinical trial success and regulatory approval, we believe bevenopran would address an important unmet medical need in the chronic care setting.

See "Business," in Item 1 of Part I to this Annual Report on Form 10-K for a discussion of our products, product candidates and pre-clinical programs.

Financial Highlights

    The following table is a summary of our selected financial results for the
periods presented:

                                                     For the Years Ended
                                                        December 31,
                                            2012              2011            2010
                                            (in millions, except per share data)
   Total revenues, net                    $    926.4        $    754.0       $ 636.4
   Net income                             $    154.1 (1)    $     33.0 (2)   $  94.3
   Basic net income per common share      $     2.42        $     0.54 (2)   $  1.60
   Diluted net income per common share    $     2.10        $     0.52 (2)   $  1.55


--------------------------------------------------------------------------------
   º (1)

º (2)
º During the year ended December 31, 2011, we recognized $91.5 million of contingent consideration expense primarily related to increasing the fair value of our contingent consideration liability related to ceftolozane/tazobactam. See the "Results of Operations" and "Commitments and Contingencies" sections of this MD&A for additional information.

Changes to our liquidity position and financing capability during 2012, were as follows:

º •
º As of December 31, 2012, we had cash, cash equivalents and investments of $979.4 million, as compared to $867.7 million as of December 31, 2011.

º •
º In June 2012, we repurchased $74.7 million aggregate principal amount of our 2.25% Notes, in privately-negotiated transactions, and in November 2012, we retired the remaining $34.5 million of our outstanding 2.25% Notes. Our outstanding convertible debt as of December 31, 2012, consists of $450.0 million aggregate principal amount of our 2.50% Notes due November 2017.

º •
º In November 2012, we entered into a three-year senior-secured revolving credit facility of up to $150.0 million.

Business Developments

The following is a summary of certain significant business developments that occurred during the year ended December 31, 2012, or that impacted the period thereof:

In February 2012, we received a Paragraph IV Certification Notice Letter from Hospira notifying us that it had submitted an ANDA to the FDA seeking approval to market a generic version of CUBICIN, and in May 2012, we received a second Paragraph IV Certification Notice Letter from Hospira notifying us that it had submitted to the FDA an amendment to its ANDA. In August 2012, we received a third Paragraph IV Certification Notice Letter from Hospira notifying us that it had submitted an NDA to the FDA seeking approval to market a generic version of CUBICIN. In March 2012, we filed a patent infringement lawsuit against Hospira in response to its ANDA filing, and in July 2012, we filed a new complaint against Hospira in response to Hospira's amendment to its ANDA

filing. In September 2012, we filed a patent infringement complaint against Hospira in response to its NDA filing. See the "Intellectual Property Portfolio" section in Item 1 of Part I of this Annual Report on Form 10-K for additional information.

In December 2011, we completed our acquisition of Adolor. Under the terms of the agreement and plan of merger, we paid Adolor stockholders $4.25 in cash for each share of Adolor common stock, or approximately $220.8 million, in aggregate, which we funded from our existing cash balances. Adolor's former stockholders also received one non-transferable CPR, which represents the right to receive up to an additional $4.50 in cash for each share of Adolor common stock owned, or up to approximately $233.8 million in aggregate, which Cubist is required to pay upon achievement of certain regulatory milestones, sales milestones or a combination of both, related to bevenopran. The fair value of the purchase price was estimated to be $331.0 million and was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition.

In the fourth quarter of 2012, we determined that the carrying value of the IPR&D asset related to bevenopran, which we acquired in connection with the acquisition of Adolor, was impaired as a result of our decision in the fourth quarter of 2012 to deprioritize and delay efforts to develop bevenopran for the EU market. This decision was based on our current assessment of the regulatory path and the commercial opportunity for OIC agents in the EU. We recorded an impairment charge of $38.7 million to write down the IPR&D asset related to bevenopran and recorded contingent consideration income of $37.0 million during the fourth quarter of 2012 to adjust the fair value of the contingent consideration liability. See the "Results of Operations" section within this MD&A for additional information.

Results of Operations for the Years Ended December 31, 2012 and 2011

Revenues

    The following table sets forth revenues for the periods presented:

                                                For the Years
                                                    Ended
                                                December 31,
                                               2012      2011     % Change
                                                (in millions)
             U.S. product revenues, net       $ 849.4   $ 701.4          21 %
             International product revenues      50.5      36.7          38 %
             Service revenues                    23.2       6.7         246 %
             Other revenues                       3.3       9.2         -64 %

             Total revenues, net              $ 926.4   $ 754.0          23 %

Cubist's net U.S. product revenues included $809.2 million of sales of CUBICIN and $40.2 million of sales of ENTEREG for the year ended December 31, 2012, as compared to $698.8 million of sales of CUBICIN and $2.6 million of sales of ENTEREG for the year ended December 31, 2011. Gross U.S. product revenues totaled $977.9 million and $802.5 million for the years ended December 31, 2012 and 2011, respectively. The $175.4 million increase in gross U.S. product revenues was primarily due to: (i) price increases of 5.5% for CUBICIN in July 2011, January 2012 and July 2012, which resulted in $94.8 million of additional gross CUBICIN U.S. product revenues; (ii) an increase of approximately

5.2% in vial sales of CUBICIN in the U.S., which resulted in higher gross CUBICIN U.S. product revenues of $41.2 million; and (iii) the addition of ENTEREG to our product portfolio in December 2011, which resulted in additional gross U.S. product revenues of $39.4 million.

Gross U.S. product revenues are offset by provisions for the years ended December 31, 2012 and 2011, as follows:

                                                      For the Years
                                                          Ended
                                                      December 31,
                                                     2012       2011      % Change
                                                      (in millions)
    Gross U.S. product revenues                    $  977.9   $  802.5           22 %
    Provisions offsetting U.S. product revenues
    Contractual adjustments                           (55.3 )    (45.1 )         23 %
    Governmental rebates                              (73.2 )    (56.0 )         31 %

    Total provisions offsetting product revenues     (128.5 )   (101.1 )         27 %

    U.S. product revenues, net                     $  849.4   $  701.4           21 %

Contractual adjustments include pricing and early payment discounts extended to our customers, as well as sales returns and wholesaler distribution fees. Governmental rebates represent estimated amounts for Medicaid program rebates and Medicare coverage gap discount programs, as well as chargebacks related to 340B/PHS and FSS drug pricing programs. The increase in provisions against gross product revenue was primarily driven by increases in chargebacks, pricing discounts and Medicaid rebates due to increased U.S. sales of CUBICIN and the price increases described above.

We expect net revenues from sales of CUBICIN in the U.S. to continue to increase due primarily to increased vial sales and price increases we may implement. We also expect an increase in ENTEREG product revenues as a result of targeted efforts by our sales force in the hospital setting. There are a number of events, trends and uncertainties that are impacting or may impact our revenues from CUBICIN and ENTEREG and the growth of such revenues. These events, trends and uncertainties are set forth in the "Risk Factors" section in Item 1A of Part I to this Annual Report on Form 10-K.

International product revenues are primarily based on sales of CUBICIN by Novartis, our distribution partner in the EU. International product revenues increased to $50.5 million for the year ended December 31, 2012, from $36.7 million for the year ended December 31, 2011, primarily related to an increase in product sold by Novartis and MSD Japan for their distribution of CUBICIN in their respective territories. We expect our international product revenues to increase from 2012 as a result of an increase in anticipated sales of CUBICIN by our international alliance partners.

Service revenues for the years ended December 31, 2012 and 2011, were $23.2 million and $6.7 million, respectively. Service revenues for the years ended December 31, 2012 and 2011, related to quarterly fees earned under the co-promotion agreement with Optimer to promote DIFICID in the U.S. In addition, during the year ended December 31, 2012, we recorded a $5.0 million payment for the achievement of an annual sales target under the terms of the co-promotion agreement and a $3.5 million payment representing a portion of Optimer's gross profits on net sales of DIFICID in the U.S. that exceeded the annual sales target for the first sales year as stipulated in the co-promotion agreement. We expect service revenues to decrease in 2013 as compared to 2012, as the arrangement with Optimer terminates in July 2013.

Other revenues for the years ended December 31, 2012 and 2011, were $3.3 million and $9.2 million, respectively. Other revenues for the year ended December 31, 2011, included a $5.0 million sales milestone during the year ended December 31, 2011, as a result of Novartis achieving a predetermined level of aggregate sales of CUBICIN to third parties, which we recognized as other revenue upon achievement.

Costs and Expenses

    The following table sets forth costs and expenses for the periods presented:

                                                  For the Years
                                                      Ended
                                                  December 31,
                                                 2012      2011      % Change
                                                  (in millions)
          Cost of product revenues              $ 230.1   $ 172.9           33 %
          Research and development                277.7     184.5           51 %
          Impairment of IPR&D                      38.7         -          N/A
          Contingent consideration                (29.0 )    91.5         -132 %
          Selling, general and administrative     171.8     163.2            5 %
          Restructuring charges                       -       9.3         -100 %

          Total costs and expenses              $ 689.3   $ 621.4           11 %

Cost of product revenues were $230.1 million and $172.9 million for the years ended December 31, 2012 and 2011, respectively. Included in our cost of product revenues are royalties owed on net sales of CUBICIN under our license agreement with Eli Lilly, costs to procure, manufacture and distribute CUBICIN and ENTEREG, and the amortization expense related to certain intangible assets. The increase in cost of product revenues of $57.2 million during the year ended December 31, 2012, as compared to the year ended December 31, 2011, is primarily attributable to the increase in sales of CUBICIN in the U.S., the addition of ENTEREG to our product portfolio and amortization expense related to the ENTEREG intangible asset. Our gross margin for the years ended December 31, 2012 and 2011, was 74% and 77%, respectively. The decrease in our gross margin percentage from the year ended December 31, 2011, is primarily due to the gross margin for ENTEREG, which was impacted by $18.3 million of amortization expense related to the ENTEREG intangible asset. We expect our gross margin percentage in 2013 to be similar to our gross margin percentage in 2012.

     Research and Development Expense

    The following table contains a breakdown of our research and development
expenses for the periods presented:

                                                             For the Years
                                                                 Ended
                                                             December 31,
                                                            2012      2011     % Change
                                                             (in millions)
External expenses:
Marketed products                                          $  17.3   $  13.9          24 %
Phase 3 programs:
Ceftolozane/tazobactam                                        70.2      26.2         167 %
Surotomycin                                                   20.3         *         N/A
Bevenopran                                                     8.2         *         N/A
Earlier-stage programs                                        29.2      36.8         -21 %
Milestone and upfront payments                                 5.5      10.0         -45 %
Research and development employee-related expenses            82.0      64.8          27 %
Other unallocated internal research and development
expenses                                                      45.0      32.8          37 %

Total research and development                             $ 277.7   $ 184.5          51 %

For each of our research and development programs, we incur both external and internal expenses. External expenses include clinical and non-clinical activities performed by CROs, lab services, purchases of drug product materials and manufacturing development costs. We track external research and development expenses by individual program, with the Phase 3 costs associated with development activities for our three current Phase 3 programs identified in the table above. Marketed product expenses include external expenses for post-marketing Phase 4 trials for CUBICIN and ENTEREG. External expenses for earlier-stage programs primarily include expenses incurred for CB-625, as well as costs incurred prior to Phase 3 for ceftolozane/tazobactam, surotomycin and bevenopran. Milestone and upfront payments included in research and development expense relate to the licensing or purchase of research and development assets that did not qualify as business combinations. Research and development employee-related expenses include salaries, benefits and stock-based compensation expense. Other unallocated internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities.

The increase in research and development expenses for the year ended December 31, 2012, as compared to the year ended December 31, 2011, is primarily due to: (i) an increase of $44.0 million in external expenses related to ceftolozane/tazobactam as a result of incurring a full year of Phase 3 clinical trial expenses for cUTI and cIAI, in which first patient enrollment commenced in July 2011 and December 2011, respectively; (ii) an increase of $20.3 million in external expenses related to surotomycin as a result of first patient enrollment in Phase 3 clinical trials, which commenced in July 2012; (iii) an increase of $8.2 million in external expenses related to bevenopran as a result of the start-up of a Phase 3 long-term safety study in October 2012; and (iv) an increase of $17.3 million in employee-related expenses due to additional headcount.

We expect research and development expenses to increase by approximately $100.0 million in 2013. The increase in expense is expected to be driven by our Phase 3 clinical trial expenses for activities related to ceftolozane/tazobactam, surotomycin and bevenopran, including the cost to purchase the

material for use in clinical trials, and continued investment in process and development, as well as an increase in headcount.

In connection with the acquisition of Adolor in December 2011, we acquired an IPR&D asset related to bevenopran with an acquisition-date fair value of $117.4 million. During the fourth quarter of 2012, we made a decision to deprioritize and delay efforts to develop bevenopran for the EU market based on our current assessment of the regulatory path and the commercial opportunity for OIC agents in the EU. As a result of this decision, and in conjunction with our annual impairment test, we updated the fair value estimate of the IPR&D asset to incorporate a low probability of pursuing bevenopran in the EU. We recorded an impairment charge of $38.7 million to write down the IPR&D asset to its revised fair value, which was recorded within our consolidated statement of income for the year ended December 31, 2012. See Note F., "Fair Value Measurements," in the accompanying notes to consolidated financial statements for additional information.

Contingent consideration income was $29.0 million for the year ended December 31, 2012, and contingent consideration expense was $91.5 million for the year ended December 31, 2011. This income/expense represents the change in the fair value of the contingent consideration liability relating to remaining amounts potentially payable to Calixa's former stockholders pursuant to our agreement to acquire Calixa in December 2009 and to Adolor's former stockholders pursuant to our agreement to acquire Adolor in December 2011. The change in the fair value for the year ended December 31, 2012, primarily related to recording contingent consideration income of $37.0 million with respect to bevenopran during the fourth quarter of 2012 as a result of decreasing the probability of . . .