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ACCESSION NUMBER: 0000912057-02-012501
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020329
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CUBIST PHARMACEUTICALS INC
CENTRAL INDEX KEY: 0000912183
STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834]
IRS NUMBER: 223192085
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-21379
FILM NUMBER: 02593183
BUSINESS ADDRESS:
STREET 1: 65 HAYDEN AVENUE
CITY: LEXINGTON
STATE: MA
ZIP: 02421
BUSINESS PHONE: 781-860-8660
MAIL ADDRESS:
STREET 1: 24 EMILY ST
CITY: CAMBRIDGE
STATE: MA
ZIP: 02139
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2001
CUBIST PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 22-3192085
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</Table>
65 HAYDEN AVENUE, LEXINGTON, MA 02421
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(781) 860-8660
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF EACH CLASS)
NASDAQ NATIONAL MARKET
(NAME OF EACH EXCHANGE ON WHICH REGISTERED)
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, or the Securities Exchange Act, 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-X is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the registrant's Common Stock, $0.001 par
value per share, or the Common Stock, held by non-affiliates of the registrant
as of March 15, 2002 was approximately $537,685,914, based on 26,750,543 shares
held by such non-affiliates at the closing price of a share of Common Stock of
$20.10 as reported on the Nasdaq National Market on such date. Affiliates of the
Company (defined as officers, directors and owners of 10 percent or more of the
outstanding shares of Common Stock) owned 1,744,908 shares of Common Stock
outstanding on such date. The number of outstanding shares of Common Stock of
the Company on March 15, 2002 was 28,495,451.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANTS DEFINITIVE PROXY STATEMENT FOR USE IN CONNECTION
WITH ITS 2002 ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO
PART III.
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CUBIST PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<Table>
<Caption>
ITEM PAGE
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PART I
1. Business.................................................... 4
2. Description of Property..................................... 40
3. Legal Proceedings........................................... 40
4. Submission of Matters to a Vote of Security Holders......... 40
PART II
5. Market For Registrant's Common Stock and Related Stockholder
Matters.................................................... 41
6. Selected Financial Data..................................... 42
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 44
7A. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 62
8. Financial Statements and Supplementary Data................. 64
9. Changes in and Disagreements With Accountants on Accounting
And Financial Disclosure................................... 104
PART III
10. Directors and Executive Officers of the Registrant.......... 104
11. Executive Compensation...................................... 104
12. Security Ownership of Certain Beneficial Owners
Management................................................. 104
13. Certain Relationships and Related Transactions.............. 104
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K Signatures............................................. 105
</Table>
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This annual report contains forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995 and within the meaning of
Section 27A of the Securities Act of 1933, or the Securities Act, and
Section 21E of the Securities Exchange Act, including statements regarding our
drug development and discovery programs, clinical trials, receipt of regulatory
approval, capital needs, collaborative agreements, intellectual property,
expectations and intentions. Forward-looking statements may be identified or
qualified by words such as "likely," "will," "suggests," "may," "would,"
"could," "should," "expects," "anticipates," "estimates," "plans," "projects,"
"believes," or similar expressions and variants of those words or expressions
are intended to identify forward-looking statements.
Forward-looking statements necessarily involve risks and uncertainties, and
our actual results could differ materially from those anticipated in the
forward-looking statements due to a number of factors, including those set forth
in "Risk Factors" and elsewhere in this annual report. The factors set forth in
the "Risk Factors" section and other cautionary statements made in this annual
report should be read and understood as being applicable to all related
forward-looking statements wherever they appear in this annual report. The
forward-looking statements contained in this annual report represent our
judgment as of the date of this annual report. We caution readers not to place
undue reliance on such statements. We undertake no obligation to update publicly
any forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
Information regarding market and industry statistics contained in this
annual report is included based on information available to us that we believe
is accurate. It is based on the publications identified that are not produced
for purposes of securities offerings or economic analysis. We have not
independently verified the data of the identified sources and cannot assure you
of the accuracy of those data.
Cidecin-Registered Trademark- (daptomycin for injection), EDGE-TM-,
VITA-TM-, NatChem-TM- and NatGen-TM- are all trademarks of Cubist
Pharmaceuticals, Inc. All other trademarks, servicemarks or trade names referred
to in this document are the property of their respective owners.
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PART I
ITEM 1. BUSINESS
CORPORATE OVERVIEW
Cubist Pharmaceuticals, Inc. is a pharmaceutical company focused on the
research, development and commercialization of novel antimicrobial drugs to
combat serious and life-threatening bacterial and fungal infections. We are
currently conducting multiple Phase III trials for Cidecin (daptomycin for
injection), our lead product candidate and the first in a new class of
antimicrobial drug candidates called lipopeptides. Because Cidecin attacks
bacteria through a novel mechanism and has demonstrated the unique ability IN
VITRO to rapidly kill virtually all clinically significant Gram-positive
bacteria, it may be particularly effective in treating infections caused by
drug-resistant bacteria that cannot be eradicated by existing antibiotics. In
addition, Cidecin's once-daily dosing regimen, which appears to optimize safety
and efficacy, may provide more convenient, cost-effective dosing administration
relative to existing antibiotics that require multiple daily doses.
Data collected from two completed pivotal Phase III trials examining the
safety and efficacy of Cidecin in the treatment of complicated skin and soft
tissue infection, or cSST, demonstrated that Cidecin achieved the trials'
primary endpoint mandated by the United States Food and Drug Administration, or
FDA, by exhibiting sufficient antibacterial activity to be statistically
equivalent to existing agents. However, on January 16, 2002, we announced that
the primary endpoint of demonstrating non-inferiority to an active comparator
agent was not achieved in the first of two Phase III trials investigating the
safety and efficacy of Cidecin in the treatment of community-acquired pneumonia
requiring hospitalization. We currently expect to file a U.S. New Drug
Application, or NDA, for Cidecin by the end of 2002.
We have licensed to Gilead Sciences, Inc., or Gilead, the exclusive right to
commercialize Cidecin in selected European countries following regulatory
approval and have retained rights to develop, manufacture and market Cidecin in
the rest of the world.
We are developing an oral formulation of the antibiotic ceftriaxone, which
is currently available only in an intravenous formulation and marketed by
Hoffmann-La Roche under the brand name Rocephin. We have initiated proof-of-
principle studies in humans for oral ceftriaxone.
We utilize our VITA, LEAPS and natural products technologies to identify
additional novel compounds with a broad spectrum of activity against a variety
of infections, as more fully described herein.
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OVERVIEW OF INFECTIOUS DISEASE AND DRUG RESISTANCE
Infectious diseases are caused by pathogens present in the environment, such
as bacteria and fungi that enter the body through the skin or mucous membranes
of the lungs, nasal passages or gastrointestinal tract, and overwhelm the body's
immune system. These pathogens establish themselves in various tissues and
organs throughout the body and cause a number of serious and, in some cases,
lethal infections, including those of the bloodstream, skin and soft tissue,
heart, lung and urinary tract.
According to The World Health Report 2000, infectious diseases are the
leading cause of death worldwide. In July 1999, Scrip Reports estimated the
worldwide antiinfective market to be valued at $25 billion and, according to
MedAd News, at least 13 branded agents each generate sales in excess of
$300 million annually.
These antimicrobial drugs have, in many cases, proven highly successful in
controlling the serious morbidity and mortality that accompany serious
infections. These drugs work by binding to specific targets in a bacterial or
fungal pathogen, thereby inhibiting a function essential to the cell's survival.
During the 1970s and 1980s, many antimicrobials were developed and introduced
into the market. Most of these antimicrobials were from existing antimicrobial
classes such as semi-synthetic penicillins, cephalosporins, macrolides,
quinolones and carbapenems. Many of these antimicrobials proved to be effective
in treating infectious disease. We believe this efficacy caused pharmaceutical
companies to shift their resources to other areas of drug discovery and
development. As a result, according to a March 2001 Chembytes E-zine article
published on www.chemsoc.org, only one new antimicrobial agent has been
introduced from a new chemical class in over 30 years.
The National Institute of Allergy and Infectious Disease has reported that
hospitals worldwide are facing unprecedented crises from the rapid emergence and
dissemination of microbes that are resistant to one or more antimicrobial
agents. The increasing prevalence of drug-resistant bacterial and fungal
pathogens has led to significantly increased mortality rates, prolonged
hospitalizations, and increased healthcare costs. In addition, the proportion of
hospital patients that have compromised immune systems has risen sharply in
recent years. This trend is the result of, among other things, the rising
incidence of cancer and the associated use of chemotherapy, the general aging of
the patient population and the increased use of complex surgical procedures such
as organ transplants. Hospital patients with compromised immune systems are more
susceptible to serious and life-threatening infections.
Certain pathogens have developed resistance to all currently available
drugs. Examples of such resistant pathogens include:
- METHICILLIN-RESISTANT STAPHYLOCOCCUS AUREUS, OR MRSA: STAPHYLOCOCCUS
AUREUS is a common bacterial pathogen that causes serious and
life-threatening infections and routinely acquires characteristics of
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drug resistance, virulence and toxicity. MRSA strains can cause severe
tissue damage to existing wounds and can cause bacteremia, both of which
have a high mortality rate.
- VANCOMYCIN-RESISTANT ENTEROCOCCI, OR VRE: The emergence of VRE strains in
the 1990s has led to infections for which only very limited commercially
available therapy exists. Hospital-based VRE has continued to rapidly rise
in the United States, resulting in increased mortality rates.
- GLYCOPEPTIDE INTERMEDIATELY SUSCEPTIBLE STAPHYLOCOCCUS AUREUS, OR
GISA: The first reports of STAPHYLOCOCCUS AUREUSinfections with decreased
susceptibility to vancomycin occurred in 1998. Such bacterial strains have
been found in a wide geographical area throughout Japan and North America
and have recently emerged in Europe. It is generally accepted within the
medical community that fully drug-resistant STAPHYLOCOCCUS AUREUS strains
will emerge from GISA as additional resistance to vancomycin develops.
SHORTCOMINGS OF CURRENT THERAPIES
Current therapies do not provide adequate treatment for some serious and
life-threatening infections for the following reasons:
- Some existing antimicrobial drugs do not kill the pathogens that cause the
infection but merely inhibit their growth (called bacteriostatic agents)
thereby allowing the immune system to destroy the pathogen. Bacteriostatic
drugs are less effective in immunocompromised patients than antimicrobial
drugs that kill the pathogens (called bactericidal agents) because
patients with weakened immune systems cannot rid their bodies of the
pathogens.
- Many antimicrobials are effective against some serious and
life-threatening infections but not others. This may be because the
antimicrobial drug is not active against a particular type of pathogen or
because a strain of this pathogen has developed resistance to the
antimicrobial drug. Many of the serious and life-threatening infections
occur in hospital patients whose immune systems are compromised. These
infections are complicated and may be caused by more than one kind of
pathogen. In addition, since these infections are life threatening,
physicians treating these patients cannot wait for the test results
necessary to identify the exact nature of the pathogen or pathogens
causing the infection.
- Some pathogens have become resistant to all antimicrobials and there are
no antimicrobial agents available that can effectively treat the
infections caused by these drug-resistant pathogens. Vancomycin is the
current treatment of choice for patients who have serious and
life-threatening infections that have failed to respond to all other
antimicrobials. However, it has been widely reported in recent years that
several strains of enterococci have developed resistance to
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vancomycin. Currently, there are limited commercially available
therapeutic alternatives to treat these strains of VRE.
- Many existing antimicrobial drugs used to treat serious and
life-threatening infections are difficult or inconvenient to administer.
Most of these antimicrobial drugs must be administered multiple times a
day in order to be effective, are not well tolerated by patients or
require lengthy infusion times when administered in a single daily dose.
Moreover, intravenous administration of some of these antimicrobial drugs
does not occur through the veins in the arm but through catheters in the
central venous system. The difficulty or inconvenience of administration
of these drugs makes them less attractive choices for home therapy or for
other therapy outside of the hospital. Existing antimicrobial drugs may
cause side effects in some patients, such as severe allergic reaction,
lower blood pressure, inflammation and swelling at the site of injection
and headaches. Some of these side effects may be significant enough to
require that therapy be discontinued.
OUR BUSINESS STRATEGY
Our objective is to be a worldwide leader in the research, development and
commercialization of new antimicrobial drugs to combat serious and
life-threatening bacterial and fungal infections. The principal elements of our
strategy to achieve this objective include the following:
DEVELOP AND COMMERCIALIZE CIDECIN. We are developing Cidecin to treat
serious and life-threatening bacterial infections, including those caused by
drug-resistant pathogens. Based on data from multiple completed Phase III
clinical trials, we currently anticipate filing an NDA for Cidecin by the end of
2002. We have the exclusive right to develop, manufacture and market Cidecin
worldwide. We have licensed to Gilead the right to commercialize Cidecin in
certain European countries and continue to evaluate marketing opportunities in
the rest of the world.
DEVELOP EXISTING PRE-CLINICAL CANDIDATES. We now have two drug candidates
in pre-clinical development: an oral formulation of daptomycin and an oral
formulation of ceftriaxone, the largest-selling intravenous antibiotic
worldwide. While oral daptomycin is still in research studies, proof of
principle studies in humans for oral ceftriaxone are currently underway. If
these ongoing proof-of-principle studies using our oral formulation of
ceftriaxone continue successfully, we anticipate filing an Investigational New
Drug Application, or IND, with the FDA in the fourth quarter of 2002 to begin
clinical development.
LICENSE NEW DRUGS AND NEW DRUG CANDIDATES. Our internal expertise allows us
to recognize viable licensing opportunities and to save time and money in
successfully developing antimicrobials by capitalizing on research initially
conducted and funded by others. We intend to continue to review and acquire
compounds with promising characteristics as antimicrobial drug candidates.
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DISCOVER AND DEVELOP NEW ANTIMICROBIAL DRUG. We focus our research and drug
discovery activities on identifying new classes of antimicrobial drugs and on
developing one or more antimicrobial drugs from each of these new classes. We
believe that antimicrobial drugs from new classes will be effective against
drug-resistant bacterial and fungal pathogens because these pathogens have not
had an opportunity to develop resistance specific to these drugs. We have a
research and development effort underway focused on a new class of
antimicrobials called lipopeptides. Daptomycin is a member of the lipopeptide
class and, as a result of our work with daptomycin, we have developed expertise
in the chemistry and biology of lipopeptides. Our proprietary lipopeptide
program is focused on identifying new lipopeptide antimicrobial compounds for
the treatment of a broad spectrum of serious and life-threatening bacterial
infections.
UTILIZE OUR VITA FUNCTIONAL GENOMICS, NATURAL PRODUCTS AND LEAPS
TECHNOLOGIES TO ACCELERATE THE DISCOVERY OF ANTIMICROBIAL DRUGS. We utilize our
VITA, Natural Products and LEAPS technologies in our internal research programs
to identify novel compounds with a broad spectrum of activity against
life-threatening infectious organisms including resistant strains such as MRSA
and VRE. Our technologies attempt to accelerate the generation of leads for
medicinal chemistry programs resulting in faster development of antimicrobial
drugs and lower costs by efficiently using resources throughout the drug
discovery process.
LICENSE OUR VITA FUNCTIONAL GENOMICS AND OTHER TECHNOLOGIES TO
PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES. We plan to continue to generate
revenues by licensing our VITA functional genomics technology. In addition, we
continue to advance our natural products and other technologies as drug
discovery platforms and may attempt to generate additional revenues through the
licensing of these platforms.
DEVELOPMENT PIPELINE
I. CIDECIN (DAPTOMYCIN FOR INJECTION)
Cidecin is our lead product candidate and the first in a new class of
antimicrobial drug candidates called lipopeptides. Under laboratory conditions,
Cidecin exhibits rapid bactericidal activity against virtually all clinically
significant Gram-positive bacteria, including multi-drug resistant bacteria.
Gram-positive bacteria, such as STAPHYLOCOCCUS, STREPTOCOCCUS and ENTEROCOCCUS,
can cause a variety of serious infections that are a major cause of morbidity
and mortality worldwide. Gram-positive bacteria can be differentiated from
Gram-negative bacteria by the differences in the outer structure of the
bacterial envelope. Gram-positive bacteria possess a singular cellular membrane
and a thicker cell wall component, whereas Gram-negative bacteria possess a
double cellular membrane with a small cell wall component. These cell surface
characteristics greatly affect the ability of an antibiotic to penetrate the
bacteria and reach its target site. We are currently evaluating the safety and
efficacy of Cidecin in a clinical program
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with Phase III trials completed and underway for multiple indications, including
cSSTs, resistant enterococcal infections and endocarditis.
CIDECIN ADVANTAGES. We believe that Cidecin could provide the following key
benefits:
- ACTIVE AGAINST GRAM-POSITIVE BACTERIA. Cidecin is effective IN VITRO
against virtually all clinically significant Gram-positive bacteria,
including VRE, MRSA and GISA. We believe that Cidecin's broad spectrum of
IN VITRO activity could give it a clinical therapeutic advantage in
treating serious and life-threatening infections because Cidecin could be
used to treat these infections regardless of which Gram-positive bacterium
is causing the infection.
- RAPIDLY KILLS BACTERIA (BACTERICIDAL). Cidecin rapidly kills virtually all
clinically significant Gram-positive bacteria IN VITRO. We believe this
could give Cidecin a clinical therapeutic advantage in treating serious
and life-threatening infections, particularly in patients that have
compromised immune systems, as compared to other drugs that do not kill
the bacteria but rather only inhibit their growth and rely on the immune
system to destroy the bacteria. Using growth-inhibiting drugs to treat
serious and life-threatening infections is riskier than using
bacteria-killing drugs because even if the growth-inhibiting drugs work,
it is possible that the immune system will not be able to destroy the
bacteria causing the infection.
- EFFECTIVE AGAINST DRUG-RESISTANT BACTERIA. Studies have shown that Cidecin
is effective IN VITRO against drug-resistant bacteria, including VRE and
GISA. Vancomycin, a glycopeptide, has become the treatment of choice for
patients who have serious Gram-positive infections that have failed to
respond to all other drugs. Recently, however, several strains of
ENTEROCOCCI have developed resistance to vancomycin and strains of
STAPHYLOCOCCUS AUREUS have become intermediately susceptible to
vancomycin. Currently, there are limited therapeutic alternatives to treat
VRE and GISA strains. We believe that Cidecin will become the therapy of
choice to treat infections caused by drug-resistant Gram-positive
bacteria.
- EASE OF ADMINISTRATION. In our current clinical trials, Cidecin is
administered in a single daily dose, intravenously, over approximately 30
minutes. Cidecin should have an advantage over several other antimicrobial
drugs that require administration in multiple doses each day, that take
longer than 30 minutes to administer or that are administered through a
central venous catheter located in parts of the body other than the arm.
CIDECIN CLINICAL DATA. On the basis of daptomycin's IN VITRO activity
against clinically significant bacteria, its bacteria-killing mode of action and
its promising profile in the Eli Lilly & Company, or Eli Lilly, Phase I and
Phase II trials, we began clinical evaluation of intravenous daptomycin. We
filed an IND with the FDA in December 1998, and we began Phase II and Phase III
trials in order to evaluate
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the safety and efficacy of intravenous daptomycin in patients with cSST and in
patients with bacteremia in February 1999. In early 2000, we branded our
intravenous formulation of daptomycin, Cidecin.
To date, we have completed two pivotal Phase III trials for the treatment of
cSST infections caused by Gram-positive bacteria and one pivotal Phase III trial
for the treatment of community-acquired pneumonia. In both of the cSST trials,
Cidecin achieved the FDA-required primary endpoint of statistical equivalence to
the comparator agents, which are currently considered optimal antibiotic
standards of care for cSST infections. In addition, data from the first of these
two trials demonstrated that clinically successful patients receiving Cidecin
required fewer days of intravenous therapy than patients receiving the
comparator agents and that Cidecin's safety profile was similar to that of the
comparator agents. On January 16, 2002 we announced that the primary endpoint of
demonstrating non-inferiority to an active comparator agent was not achieved in
the first of two Phase III trials investigating the safety and efficacy of
Cidecin in the treatment of community-acquired pneumonia requiring
hospitalization. We have discontinued the second Phase III community-acquired
pneumonia trial. We currently expect to file the NDA for Cidecin by the end of
2002.
CIDECIN SAFETY PROFILE. In our clinical trials to date, observed side
effects in patients treated with Cidecin have been comparable to those observed
in patients treated with standard therapies.
II. ORAL CEFTRIAXONE
We have obtained licenses from International Health Management Associates,
or IHMA, and the University of Utah to research, develop, and commercialize
certain oral formulations of ceftriaxone, a third-generation cephalosporin
antibiotic that has activity against both Gram-positive and Gram-negative
bacterial infections. Ceftriaxone is currently only marketed in an intravenous,
or IV, formulation. This formulation is currently the largest-selling IV
antibiotic worldwide, marketed by Hoffmann-LaRoche as Rocephin, and had sales of
over $1.0 billion in 2000. Terms of the acquisition were not disclosed.
Gram-positive and Gram-negative bacteria are responsible for the majority of
community-based infections, which include upper and lower respiratory tract
infections (including otitis media, sinusitis, bronchitis and community-acquired
pneumonia), urinary tract infections and skin and soft tissue infections. These
infections result in nearly 80 million treated patients annually in the United
States.
To date, IV ceftriaxone has been primarily used to treat hospital
in-patients due to the lack of an oral version. Nonetheless, IV ceftriaxone has
been successfully and safely prescribed for over 15 years in both adults and
children. If successfully developed, we believe that an oral formulation could
greatly expand the utility and revenue potential of ceftriaxone through
community-based prescribing. In addition, we believe oral ceftriaxone could also
be used for the continuation of antibiotic therapy by converting IV therapy to
oral therapy, otherwise known as step-down therapy. Step-down therapy provides
multiple
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benefits, including convenience and cost savings, potential earlier hospital
discharge, the reduction of associated healthcare costs and increased physician
confidence in an optimal therapeutic outcome given that a discharged patient is
receiving the same therapy that was taken intravenously in the hospital setting.
In January 2002, we announced successful results from a human clinical
research study examining the bioavailability of ceftriaxone in a variety of oral
formulations. In these studies, we achieved our goal, demonstrating clinically
relevant blood levels of ceftriaxone delivered intraduodenally, or directly to
the small intestine, in human volunteers. These studies confirmed earlier work
performed in both non-human primates and rodents. Based on these studies, we
intend to continue clinical research on oral ceftriaxone by developing and
optimizing oral dosage formulations. Should this development be completed
successfully along currently forecasted timelines, we believe that we could file
an IND with the FDA by the end of 2002 to begin formal clinical development.
III. ORAL DAPTOMYCIN
In November 2000, Cubist and Emisphere Technologies announced a research
agreement to develop an oral formulation of daptomycin. The agreement followed
successful completion of proof-of-principle feasibility studies using Emisphere
carrier molecules and daptomycin. At that time, we announced that we had been
able to show that after oral administration, the degree to which oral daptomycin
became available was sufficient to achieve efficacy in an infected rodent model.
If successfully developed, oral daptomycin would enable us to compete in the
market for step-down therapy from IV to oral, should the IV formulation also
receive FDA approval. The ability to treat infected patients with daptomycin on
an outpatient basis could be an important contributor to a reduction in
healthcare costs.
Pre-clinical testing of oral daptomycin is ongoing.
IV. LIPOPEPTIDE PROGRAM
Cidecin is the first member of a new class of chemical molecules called
lipopeptides. Within traditional classes of antimicrobials, such as penicillins
and cephalosporins, multiple antimicrobial drugs have been developed. Therefore,
we expect there will be additional clinically useful lipopeptides with the
potential for commercialization. To discover these compounds, we are engaged in
a comprehensive drug discovery and development program designed to capitalize on
our knowledge of the chemistry and biology of lipopeptides that we have acquired
through our development work with Cidecin. Based on the results of this program,
we have filed multiple patent applications on several different series of novel
analogs and are currently screening these analogs to enable the selection of an
investigational pre-clinical candidate.
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OUR DRUG DISCOVERY PROGRAMS AND TECHNOLOGIES
Our drug discovery technologies are an integral part of our mission to
accelerate the discovery of novel antiinfectives. Through experience and
acquisition, we have amassed a comprehensive portfolio of proprietary methods
for both discovering novel pharmaceuticals and also validating novel
antiinfective targets. We focus on the use of biodiversity as a means of natural
product drug discovery, while also using traditional chemical discovery and
development techniques.
OUR PROPRIETARY NATURAL PRODUCTS DRUG DISCOVERY TECHNOLOGIES
We own multiple proprietary assets and technologies in the area of natural
products that are being applied to discover novel antimicrobial drugs and will
attempt to eliminate the bottlenecks that currently exist in the natural
products drug discovery process. This portfolio includes assets such as NatChem
and proprietary natural products technologies including macrodroplet screening
and NatGen.
- NATCHEM. Our NatChem asset consists of compound extracts from a unique
collection of rare, diverse fungi and actinomycetes. Designed and curated
for maximum chemical diversity, a range of fermentation and extract
conditions are employed for each organism. The resource is continually
evaluated and improved by replacing the most heavily screened extracts
with new extracts derived from previously unexploited organisms.
In natural products screening, our proprietary macrodroplet screening
technology eliminates the need to ferment, extract and assay individual
cultures. The technology is a miniaturized, ultra high-throughput system
that integrates multiple fermentation conditions and screening into one
system. It can efficiently screen millions of strains annually against a
broad panel of antimicrobial bioassays and can be adapted for different
assay formats for a range of applications. The technology provides for the
rapid determination of desired biological activities, temporal and spatial
detection of secondary metabolite synthesis and easy recovery of the
organisms producing compounds with desired biological activity.
- NATGEN. The NatGen proprietary technologies are comprised of advanced
genetics tools that enable the cloning of large fragments of DNA that
encode entire metabolic pathways and the heterologous expression of
encoded novel secondary metabolites in the surrogate host organism. Using
these technologies, new members of biosynthetic pathways can be rapidly
isolated and identified. In addition, these tools facilitate the directed
biosynthesis of novel secondary metabolites. Directed biosynthesis is
employed to genetically modify a metabolic pathway such that novel natural
product analogs are produced. For example, the non-ribosomal peptide
synthetase responsible for the biosynthesis of daptomycin is composed of
four enzymatic subunits. Novel analogs of daptomycin with differences in
the amino acid core of this lipopeptide have been synthesized by
genetically
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producing hybrid non-ribosomal peptide synthetases composed of subunits
from the daptomycin synthetase and complementary subunits from other non
ribosomal peptide synthetases.
- DIRECTED BIOSYNTHESIS. Using Directed Biosynthesis, the metabolic pathway
for a specific natural product, is genetically modified to produce novel
natural product analogs. This directed evolution of metabolic pathways
also produces new chemical classes of compounds not found in nature.
OUR PROPRIETARY VITA FUNCTIONAL GENOMICS TECHNOLOGY
Our Validation IN VIVO of Targets and Assays for Antiinfectives, or VITA,
technology is a functional genomics tool that generates biological information
useful for identifying drug discovery targets from clinically important
pathogens such as STAPHYLOCOCCUS AUREUS. The technology allows validated targets
to be rapidly enabled for high-throughput screening assays used for the
identification of quality lead compounds for medicinal chemistry programs. VITA
is broadly applicable to both validation IN VIVO and screening IN VITRO of drug
discovery targets with diverse functions, including those targets for which no
suitable high-throughput screening assay has been identified.
An antimicrobial drug acts during an infection by binding to a specific
target and inhibiting its function. Target inhibition leads to impaired pathogen
growth or pathogen cell death; consequently the infected subject survives the
infection. The method by which novel targets are validated using the VITA
technology is analogous to how an antibiotic inhibits its target during an
established infection. A target is validated if a causal link is established
between the target and a cellular response important in a disease process.
Utilizing VITA, a target is validated by initially identifying a peptide that
specifically binds to the target and subsequently regulating the production of
the peptide in the pathogen during an established infection in mice. If the
target is essential for pathogen survival, production of the peptide will
inhibit target function and prevent pathogen growth, and the mice will survive.
If the inhibition of the target is not essential for pathogen survival, the
pathogen will continue to thrive and the mice will die from the infection. The
peptide used to specifically inhibit the target can then be used in a
high-throughput screening assay to identify small molecule compounds. We have
filed patent applications in connection with our VITA technology.
In February 1999, we entered into a collaborative research and license
agreement with Novartis Pharma AG, or Novartis, in which we granted Novartis a
non-exclusive license to the VITA technology. As of this filing, three novel,
validated antibacterial targets and screening assays have been delivered to
Novartis, triggering milestone payments to us by Novartis. In 2001 this
collaboration was extended for the full three-year term of the original
agreement. In 2002 the collaborative research agreement was renewed for a fourth
year.
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OUR PROPRIETARY LEAPS TECHNOLOGY
To enhance our ability to effectively use high-throughput screening data
from target-based assays, we have designed and implemented a discovery approach
called LEAPS (Lead Evolution for Antiinfectives using Pharmacophores and
Scaffolds). Industry-wide experience has demonstrated that having
high-throughput screening assays and large numbers of compounds to screen does
not consistently yield lead compounds suitable for medicinal chemistry. This
problem is especially acute in antimicrobials where, to be effective, lead
compounds need to be active against diverse pathogen species and to have
properties that permit pathogen cell-wall penetration. Our LEAPS approach
bridges the gap between high-throughput screening and medicinal chemistry and
serves as the drug discovery engine that fuels our medicinal chemistry programs.
LEAPS integrates high-throughput screening, enzymology, combinatorial chemistry
and structure based drug design to generate three-dimensional models that are
predictive for biological activity of a medicinal chemistry series. To enhance
the LEAPS technology we have entered into a three year collaborative agreement
with Syrrx Inc. to rapidly examine the ligand/target structures of many
medicinal chemistry series with target enzymes from multiple, diverse bacterial
species. By combining these technologies, many novel series of compounds can be
designed to have the proper chemical and broad-spectrum properties to be new
antimicrobial agents.
HIGH-THROUGHPUT SCREENING
We utilize automation, robotics and assay technologies to perform
high-throughput screening of compound libraries to identify novel inhibitors.
Thousands of compounds a day may be screened in VITA-generated target-based and
whole cell assays. Inhibitors may be further characterized using our secondary
screening assays where increasingly stringent selection criteria are applied to
identify lead candidates with the greatest potential for successful medicinal
chemistry programs.
MEDICINAL CHEMISTRY
Medicinal chemistry refers to an iterative process where lead series of
compounds are optimized to yield new drug candidates. We have implemented
systems that allow for the optimization of many series of compounds for any
given target. In each compound series, we place an emphasis on extensively
evaluating the profile of compounds including microbiological and IN VIVO
properties. Our integrated chemistry and biology teams focus on the key
parameters that need improvement for a series to advance to drug development. By
utilizing many chemical series for each target, we increase the chances that
these series will overcome the IN VIVO hurdles to pre-clinical development. To
accelerate this process, we have put into place high-throughput systems for
preparing, purifying and testing compounds.
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OUR COLLABORATIVE AGREEMENTS
We seek to enter into drug discovery and development collaboration
agreements to discover, develop and commercialize novel antimicrobials. In
addition to providing us with funding, collaborations give us access to
libraries of diverse compounds and to the clinical development, manufacturing
and commercialization capabilities of the partners.
NOVARTIS
In February 1999, we announced the signing of a research and license
collaboration agreement with Novartis to use our proprietary VITA technology to
validate and develop assays for antiinfective targets and to identify new
compounds for development as antiinfective agents. Novartis was granted a
non-exclusive license to the VITA technology and exclusive licenses to specific
targets, assays and compounds. Under certain circumstances, we will have
co-exclusive rights with Novartis to particular targets and assays.
Upon the signing of the collaboration, Novartis made an up-front,
$4.0 million equity investment in us. The collaboration agreement contemplated
that Novartis would provide us with research funding annually for three years,
with an option to terminate at the end of two years. The total value of the
collaboration to Cubist based on the equity investment, research funding and
potential milestone payments could exceed $33.0 million, assuming that two
products are ultimately developed. In addition, we will receive royalties on net
sales of each product stemming from the collaboration.
In October 2000, we announced the achievement of the first milestone in the
collaboration with Novartis and received a payment of $500,000 for the delivery
of a validated target and a high-throughput screening assay for antiinfective
drug discovery. Shortly thereafter, in November 2000, as a result of the success
of the collaboration, Novartis agreed to extend the collaboration to its full
three years, or until February 2002. Then in January 2001, we announced the
achievement of a second milestone in the collaboration through the delivery of
another validated antiinfective target and high-throughput screening assay. In
February 2002, we announced the achievement of a third milestone in the
collaboration and a one-year extension of the agreement.
Both parties are screening their respective compound libraries against the
assays developed in the collaboration. Novartis will optimize any candidates and
will conduct appropriate pre-clinical testing. The work conducted under the
collaboration is reviewed by a management committee composed of representatives
from both companies. Products resulting from this effort will be clinically
developed and commercialized worldwide by Novartis.
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BIOTECHNOLOGY ALLIANCES
To expand our access to novel small molecule libraries and other
technologies for screening, target and drug discovery, we have formed and are
currently engaged in alliances with biotechnology companies including Albany
Molecular Research Inc., Cetek Corporation, Synthematix, Inc. and Syrrx Inc.
PATENTS AND PROPRIETARY TECHNOLOGY
We seek to protect our cloned targets, expressed proteins, assays, organic
synthetic processes, lead compounds, screening technology and other technologies
by, among other things, filing, or causing to be filed on our behalf, patent
applications. As of March 15, 2002, we owned or co-owned 28 issued U.S. patents,
35 pending U.S. patent applications, 10 issued foreign patents and numerous
pending foreign patent applications. As of March 15, 2002, we had licensed, from
the Massachusetts Institute of Technology, three U.S. patents related to
research technologies. We have licenses to research, develop and commercialize
certain oral formulations of ceftriaxone from IHMA and the University of Utah
under an issued U.S. patent related to oral formulations of ceftriaxone, and
together with the University of Utah and IHMA, we co-own pending U.S. and
foreign patent application equivalents related to oral formulations and specific
oral dosage forms of antibiotics. Additionally, we have licensed from Eli Lilly
a portfolio of eight issued U.S. patents and 16 foreign patents related to the
composition, manufacture, administration and use of daptomycin. In addition, Eli
Lilly has agreed to assign to us an additional two U.S. issued patents, 53
issued foreign patents and two pending foreign patent applications. This
portfolio also covers the composition, manufacture and use of daptomycin. We
have also filed a number of patent applications in our name relating to the
composition, manufacture, administration and use of daptomycin and other
lipopeptides. The Company has received a Notice of Allowance from the U.S.
Patent and Trademark Office for a daptomycin-related patent application entitled
"Methods for Administration of Antibiotics," which the Company expects will
issue in 2002. We cannot be sure that patents will be granted with respect to
any of our pending patent applications or with respect to any patent
applications filed by us in the future, nor can we be sure that any of our
existing patents or any patents that may be granted to us in the future will be
commercially useful in protecting our technology.
MANUFACTURING
We currently engage ACS Dobfar SpA, or ACS, to manufacture bulk clinical
grade daptomycin drug substance for our clinical trials. We currently obtain our
finished clinical grade vialed formulation of daptomycin from Abbott
Laboratories (Hospital Products Division), or Abbott.
In April 2000, we entered into a development and supply agreement with
Abbott pursuant to which Abbott has agreed to assist Cubist in the development
of daptomycin as a parenteral formulation and to manufacture and sell
exclusively to us, daptomycin as a parenteral formulation. Under the terms of
this
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agreement, we have agreed to make certain milestone payments to Abbott for their
development efforts and assistance in obtaining an approved NDA for daptomycin.
If the FDA approves the daptomycin NDA, we will purchase minimum annual
quantities of drug product from Abbott over a five-year period.
In June 2000, we entered into a services agreement with Gist-brocades
Holding A.G., or DSM, an affiliated company of DSM Capua pursuant to which DSM
has agreed to provide supervisory and advisory services to us relating to the
equipping of the manufacturing facility at DSM Capua. We have also entered into
a manufacturing and supply agreement with DSM Capua pursuant to which DSM Capua
has agreed to manufacture and supply to us bulk daptomycin drug substance for
commercial purposes. Under the terms of the manufacturing and supply agreement,
DSM Capua is required to prepare its manufacturing facility in Italy to
manufacture bulk daptomycin drug substance in accordance with Good Manufacturing
Practices, or GMP, standards. Under the terms of the service agreements, we will
make a series of scheduled payments to DSM over a five year period beginning in
2000 in order to reimburse DSM for certain costs to be incurred by DSM Capua in
connection with the scale up and construction of its manufacturing facility. In
addition, in consideration for the implementation of our technology in the
facility by DSM Capua, we have agreed to make milestone payments to DSM if
specific phases of the preparation of its manufacturing facility are completed
within specified periods of time. We are accruing these milestone payments based
on cost incurred. Upon completion of the preparation of DSM Capua's
manufacturing facility and a determination by the FDA that the manufacturing
facility complies with GMP standards, we will purchase minimum annual quantities
of bulk daptomycin drug substance from DSM over a five-year period.
In November 2001, we entered into a manufacturing and supply agreement with
ACS pursuant to which ACS has agreed to provide scale-up services and to
construct a production facility dedicated to the manufacture of daptomycin and
to sell bulk daptomycin exclusively to us for commercial purposes. Under the
terms of this agreement, ACS is required to prepare its manufacturing facility
in Italy to manufacture bulk daptomycin drug substance in accordance with GMP
standards. In consideration, we will make contributions in equity, milestones,
product price premiums, resin investment, process development, quality systems
and facility qualification support. Upon completion of the preparation of ACS's
manufacturing facility and a determination by the FDA that the manufacturing
facility complies with GMP, standards, we will purchase minimum annual
quantities of bulk daptomycin drug substance from ACS over a six-year period.
Under the terms of the agreement, we issued to ACS 62,558 shares of our common
stock. These shares had a value of $2.0 million. The cost of these shares was
accounted for as part of the cost of the manufacturing facility and was recorded
as other assets.
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SALES AND MARKETING
We have the exclusive worldwide rights to commercialize daptomycin, in both
intravenous and oral formulations, and any analogs of daptomycin to which we
have intellectual property rights.
In North America, it is our plan to commercialize Cidecin via a Cubist-owned
sales force assuming regulatory approval. We are currently in the process of
building a commercial infrastructure and expect to launch Cidecin with a sales
force of approximately 100-125 representatives. As part of our commercialization
strategy in the U.S., it is our plan to establish a medical science liaison team
of 20-30 representatives to provide medical education services to infectious
disease specialists and other opinion leaders. To this end, in February 2001, we
announced the hiring of 10 medical science liaisons. Should Cidecin gain FDA
approval, this team will form the basis for the larger educational marketing
team. Until such time, the team is leveraging its current relationships with
thought leaders in the antiinfective space to aid in the recruitment and
education of clinical trial physicians involved in the development of Cidecin.
The group is also playing a key role in the strategic direction of Cubist by
identifying antibiotic resistance and trends, initiating medical affairs
efforts, providing input on Phase III/Phase IV clinical studies, guiding the
advancement of early-stage clinical candidates and assisting in the assessment
of potential product and technology acquisitions.
In January 2001, Cubist and Gilead jointly announced the signing of a
licensing agreement for the exclusive rights to commercialize Cidecin and an
oral formulation of daptomycin in 16 European countries following regulatory
approval. Gilead paid us an up-front licensing fee of $13 million, and we are
entitled to receive additional cash payments of up to $31 million upon
achievement of certain clinical and regulatory milestones. Gilead will also pay
us a fixed royalty on net sales. We will continue to be responsible for
worldwide clinical development of Cidecin, while Gilead will be responsible for
any regulatory filings in the covered territories. Gilead's sales force will
market the products in Europe. We will provide Cubist-employed European medical
science liaisons to support the product by providing medical education services
to infectious disease specialists and other international opinion leaders.
We are currently investigating commercialization strategies for Cidecin
outside North America and Europe.
As a result of our agreements with IHMA and the University of Utah, we have
rights to commercialize certain oral formulations of ceftriaxone. As our
formulations of oral ceftriaxone are in clinical research programs, we have not
yet formulated a commercialization strategy.
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GOVERNMENT REGULATION
OVERVIEW
The development, manufacture and marketing of drugs, including antibiotics,
developed by us or our collaborative partners are subject to regulation by
numerous governmental agencies in the U.S., principally the FDA, by state and
local governments, and in some instances by foreign governments. Pursuant to the
Federal Food, Drug, and Cosmetic Act, or FDC Act, and the regulations
promulgated thereunder, the FDA regulates the pre-clinical and clinical trials,
safety, effectiveness, manufacture, labeling, storage, record keeping,
distribution, and promotion of drugs. Product development and approval within
the FDA regulatory framework usually takes a significant number of years,
involves the expenditure of substantial capital resources and is uncertain.
FDA PROCESS
Before testing in the United States of any compounds with potential
therapeutic value in human subjects may begin, stringent government requirements
for pre-clinical data must be satisfied. Pre-clinical testing includes both IN
VITRO and IN VIVO laboratory evaluation and characterization of the safety and
efficacy of a drug and its formulation. Pre-clinical testing results obtained
from studies in several animal species, as well as from IN VITRO studies, are
submitted to the FDA as part of an IND and are reviewed by the FDA prior to the
commencement of human clinical trials. These pre-clinical data must provide an
adequate basis for evaluating both the safety and the scientific rationale for
the initial studies in human volunteers. Unless the FDA objects to an IND, the
IND becomes effective 30 days following its receipt by the FDA. Once trials have
commenced, the FDA may stop the trials by placing them on "clinical hold"
because of concerns about, for example, the safety of the product being tested.
Clinical trials involve the administration of the drug to healthy human
volunteers or to patients under the supervision of a qualified investigator,
usually a physician, pursuant to an FDA-reviewed protocol. Human clinical trials
are typically conducted in three sequential phases, although the phases may
overlap with one another. Clinical trials must be conducted under protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Each clinical trial must be conducted under the
auspices of an Institutional Review Board that considers, among other things,
ethical factors, the safety of human subjects, the possible liability of the
institution and the informed consent disclosure, which must be made to
participants in the clinical trial.
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety, dose tolerance,
absorption,
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biodistribution, metabolism, excretion and clinical pharmacology and, if
possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose response and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for product
labeling. The Phase III clinical development program consists of expanded,
large-scale studies of patients with the target disease or disorder, to obtain
definitive statistical evidence of the efficacy and safety of the proposed
product and dosing regimen. All of the phases of clinical studies must be
conducted in conformance with the FDA's bioresearch monitoring regulations.
All data obtained from a comprehensive development program including
research and product development, manufacturing, pre clinical and clinical
trials and related information are submitted in an NDA to the FDA and the
corresponding agencies in other countries for review and approval. In addition
to reports of the trials conducted under the IND, the NDA includes information
pertaining to the preparation of the new drug or antibiotic, analytical methods,
details of the manufacture of finished products and proposed product packaging
and labeling. Although the FDC Act requires the FDA to review NDAs within
180 days of their filing, in practice, longer times may be required. The FDA
also frequently requests that additional information be submitted, requiring
significant additional review time. Any of our proposed products would likely be
subject to demanding and time-consuming NDA approval procedures in virtually all
countries where marketing of the products is intended. These regulations define
not only the form and content of safety and efficacy data regarding the proposed
product but also impose specific requirements regarding manufacture of the
product, quality assurance, packaging, storage, documentation and record
keeping, labeling, advertising and marketing procedures.
In some cases, drug approvals may proceed under the accelerated approval or
"fast track" provisions of the Food and Drug Administration Modernization Act.
The accelerated approval provisions are largely codified FDA's accelerated
approval regulations. While the statutory provisions expand upon the
regulations, the FDA continues to rely on its regulations to implement the
statutory provision. The accelerated approval regulations apply to products used
in the treatment of serious or life-threatening illnesses that appear to provide
meaningful therapeutic benefits over existing treatments. These regulations
permit approval of such products before clinical research is completed based on
the product's effect on a clinical endpoint or surrogate endpoint. When a
product is approved under the accelerated approval regulations, the sponsor may
be required to conduct additional adequate and well controlled
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studies to verify that the effect the surrogate endpoint correlates with
improved clinical outcome or to otherwise verify the clinical benefit. In the
event such post-marketing studies do not verify the drug's anticipated clinical
benefit, or if there is other evidence that the drug product is not shown to be
safe and effective, expedited withdrawal procedures permit the FDA, after a
hearing, to remove a product from the market. Significant uncertainty exists as
to the extent to which these accelerated approval regulations will result in
accelerated review and approval. The FDA retains considerable discretion to
determine eligibility for accelerated review and approval.
OTHER REGULATORY PROCESSES
We are also subject to regulation under other federal laws and regulation
under state and local laws, including laws relating to occupational safety,
laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although we
believe that our safety procedures for handling and disposing of radioactive
compounds and other hazardous materials used in our research and development
activities comply with the standards prescribed by federal, state and local
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of any such accident, we could be
held liable for any damages that result and any such liability could exceed our
resources.
OUR EMPLOYEES
As of March 15, 2002, we had 180 full-time employees, 112 of whom were
engaged in research and development and 68 of whom were engaged in management,
marketing, administration and finance. Doctorates are held by 56 of our
employees. Our employees are not covered by a collective bargaining agreement.
We have never experienced an employment-related work stoppage and we consider
our employee relations to be good.
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OUR EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers and their ages as of March 30, 2002 are
as follows:
<Table>
<S> <C> <C>
Scott M. Rocklage, Ph.D..................... 47 Chairman of Board of Directors and Chief
Executive Officer
Michael W. Bonney........................... 43 President and Chief Operating Officer
Francis P. Tally, M.D....................... 61 Executive Vice President, Scientific Affairs
Julian M. Davies, Ph.D...................... 70 Executive Vice President, Technology
Development
Robert J. McCormack, Ph.D................... 48 Senior Vice President, Drug Development
Christopher D.T. Guiffre.................... 33 Vice President, General Counsel & Secretary
Dennis D. Keith, Ph.D....................... 58 Vice President, Chemical Development
Frederick B. Oleson, Jr., D.Sc.............. 52 Vice President, Pre-Clinical Development
Thomas A. Shea.............................. 42 Vice President, Finance and Administration,
Chief Financial Officer & Treasurer
George H. Shimer, Jr., Ph.D................. 48 Vice President, Research
Thomas J. Slater............................ 46 Vice President, Commercial Development
Susan Bayh (3).............................. 42 Director
Barry Bloom, Ph.D. (1)...................... 73 Director
John K. Clarke (2).......................... 49 Director
David W. Martin, Jr., M.D. (2) (3).......... 61 Director
Walter Maupay (2) (3)....................... 63 Director
Paul R. Schimmel, Ph.D. (1)................. 61 Director
John Zabriskie, Ph.D. (1)................... 62 Director
</Table>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
DR. ROCKLAGE was elected Chairman of the Board of Directors in March 2000.
Dr. Rocklage has served as our Chief Executive Officer and as a member of the
board of directors since July 1994. He served as our President from July 1994
until March 2001. From 1990 to 1994, Dr. Rocklage served as President and Chief
Executive Officer of Nycomed Salutar, Inc., a diagnostic imaging company. From
1992 to 1994, he also served as President and Chief Executive Officer and
Chairman of Nycomed Interventional, Inc., a medical device company. From 1986 to
1990, he served in various positions at Nycomed Salutar, Inc. and was
responsible for designing and implementing research and development programs
that resulted in three
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drug products in human clinical trials, including the approved drugs Omniscan
and Teslascan. Dr. Rocklage currently serves as a director of MDS
Proteomics, Inc. Dr. Rocklage received his B.S. in Chemistry from the University
of California, Berkeley and his Ph.D. in Chemistry from the Massachusetts
Institute of Technology.
MR. BONNEY has served as our President & Chief Operating Officer since
January 2002. From 1995 to 2001, he held various positions of increasing
responsibility at Biogen, Inc., including Vice President, Sales and Marketing
from 1999-2001. While at Biogen, Mr. Bonney built the commercial infrastructure
for the launch of Avonex. Prior to that, Mr. Bonney held various positions in
sales, marketing and strategic planning at Zeneca Pharmaceuticals, ending his
eleven-year career there serving as National Business Director. Mr. Bonney
received a BA in Economics from Bates College.
DR. TALLY has served as our Executive Vice President, Scientific Affairs
since January 1997. From March 1995 to January 1997, he served as our Vice
President of Research and Development. From 1986 to February 1995, Dr. Tally
served as Executive Director of Infectious Disease, Molecular Biology and
Natural Products Research at the Lederle Laboratories of American
Cyanamid/American Home Products, where he was responsible for worldwide clinical
studies for piperacillin/tazobactam, which was registered for sales in Europe in
1992, approved by the FDA in 1993 and marketed as Zosyn. From 1975 to 1986, he
served as Senior Physician in Infectious Disease at the New England Medical
Center and Associate Professor of Medicine at Tufts Medical Center. Dr. Tally
received his A.B. in Biology from Providence College and his M.D. from George
Washington University School of Medicine.
DR. DAVIES was appointed Executive Vice President of Technology Development
following Cubist's October 2000 acquisition of TerraGen Discovery Inc.
Dr. Davies founded TerraGen in 1996 where he served as Chief Scientific Officer.
From 1992 to 1996, he served as Head of Microbiology and Immunology at the
University of British Columbia and was Research Director and President of Biogen
(Geneva) from 1980 to 1985. Dr. Davies has held academic positions at the
University of Wisconsin, University of Geneva and Institut Pasteur and is a past
President of the American Society of Microbiology. He is a Fellow of the Royal
Society (London) and the Royal Society of Canada and Emeritus Professor of
Microbiology and Immunology. Dr. Davies received a B.Sc. and Ph.D. in Chemistry
from the University of Nottingham.
DR. MCCORMACK has served as our Senior Vice President of Drug Development
since July 2000. From 1997 until 2000, Dr. McCormack was Vice President,
Regulatory Affairs at Target Research Associates. Prior to that, he served as
Vice President, Regulatory Affairs from 1993 to 1997 and as Director, Regulatory
Affairs from 1987 to 1993 at Oxford Research International Corporation, a large
contract research organization. Dr. McCormack has also served in various
positions at Knoll Pharmaceuticals, Morristown Memorial Hospital and
Sandoz, Inc. During his career, Dr. McCormack has participated in gaining
approval for drugs in the CNS, cardiovascular, dermatological and oncological
therapeutic areas.
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He has a B.A. in Biology from William Patterson College and a Ph.D. in Molecular
Immunology from Rutgers University.
MR. GUIFFRE has served as our Vice President, General Counsel and Secretary
since December 2001. From 1997 to 2001, Mr. Guiffre held various positions of
increasing responsibility at Renaissance Worldwide, Inc., a provider of
information technology consulting services, including Counsel, Corporate Counsel
and Director of Legal Affairs, and Vice President, General Counsel and Clerk.
Prior to joining Renaissance Worldwide, he was an Associate at Bingham Dana LLP,
a Boston law firm. He received a B.S. in Marketing from Babson College, a JD
from Boston College Law School, and an MBA from Boston College Carroll School of
Management. Mr. Guiffre is a member of the Massachusetts Bar.
DR. KEITH has served as our Vice President, Chemical Development since
July 2000. From October 1997 to July 2000, he served as our Vice President, Drug
Discovery. From 1971 to October 1997, Dr. Keith was with Hoffmann-La Roche Inc.
where he served in various positions, including Director of Antiinfective
Chemistry, Senior Director of Medicinal Chemistry and Research Director of
Oncology. Dr. Keith received his B.S. in Chemistry from Bates College and his
Ph.D. in Organic Chemistry from Yale University.
DR. OLESON has served as our Vice President, Pre-Clinical Development since
July 2000. From November 1997 to July 2000, he served as our Vice President,
Drug Development. Prior to joining us, Dr. Oleson was an independent consultant
from June 1997 to November 1997. From January 1997 to June 1997, Dr. Oleson
served as Director of Preclinical Research at Autoimmune, Inc., a biotechnology
company. From 1992 to January 1997, Dr. Oleson served as Director, Toxicology
and Preclinical Pharmacology at Biogen, Inc., a biotechnology company.
Dr. Oleson also held various positions at Bristol-Myers Squibb from 1983 to
1992. Dr. Oleson was a key contributor in the development of the Biogen drug
Avonex and a key consultant in the development of Angiomax for The Medicines
Company. Dr. Oleson received his B.S. in Biochemistry from Princeton University
and a Doctor of Science in Physiology/ Radiation Biology from Harvard University
School of Public Health.
MR. SHEA has served as our Vice President, Finance and Administration and
Chief Financial Officer since December 1998. He has also served as our Treasurer
and Chief Accounting Officer since June 1996. From December 1997 to
December 1998 he served as our Senior Director of Finance and Administration,
and from 1993 to November 1997, as our Director of Finance and Administration.
From 1987 to 1993, he served as Manager of Accounting/MIS and Budget and
Financial Analyst at ImmuLogic Pharmaceutical Corporation, a biotechnology
company. Mr. Shea received his B.S. in Accounting/Law from Babson College and
his M.B.A. from Suffolk University.
DR. SHIMER has served as our Vice President, Research since July 2000. From
January 2000 to July 2000, he served as our Vice President, Biology. Prior to
joining us, Dr. Shimer was Senior Director, Pathogen Genomics at Genome
Therapeutics Corp. from February 1995 through January 2000.
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Dr. Shimer received his B.S. in Biochemistry from North Carolina State
University and his Ph.D. in Biochemistry from Colorado State University.
MR. SLATER has served as our Vice President, Commercial Development since
May 1999. From July 1998 to April 1999, he served as Senior Vice President of
Business Development for Newport Strategies, a consulting company. From
January 1996 to June 1998, he served as Vice President, Biomaterials Business
for Genzyme Corporation, a biotechnology company. From 1988 to January 1996,
Mr. Slater served in various sales and marketing positions for Genzyme
Corporation. Prior to 1988, Mr. Slater served in marketing and sales positions
for pharmaceutical companies Hoffmann LaRoche and Upjohn. Mr. Slater received
his B.S. in Biology from Upsala College.
MS. BAYH has served as one of our directors since June 2000. From 1994 to
present, Ms. Bayh has served as the Commissioner of the International Joint
Commission (IJC), a bi-national organization between the United States and
Canada focusing on environmental issues of the Great Lakes. Ms. Bayh served as
an attorney in Eli Lilly's Pharmaceutical Division handling federal regulatory
issues for marketing and medical clients from 1989 to 1994 and, from 1984 until
1989, Ms. Bayh practiced law, focusing on litigation, utility and corporate law,
and antitrust. She is also a director of Anthem, Inc., (a Blue Cross/Blue Shield
company), Corvas International, Inc., a biotechnology company, Curis, Inc., a
biotechnology company, Esperion Therapeutics, a biotechnology company, Emmis
Communications, and Golden State Foods. Ms. Bayh has a B.A. from the University
of California at Berkeley and a J.D. from the University of Southern California
Law Center.
DR. BLOOM has served as a one of our directors since September 1993.
Dr. Bloom has more than 40 years experience in the pharmaceutical industry. From
1952 to 1993, Dr. Bloom served in various positions at Pfizer Inc., including
Executive Vice President of Research & Development. He is a director of Vertex
Pharmaceuticals, Inc., Microbia and Neurogen Corp., biotechnology companies and
Incyte Pharmaceuticals, Inc., a genomics company. Dr. Bloom received his S.B. in
Chemistry and his Ph.D. in Organic Chemistry from the Massachusetts Institute of
Technology.
MR. CLARKE is one of our founders and served as Chairman of the Board of
Directors from our incorporation to March 2000. Mr. Clarke has served as one of
our directors since our incorporation. From 1992 to 1994, Mr. Clarke served as
our acting President and Chief Executive Officer. Since 1982, he has been a
general partner of DSV Management in Princeton, New Jersey, the general partner
of DSV Partners IV. He is a founder and director of Alkermes, Inc. and a
director of VISICU, Inc., MedContrax, Inc., Molecular Mining, Inc. and
TechRx, Inc. Mr. Clarke is the Managing General Partner for Cardinal Partners,
founded in 1997. Mr. Clarke is also the General Partner for DSV Partners.
Mr. Clarke has been employed with DSV Partners since 1982. Mr. Clarke received
his B.A. in Biology and Economics from Harvard College and his M.B.A. from The
Wharton School of the University of Pennsylvania.
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DR. MARTIN has served as one of our directors since October 1997. Since
July 1997, Dr. Martin has served as President, Chief Executive Officer and a
founder of Eos Biotechnology, Inc. Dr. Martin was a Professor of Medicine,
Professor of Biochemistry and an Investigator of the Howard Hughes Medical
Institute at the University of California San Francisco until 1983 when he
became the first Vice President and subsequently Senior Vice President of
Research and Development at Genentech, Inc., a position he held until 1990. He
was Executive Vice President of DuPont Merck Pharmaceutical Company from 1991
through 1993 and then returned to California in 1994 where he was Senior
Vice-President of Chiron Corp., a biotechnology company, and President of Chiron
Therapeutics. In May 1995, he assumed the position of President and Chief
Executive Officer of Lynx Therapeutics, Inc., a biotechnology company, and
served until November 1996. Dr. Martin is also a Director of Varian Medical
Systems, Inc., a medical equipment and software supplier, and of Telik, Inc., a
biopharmaceutical development company.
MR. MAUPAY has served as one of our directors since June 2000. Since 1988,
Mr. Maupay has served as President of Calgon Vestal Laboratories, a division of
Merck & Co., Inc. until January 1995, when it was sold to Bristol-Myers Squibb.
Since June 1995, Mr. Maupay has also served as Group Executive of Calgon Vestal
Laboratories after the sale to Bristol-Myers Squibb. From 1984 to 1988
Mr. Maupay served as Vice-President, Healthcare at Calgon Vestal Laboratories.
Mr. Maupay is a director of Life Medical Sciences, Inc., a medical device
company, Kensey Nash Corporation, a medical device company, Neshaminy Golf
Club, Inc. and Warwick Golf Farm. Mr. Maupay received his Bachelor of Science in
Pharmacy from Temple University and his M.B.A. from Lehigh University.
DR. SCHIMMEL is one of our scientific founders and has served as one of our
directors since our incorporation. From 1967 to 1998, Dr. Schimmel served as a
Professor of Biochemistry and Biophysics at the Massachusetts Institute of
Technology and as the John D. and Catherine T. MacArthur Professor of
Biochemistry and Biophysics at the Massachusetts Institute of Technology from
1992 to 1997. He has been a Professor and member of the Skaggs Institute for
Chemical Biology of the Scripps Research Institute since 1998 and an Ernest and
Jean Hahn Professor of Molecular Biology and Chemistry since 2001. Dr. Schimmel
is an expert in molecular biology, protein translation and aminoacyl-tRNA
synthetases. He is a member of the National Academy of Sciences and the American
Academy of Arts and Sciences. Dr. Schimmel was a founder and is a director of
Repligen Corporation and Alkermes, Inc., each a biotechnology company.
Dr. Schimmel received his A.B. in Pre-Medicine from Ohio Wesleyan University and
his Ph.D. in Biochemistry from the Massachusetts Institute of Technology.
DR. ZABRISKIE has served as one of our directors since June 1999.
Dr. Zabriskie is currently president of Lansing Brown Investments, LLC, an
investment firm, and Chief Executive Officer of BioSpecific, LLC, a diagnostic
company. From July 1997 to July 2000, Dr. Zabriskie served as Chairman of the
Board of NEN Life Science Products, Inc., a laboratory supply company. From
July 1997 to December 1999, Dr. Zabriskie also served as President and Chief
Executive Officer of NEN Life Science Products, Inc. From November 1995 to
January 1997, he was President and Chief Executive Officer of Pharmacia &
Upjohn, a pharmaceutical company. From 1994 to November 1995, he served as
President, Chief Executive Officer and Chairman of Upjohn Co.
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RISK FACTORS
INVESTING IN OUR COMPANY INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER
CAREFULLY THE RISKS DESCRIBED BELOW, TOGETHER WITH THE OTHER INFORMATION IN AND
INCORPORATED BY REFERENCE INTO THIS DOCUMENT. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCUR, OUR BUSINESS, OPERATING RESULTS OR FINANCIAL CONDITION COULD BE
MATERIALLY ADVERSELY AFFECTED. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON
STOCK TO DECLINE, AND COULD CAUSE YOU TO LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS
OUR OPERATING RESULTS FOR THE FORESEEABLE FUTURE WILL DEPEND SIGNIFICANTLY ON
OUR ABILITY TO OBTAIN REGULATORY APPROVAL OF, AND TO SUCCESSFULLY COMMERCIALIZE,
CIDECIN.
Cidecin is currently our only drug candidate in clinical trials. We may not
receive revenues or royalties from commercial sales of Cidecin or any other drug
in the foreseeable future, if at all.
Our development of Cidecin involves a high degree of risk. Many important
factors may affect our ability to successfully develop and commercialize
Cidecin, including our ability to:
- demonstrate safety and efficacy of Cidecin at each stage of the clinical
trial process;
- meet applicable regulatory standards and receive required regulatory
approvals;
- obtain, maintain and enforce necessary patents and licenses;
- produce Cidecin in commercial quantities at reasonable costs;
- obtain reimbursement coverage for Cidecin;
- compete successfully against other products; and
- market Cidecin successfully.
We cannot be sure that we will successfully develop and commercialize
Cidecin or that we will obtain required regulatory approvals for its
commercialization. As a result, we may never generate revenues from Cidecin
sales.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST AND EXPECT TO INCUR ADDITIONAL
LOSSES OVER THE NEXT SEVERAL YEARS.
Since we began operations, we have incurred substantial net losses in every
fiscal period. We had net losses of $69.9 million in 2001, $44.3 million in
2000, and $24.1 million in 1999. We had an accumulated deficit of
$178.0 million through December 31, 2001. These losses have resulted principally
from costs in
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conducting research and development activities, conducting clinical trials and
associated administrative costs.
While we do not currently maintain cost accounting systems to accurately
track costs on an individual project basis, based on an estimated average
full-time equivalent basis, we estimate that in 2001 we incurred costs in an
approximate aggregate amount of $2.7 million in connection with all of our
research collaborations which generated approximately $2.5 million of revenue in
the aggregate in 2001; and based on an estimated average full-time equivalent
basis, we estimate that in 2000, we incurred costs in an approximate aggregate
amount of $4.5 million in connection with all of our research collaborations
which generated approximately $4.3 million of revenue in the aggregate in 2000.
We expect to incur significant additional operating losses over the next
several years as we expand our research and development efforts, pre-clinical
testing and clinical trials and we implement manufacturing, marketing and sales
programs. As a result, we cannot predict when we will become profitable, if at
all, and if we do, we may not remain profitable for any substantial period of
time. If we fail to achieve profitability within the time frame expected by
investors, the market price of our Common Stock may decline.
WE DEPEND ON THIRD PARTIES FOR MANUFACTURING OF DAPTOMYCIN, AND OUR
COMMERCIALIZATION OF DAPTOMYCIN COULD BE STOPPED, DELAYED OR MADE LESS
PROFITABLE IF THOSE THIRD PARTIES FAIL TO PROVIDE US WITH SUFFICIENT QUANTITIES
AT ACCEPTABLE PRICES.
We have no experience in manufacturing. We lack the facilities and personnel
to manufacture products in accordance with the GMP prescribed by the FDA or to
produce an adequate supply of compounds to meet future requirements for clinical
trials and commercialization of daptomycin. Drug manufacturing facilities are
subject to an inspection before the FDA will issue an approval to market a new
drug product, and all of the manufacturers that we intend to use must adhere to
the current GMP regulations prescribed by the FDA.
We currently depend entirely on one company, ACS, to manufacture bulk
daptomycin drug substance for our clinical trials, and on one company, Abbott,
to manufacture clinical grade vialed formulations of daptomycin. We have entered
into manufacturing and supply agreements with DSM and ACS to manufacture and
supply to us bulk daptomycin drug substance for commercial purposes. We have
also entered into a development and supply agreement with Abbott to manufacture
and supply final vialed daptomycin commercial drug product.
We may not be able to enter into definitive agreements on acceptable terms
for the expanded commercial scale manufacturing of daptomycin. If we are unable
to do so, or if we are required to transfer manufacturing processes to other
third-party manufacturers, we would be required to satisfy
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various regulatory requirements, and we could experience significant delays in
supply. If we are unable to maintain, develop or contract for manufacturing
capabilities on acceptable terms at any time, our ability to conduct clinical
trials and to make any commercial sales would be adversely affected.
IF WE ARE UNABLE TO DEVELOP SATISFACTORY SALES AND MARKETING CAPABILITIES, WE
MAY NOT SUCCEED IN COMMERCIALIZING CIDECIN OR ANY OTHER PRODUCT CANDIDATE.
We have no experience in marketing and selling drug products. We have
entered into a marketing, distribution and development agreement with Gilead for
the development and commercialization of Cidecin and oral daptomycin in the
European Community. We have not entered into other arrangements for the sale and
marketing of Cidecin or any other product in North America. We may seek to
collaborate with a third party to market our drugs, or we may seek to market and
sell our drugs by ourselves. If we seek to collaborate with a third party in
North America, we cannot be sure that a collaborative agreement can be reached
on terms acceptable to us. If we seek to market and sell our drugs directly in
North America, we will need to hire additional personnel skilled in marketing
and sales. We cannot be sure that we will be able to acquire, or establish
third-party relationships to provide, any or all of these marketing and sales
capabilities in North America.
EVEN IF WE OBTAIN REGULATORY APPROVALS TO COMMERCIALIZE CIDECIN OR ANY OTHER
DRUG, OUR DRUG PRODUCTS MAY NOT BE ACCEPTED BY PHYSICIANS, PATIENTS, THIRD-PARTY
PAYORS OR THE MEDICAL COMMUNITY IN GENERAL.
We cannot be sure that Cidecin or any other drug successfully developed by
us, independently or with our collaborative partners, will be accepted by the
pharmaceutical market. Cidecin and any future products we develop will compete
with a number of antimicrobial drugs manufactured and marketed by major
pharmaceutical companies. The degree of market acceptance of any drugs we
develop depends on a number of factors, including:
- our demonstration of the clinical efficacy and safety of our drugs;
- the advantages and disadvantages of our drugs compared to alternative
therapies; and
- the reimbursement policies of government and third-party payors.
We cannot be sure that physicians, patients, third-party payors or the
medical community in general will accept and utilize any drugs we develop.
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OUR APPROACH TO DRUG DISCOVERY IS UNPROVEN, AND WE MAY NOT SUCCEED IN
IDENTIFYING ANY DRUG CANDIDATES WITH CLINICAL BENEFITS.
Our approach requires the development of multiple novel technologies to
create a successful drug candidate. While we have demonstrated that some
compounds have the ability to inhibit the activity of some molecular targets, we
have not proven that this activity can be utilized clinically as a therapeutic
drug. We cannot be certain that any preliminary potential demonstrated in
primary screening will continue to be encouraging in further screening or drug
discovery studies. We have not tested any drug candidates developed from our
drug discovery program in humans, and we cannot assure you that there will be
clinical benefits associated with any drug candidates we do develop. Our failure
to develop new drug candidates would have a material adverse effect on our
business, operating results and financial condition.
OUR RESEARCH AND DEVELOPMENT PROGRAM FOR DRUG PRODUCTS OTHER THAN CIDECIN IS AT
AN EARLY STAGE, AND WE CANNOT BE CERTAIN OUR PROGRAM WILL RESULT IN THE
COMMERCIALIZATION OF ANY DRUG.
Except for our development program for Cidecin, our research and development
program is at an early stage. To date, we have not, independently or with our
collaborative partners, optimized any lead drug candidates generated in our
research program. Any drug candidates we develop will require significant
additional research and development efforts prior to commercial sale, including
extensive pre-clinical and clinical testing and regulatory approval. This may
require increases in spending on internal projects, the acquisition of third
party technologies or products and other types of investments. We cannot be sure
our approach to drug discovery, acting independently or with our collaborative
partners, will be effective or will result in the development of any drug. We
cannot expect that any drug products that do result from our research and
development efforts will be commercially available for many years.
We have limited experience in conducting pre-clinical testing and clinical
trials. Even if we receive initially positive pre-clinical or clinical results,
those results will not mean that similar results will be obtained in the later
stages of drug development. All of our potential drug candidates are prone to
the risks of failure inherent in pharmaceutical product development, including
the possibility that none of our drug candidates will be:
- safe, non-toxic and effective;
- approved by regulatory authorities;
- developed into a commercially viable drug;
- manufactured or produced economically;
- successfully marketed; or
- accepted widely by customers.
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WE FACE SIGNIFICANT COMPETITION FROM OTHER BIOTECHNOLOGY AND PHARMACEUTICAL
COMPANIES, AND OUR OPERATING RESULTS WILL SUFFER IF WE FAIL TO COMPETE
EFFECTIVELY.
The biotechnology and pharmaceutical industries are intensely competitive.
We have many competitors both in the United States and internationally,
including major multinational pharmaceutical and chemical companies,
biotechnology companies and universities and other research institutions.
Specifically, should Cidecin receive FDA and international approvals, it would
face competition from commercially available drugs such as vancomycin (marketed
generically by Eli Lilly, Abbott Laboratories and Shionogi & Co. Ltd.) and Zyvox
(marketed by Pharmacia Corporation) as well as from drug candidates currently in
clinical development.
Many of our competitors have greater financial and other resources, such as
larger research and development staffs and more experienced marketing and
manufacturing organizations. Our competitors may succeed in developing or
licensing on an exclusive basis technologies and drugs that are more effective
or less costly than any that we are currently developing, which could render our
technology and future drug products obsolete and noncompetitive. It is possible
for our competitors to obtain FDA or other regulatory approvals for drug
candidates before we can. Specifically, several products currently in
development at Intermune Pharmaceuticals, Inc. and Versicor Inc. may prove to be
competitive to Cidecin and could receive regulatory approvals prior to Cidecin.
In general, companies that begin commercial sale of their drugs before their
competitors have a significant competitive advantage in the marketplace,
including the ability to obtain patent and FDA marketing exclusivity rights that
would delay our ability to market specific products. Even if our drug candidates
are approved for sale, we may not be able to compete successfully with
competitors' existing products or products under development. The introduction
of drugs that would compete with our drug candidates could have a material
adverse impact on our operating results.
DECISIONS BY OUR COLLABORATIVE PARTNERS COULD IMPAIR OR PROHIBIT OUR DEVELOPMENT
OF NEW PRODUCTS AND OTHERWISE ADVERSELY AFFECT OUR REVENUES.
A key element of our strategy is to enhance our drug discovery and
development programs, and to fund a portion of our capital requirements, by
entering into collaborative agreements with pharmaceutical and biotechnology
companies, including, but not limited to, drug discovery collaborations with
Novartis, Syrrx Inc. and Cetek Corporation, or Cetek, among others. We are also
engaged in a partnership with Gilead for the European commercialization of
Cidecin. Our receipt of revenues, whether in the form of continued research
funding, drug development milestone payments or royalty payments on sales of
drugs, from collaborative agreements is dependent upon the decisions made by our
collaborative partners. The amount and timing of resources dedicated by our
collaborative partners to their respective collaborations with us is not under
our control.
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Some drug candidates discovered by us may be viewed by our collaborative
partners as competitive with their drugs or drug candidates. Accordingly, our
collaborative partners may not elect to proceed with the development of drug
candidates that we believe to be promising. In addition, our collaborative
partners may pursue their existing or alternative technologies in preference to
our drug candidates. As a result:
- the interests and goals of our collaborative partners might not always
align with ours;
- some of our collaborative partners might develop independently, or with
others, drugs that could compete with ours; or
- disagreements over proprietary rights might lead to delays in research or
in the development and commercialization of product candidates and might
result in litigation or arbitration, either of which would be time
consuming and expensive.
If any of our collaborative partners breaches or terminates its agreement
with us or otherwise fails to conduct its collaborative activities in a timely
manner:
- the development or commercialization of any drug candidate or research
program under these collaborative agreements may be delayed;
- we may be required to undertake unforeseen additional responsibilities or
to devote unforeseen additional resources to such development or
commercialization; or
- the development or commercialization could be terminated.
We cannot be sure that we will be able to establish additional collaborative
relationships on terms acceptable to us or to continue our existing
collaborative arrangements.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.
Our success depends to a significant degree upon our ability to obtain
United States and foreign patent protection for our drug candidates and
processes, preserve our trade secrets, and operate without infringing the
proprietary rights of third parties. Legal standards relating to the validity of
patents covering pharmaceutical and biotechnological inventions, and the scope
of claims made under such patents, are still developing. Our patent position is
highly uncertain and involves complex legal and factual questions. We cannot be
certain that the named applicants or inventors of the subject matter covered by
our patent applications or patents, whether directly owned by us or licensed to
us, were the first to invent or the first to file patent applications for such
inventions. Third parties may challenge, infringe upon, circumvent or seek to
invalidate existing or future patents owned by or licensed to us. A court or
other
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agency with jurisdiction may find our patents unenforceable. Even if we have
valid patents, these patents still may not provide sufficient protection against
competing products or processes.
If our drug candidates or processes are found to infringe upon the patents
of others or are found to impermissibly utilize the intellectual property of
others, our development, manufacture and sale of our infringing drug candidates
could be severely restricted or prohibited. In this case, we may have to obtain
licenses from third parties to continue utilizing the patents or proprietary
rights of others. Obtaining these licenses may be expensive, if we are able to
obtain them at all. If we become involved in litigation involving our
intellectual property rights or the intellectual property rights of others, the
potential costs of such litigation and the potential damages that we could be
required to pay could be substantial.
We seek to protect our cloned targets, expressed proteins, assays, organic
synthetic processes, lead compounds, screening technology and other technologies
by, among other things, filing, or causing to be filed on our behalf, patent
applications. As of March 15, 2002, we owned or co-owned 28 issued U.S. patents,
35 pending U.S. patent applications, 10 issued foreign patents and numerous
pending foreign patent applications. As of March 15, 2002, we had licensed, from
the Massachusetts Institute of Technology, three U.S. patents related to
research technologies. We have licenses to research, develop and commercialize
certain oral formulations of ceftriaxone from IHMA and the University of Utah
under an issued U.S. patent related to oral formulations of ceftriaxone, and
together with the University of Utah, we co-own pending U.S. and foreign patent
application equivalents related to oral formulations and specific oral dosage
forms of antibiotics. Additionally, we have licensed from Eli Lilly a portfolio
of eight issued U.S. patents and 16 foreign patents related to the composition,
manufacture, administration and use of daptomycin. In addition, Eli Lilly has
agreed to assign to us an additional two U.S. issued patents, 53 issued foreign
patents and two pending foreign patent applications. This portfolio also covers
the composition, manufacture and use of daptomycin. We have also filed a number
of patent applications in our name relating to the composition, manufacture,
administration and use of daptomycin and other lipopeptides. The Company has
received a Notice of Allowance from the U.S. Patent and Trademark Office for a
daptomycin-related patent application entitled "Methods for Administration of
Antibiotics," which the Company expects will issue in 2002. We cannot be sure
that patents will be granted with respect to any of our pending patent
applications or with respect to any patent applications filed by us in the
future, nor can we be sure that any of our existing patents or any patents that
may be granted to us in the future will be commercially useful in protecting our
technology.
In addition to patent protection, we rely on trade secrets, proprietary
know-how, and confidentiality provisions in agreements with our collaborative
partners, employees and consultants to protect our intellectual property. We
also rely on invention assignment provisions in agreements with employees and
some consultants. It is possible that these agreements could be breached or that
we might not have adequate remedies for any such breaches. Third parties may
learn of or independently discover our trade
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secrets, proprietary know-how and intellectual property, which could have a
material adverse effect on our business, financial condition and results of
operations. Moreover, the laws of foreign countries in which we market our drug
products may afford little or no effective protection of our intellectual
property.
THE COMPANY DEPENDS ON CERTAIN KEY EMPLOYEES, AND THE LOSS OF ANY OF THOSE
EMPLOYEES COULD POTENTIALLY HARM THE COMPANY'S BUSINESS.
We believe that our ability to successfully implement our business strategy
is highly dependent on our senior management and scientific team. In particular
Scott M. Rocklage, Ph.D., our Chairman and Chief Executive Officer, and Michael
W. Bonney, President and Chief Operating Officer, are key to the success of the
Company. The loss of either Dr. Rocklage or Mr. Bonney could have a negative
effect on our ability to operate effectively. Although Dr. Rocklage has entered
into an employment agreement with us, he may terminate his employment at any
time upon thirty days' written notice. In addition, our success is highly
dependent on its ability to attract, train, retain, and motivate high quality
personnel, especially for its senior management. The loss of the services of any
of our executive officers, officers, or other key employees could potentially
harm its business or financial results.
INABILITY TO HIRE AND RETAIN QUALIFIED PERSONNEL IN A COMPETITIVE LABOR MARKET
COULD LIMIT OUR OPERATIONS AND RESULTS.
Our success in large part depends upon our ability to attract, train,
motivate and retain qualified personnel for all aspects of our business. In
recent years, because of great demand for qualified personnel and the numerous
opportunities available to them in the biotechnology and pharmaceutical
industries, we have experienced intense competition in attracting and retaining
employees from the limited number of qualified personnel available. Because of
this intense competition, we have had to interview an increasing number of
candidates to meet our hiring needs. Many of the other biotechnology and
pharmaceutical companies with whom we compete for qualified personnel have
qualities, such as greater financial and other resources, different risk
profiles and a longer history in the industry, or provide different
opportunities, such as greater room for career advancement, that may be more
appealing to, and helpful in attracting and retaining, qualified personnel.
Notwithstanding the foregoing, we have been able to attract and retain qualified
personnel. In the event that we are unable to continue to do so, the rate at
which we can discover, develop and commercialize drugs will be limited.
WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
RELATING TO OUR DRUG PRODUCTS.
The nature of our business exposes us to potential liability risks inherent
in the testing, manufacturing and marketing of pharmaceutical products. Using
our drug candidates in clinical trials may expose us to product liability claims
and possible adverse publicity. These risks will expand with respect to drugs,
if any,
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that receive regulatory approval for commercial sale. Product liability
insurance is expensive and may not be available in the future. While we
currently maintain product liability insurance coverage that we believe is
adequate for our current operations, we cannot be sure that such coverage will
be adequate to cover any incident or all incidents. In addition, we cannot be
sure that we will be able to maintain or obtain insurance coverage at acceptable
costs or in a sufficient amount, that our insurer will not disclaim coverage as
to a future claim or that a product liability claim would not otherwise
adversely affect our business, operating results or financial condition.
OUR ABILITY TO GENERATE FUTURE REVENUES FROM DRUG PRODUCTS WILL DEPEND ON
REIMBURSEMENT AND DRUG PRICING.
Acceptable levels of reimbursement for costs of developing and manufacturing
of drugs and treatments related to those drugs by government authorities,
private health insurers and other organizations, such as HMOs, will have an
effect on the successful commercialization of, and attracting collaborative
partners to invest in the development of, our drug candidates. We cannot be sure
that reimbursement in the United States or elsewhere will be available for any
drugs we may develop or, if already available, will not be decreased in the
future. Also, we cannot be sure that reimbursement amounts will not reduce the
demand for, or the price of, our drugs. Any reduction in demand would adversely
affect our business. If reimbursement is not available or is available only at
limited levels, we may not be able to obtain collaborative partners to
manufacture and commercialize drugs, and may not be able to obtain a
satisfactory financial return on our own manufacture and commercialization of
any future drugs.
Third-party payors are increasingly challenging prices charged for medical
products and services. Also, the trend toward managed health care in the United
States and the concurrent growth of organizations such as HMOs, as well as
legislative proposals to reform health care or reduce government insurance
programs, may result in lower prices for pharmaceutical products, including any
products that may be offered by us in the future. Cost-cutting measures that
health care providers are instituting, and the effect of any health care reform,
could materially adversely affect our ability to sell any drugs that are
successfully developed by us and approved by regulators. Moreover, we are unable
to predict what additional legislation or regulation, if any, relating to the
health care industry or third-party coverage and reimbursement may be enacted in
the future or what effect such legislation or regulation would have on our
business.
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WE MAY UNDERTAKE ADDITIONAL STRATEGIC ACQUISITIONS IN THE FUTURE AND ANY
DIFFICULTIES FROM INTEGRATING SUCH ACQUISITIONS COULD DAMAGE OUR ABILITY TO
ATTAIN OR MAINTAIN PROFITABILITY.
We may acquire additional businesses and technologies that complement or
augment our existing business and technologies. Integrating any newly acquired
businesses or technologies could be expensive and time-consuming. We may not be
able to integrate any acquired business successfully. Moreover, we may need to
raise additional funds through public or private debt or equity financing to
acquire any businesses, which may result in dilution for stockholders and the
incurrence of indebtedness. We may not be able to operate acquired businesses
profitably or otherwise implement our growth strategy successfully.
WE MAY REQUIRE ADDITIONAL FUNDS.
Given that we are currently a research and development company, certain
economic and strategic factors may require us to seek substantial additional
funds in order to:
- finance our drug discovery and development programs;
- fund our operating expenses;
- pursue regulatory approvals;
- license or acquire additional drug candidates or technologies;
- develop manufacturing, marketing and sales capabilities; and
- prosecute and defend our intellectual property rights.
We may seek additional funding through public or private financing or other
arrangements with collaborative partners. If we raise additional funds by
issuing equity securities, further dilution to existing stockholders may result.
In addition, as a condition to giving additional funds to us, future investors
may demand, and may be granted, rights superior to those of existing
stockholders. We cannot be sure, however, that additional financing will be
available from any of these sources or, if available, will be available on
acceptable or affordable terms.
If adequate additional funds are not available, we may be required to delay,
reduce the scope of, or eliminate one or more of our research and development
programs. In order to obtain additional funding, we may be required to
relinquish rights to technologies or drug candidates that we would not otherwise
relinquish in order to continue independent operations.
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A VARIETY OF RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS.
Because we have a portion of our research operations in Canada and the
United Kingdom and we have manufacturing and clinical relationships abroad, we
are subject to additional risks related to operating in foreign countries. Our
Canadian and English operations are organized as separate legal entities.
Associated risks of conducting operations in foreign countries include, but are
not limited to:
- unexpected changes in tariffs, trade barriers and regulatory requirements;
- economic weakness, including inflation, or political instability in
particular foreign economies and markets;
- compliance with tax, employment, immigration and labor laws for employees
living and traveling abroad;
- foreign taxes including withholding of payroll taxes;
- foreign currency fluctuations, which could result in increased operating
expenses and reduced revenues, and other obligations incident to doing
business or operating a subsidiary in another country;
- work force uncertainty in countries where labor unrest is more common than
in the U.S.; and
- production shortages resulting from any events affecting raw material
supply or manufacturing capabilities abroad.
These and other risks associated with our international operations may
materially adversely affect our ability to attain or maintain profitable
operations.
RISKS RELATING TO GOVERNMENTAL APPROVALS
IF WE DO NOT OBTAIN REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET CIDECIN
OR ANY FUTURE DRUG CANDIDATES.
The FDA and comparable regulatory agencies in foreign countries impose
substantial requirements for the development, production and commercialization
introduction of drug products. These include lengthy and detailed pre-clinical,
laboratory and clinical testing procedures, sampling activities and other costly
and time-consuming procedures. In addition, the FDA may impose more stringent
requirements than currently in effect, which may adversely affect our planned
on-going development. All of our drug candidates will require governmental
approvals for commercialization, none of which has been obtained. Pre-clinical
testing and clinical trials and manufacturing of our drug candidates will be
subject to rigorous
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and extensive regulation by the FDA and corresponding foreign regulatory
authorities. Satisfaction of these requirements typically takes a significant
number of years and can vary substantially based upon the type, complexity and
novelty of the product.
We are currently testing Cidecin in human clinical trials to determine
whether Cidecin is safe and effective and, if so, to what degree. Many drugs in
human clinical trials fail to demonstrate the desired safety and efficacy
characteristics. Drugs in later stages of clinical development may fail to show
the desired safety and efficacy traits despite having progressed through initial
human testing. Our failure to demonstrate the safety and efficacy of Cidecin
could delay or prevent required approvals from regulatory authorities. This
would prevent us from commercializing Cidecin and would substantially impair our
business, operating results and financial condition. We cannot be sure when we,
independently or with our collaborative partners, might submit additional drug
candidates for FDA or other regulatory review. Government regulation also
affects the manufacturing and marketing of pharmaceutical products like ours.
The effects of governmental regulations may be to:
- delay the marketing of our potential drugs for a considerable or
indefinite period of time;
- impose costly procedural requirements upon our activities; and
- furnish a competitive advantage to larger companies or companies more
experienced in regulatory affairs.
Delays in obtaining governmental regulatory approval could adversely affect
our marketing as well as our ability to generate significant revenues from
commercial sales. We cannot be sure that FDA or other regulatory approvals for
any drug candidates developed by us will be granted on a timely basis or at all.
Moreover, if regulatory approval to market a drug candidate is granted, the
approval may impose limitations on the indicated use for which the drug may be
marketed.
WE HAVE LIMITED EXPERIENCE IN CONDUCTING THE PRE-CLINICAL AND CLINICAL TESTING
NECESSARY FOR US TO OBTAIN REGULATORY APPROVALS OF OUR DRUG CANDIDATES.
Before we receive regulatory approvals for the commercial sale of any of our
potential drugs, our drug candidates will be subject to extensive pre-clinical
testing and clinical trials to demonstrate their safety and efficacy in humans.
We depend on our collaborative partners to conduct clinical trials for the drug
candidates resulting from the collaborative agreements, and we may become
dependent on third parties to conduct future clinical trials of our internally
developed drug candidates. We have limited experience in conducting pre-clinical
testing or clinical trials. Clinical trials have been commenced with Cidecin and
oral ceftriaxone and not with respect to any of our other drug candidates or any
drug
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candidates being developed jointly by us and our collaborative partners.
Furthermore, we cannot be sure that pre-clinical testing or clinical trials of
any drug candidates will demonstrate the safety and efficacy of our drug
candidates at all or to the extent necessary to obtain regulatory approvals.
Companies in the biotechnology industry have suffered significant setbacks in
advanced clinical trials, even after demonstrating promising results in earlier
trials. The failure to demonstrate the safety and efficacy of a drug candidate
under development could delay or prevent regulatory approval of the drug
candidate and could have a material adverse effect on our business, operating
results and financial condition.
IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS AFTER ANY REGULATORY APPROVAL OF
A DRUG PRODUCT OR IF A REGULATORY AUTHORITY WITHDRAWS ITS APPROVAL OF A DRUG
PRODUCT, WE MAY BE FORCED TO SUSPEND THE SALE OF THE PRODUCT.
Even if initial regulatory approvals for our drug candidates are obtained,
our company, our drugs and the manufacturing facilities for our drugs would be
subject to continual review and periodic inspection. Later discovery of
previously unknown problems with a drug, manufacturer or facility may result in
restrictions on the drug, the manufacturer or us, including withdrawal of the
drug from the market. The FDA stringently applies regulatory standards. Failure
to comply can, among other things, result in fines, denial or withdrawal of
regulatory approvals, product recalls or seizures, operating restrictions and
criminal prosecution. In addition, our manufacturing facilities will be subject
to FDA inspections for adherence to GMP prior to marketing clearance and
periodically during the manufacturing process. The FDA may also require
post-marketing testing and surveillance to monitor the effects of an approved
product. In addition, if there are any modifications to a drug, further
regulatory approval will be required.
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ITEM 2. DESCRIPTION OF PROPERTY
We are headquartered at 65 Hayden Avenue in Lexington, Massachusetts, where
we own approximately 88,000 square feet of commercial and laboratory space. We
currently lease approximately 24,000 square feet of commercial space at 24 Emily
Street in Cambridge, Massachusetts, pursuant to a term lease that expires in
September 2003, subject to a 5-year renewal option. We have subleased this space
for a term that coincides with our September 2003 lease expiration. We also
lease an additional 15,000 square feet of commercial space at 148 Sidney Street
in Cambridge Massachusetts, pursuant to a term lease that expires in
October 2010.
In connection with the acquisition of TerraGen Discovery in October 2000, we
acquired the office space of former TerraGen subsidiaries in Canada and the
United Kingdom. We currently lease 9,265 square feet of commercial office and
laboratory space in Vancouver, Canada pursuant to a term lease that expires in
March 2002. The lease will not be renewed after March 2002 since the operations
have been closed and relocated to our corporate headquarters. In addition, we
also lease 18,000 square feet of commercial office and laboratory space in
Slough, England pursuant to a term lease that expires in June 2003.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in legal proceedings arising in the
normal course of business. We are not currently involved in any legal
proceedings the resolution of which, in management's opinion, would have a
material adverse effect on our business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 2001.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Cubist's Common Stock is traded on the Nasdaq National Market under the
symbol "CBST". The following table sets forth, for the period indicated, the
high and low sale prices per share of Cubist's Common Stock as reported by the
Nasdaq National Market.
<Table>
<Caption>
PRICE RANGE OF
COMMON STOCK
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
Year Ended December 31, 2000:
First Quarter....................................... $71.50 $16.25
Second Quarter...................................... $52.50 $16.87
Third Quarter....................................... $64.12 $41.00
Fourth Quarter...................................... $52.12 $22.68
Year Ended December 31, 2001:
First Quarter....................................... $35.94 $12.00
Second Quarter...................................... $40.20 $19.50
Third Quarter....................................... $43.98 $27.92
Fourth Quarter...................................... $43.00 $30.65
Year Ended December 31, 2002:
First Quarter (through March 15, 2002).............. $35.99 $12.87
</Table>
HOLDERS
As of March 15, 2002, Cubist had 272 stockholders of record. This figure
does not reflect persons or entities who hold their stock in nominee or "street"
name through various brokerage firms.
DIVIDENDS
We have never declared or paid cash dividends on our capital stock and do
not anticipate paying any dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to operate and expand our business.
Our payment of any future dividends will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, cash needs and growth plans. Our bank term loan
contains a restrictive covenant that prohibits us from paying
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cash dividends or making stock redemptions or repurchases without the prior
written consent of the lender bank.
RECENT SALES OF UNREGISTERED SECURITIES
Described below is information regarding all securities we sold during the
fiscal year ended December 31, 2001, which, unless otherwise noted below, were
not registered under the Securities Act.
We issued 5 1/2% convertible subordinated notes due in 2008 in the aggregate
principal amount of $125,000,000 in a private placement in October 2001. The
subordinated notes were resold by the initial purchasers of the notes to
qualified institutional buyers under Rule 144A under the Securities Act. The
initial purchasers purchased an additional $40,000,000 aggregate principal
amount of the subordinated notes in December 2001. The resale of the notes and
the underlying shares were subsequently registered with the SEC.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the years ended
December 31, 2001, 2000, 1999 and 1998 and statement of operations for 1997 are
derived from our audited consolidated financial statements. The balance sheet
data as of December 31, 1997 has been prepared by us to reflect the combination
of Cubist with TerraGen using the pooling-of-interests method of accounting and
is unaudited. The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis
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of Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto, included elsewhere in this report.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development revenue............... $ 11,827 $ 2,255 $ 3,871 $ 174 $ 1,267
Related party research and development
revenue...................................... 2,561 2,968 2,975 1,500 1,500
-------- -------- -------- -------- -------
Total revenues........................... 14,388 5,223 6,846 1,674 2,767
Operating expenses:
Research and development expenses............ 63,686 44,638 25,539 12,357 10,799
General and administrative expenses.......... 21,827 12,113 6,397 4,451 3,618
-------- -------- -------- -------- -------
Total operating expenses................. 85,513 56,751 31,936 16,808 14,417
Interest income................................ 6,922 8,464 905 931 1,098
Interest expense............................... (5,739) (2,314) (1,059) (361) (244)
Other income (expense)......................... 54 578 197 (1) 1,833
Income tax benefit............................. 34 499 925 175 --
-------- -------- -------- -------- -------
Net loss................................. $(69,854) $(44,301) $(24,122) $(14,390) $(8,963)
Basic and diluted net loss per common share.... $ (2.49) $ (1.68) $ (1.31) $ (1.16) $ (0.89)
Weighted average number of common shares
outstanding for basic and diluted net loss
per common share............................. 28,088 26,415 18,456 12,395 10,115
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments.......... $243,135 $139,783 $26,829 $21,327 $20,197
Working capital................................. 158,012 110,146 21,938 16,046 10,238
Total assets.................................... 314,834 193,370 42,595 26,178 24,384
Long-term liabilities........................... 213,007 46,075 6,392 1,523 1,366
Stockholders' equity............................ 69,501 133,020 29,441 22,658 21,345
Dividends....................................... -- -- -- -- --
</Table>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS ANNUAL REPORT. THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. OUR 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. ALSO, SEE
"SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA."
OVERVIEW
Since our incorporation on May 1, 1992 and commencement of operations in
February 1993, we have been engaged in the research, development and
commercialization of novel antimicrobial drugs to combat serious and
life-threatening bacterial and fungal infections. We have a limited history of
operations and have experienced significant net losses since inception. We had
an accumulated deficit of $178.0 million through December 31, 2001. We expect to
incur significant additional operating losses over the next several years and
expect cumulative losses to increase due to expanded research and development
efforts, pre-clinical testing and clinical trials, and the development of
manufacturing, marketing and sales capabilities.
On October 23, 2000, C&T Acquisition Corporation, a subsidiary of Cubist,
acquired TerraGen, a natural products discovery company with operations in
Vancouver, Canada and Slough, England. Following the acquisition, the name of
TerraGen was changed to Cubist Pharmaceuticals Inc. TerraGen conducts its
Slough, England operations through a wholly owned subsidiary. With the
acquisition, we acquired proprietary technologies and expertise in the area of
small molecule drug discovery from natural products. Pursuant to the
acquisition, we, indirectly through C&T Acquisition Corporation, acquired all of
the issued and outstanding common and preferred shares of TerraGen, and assumed
all of the outstanding options, warrants and convertible debentures of TerraGen,
by issuing 334,933 shares of our Common Stock and causing C&T Acquisition
Corporation to issue 178,491 exchangeable shares. The exchangeable shares are
exchangeable at any time at the option of the holder, on a one-for-one basis,
subject to certain adjustments, for shares of our Common Stock. All exchangeable
shares that remain outstanding will be automatically exchanged for shares of our
Common Stock on October 23, 2002. The options, warrants and convertible
debentures of TerraGen assumed by us pursuant to the acquisition are exercisable
or convertible into 94,605 shares of our Common Stock. This acquisition had been
accounted for using the pooling-of-interests method of accounting. This
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the accompanying Consolidated Financial Statements of Cubist
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have been restated to include the results and balances of C&T Acquisition
Corporation and TerraGen and its subsidiaries for all periods presented.
In recent years, we have enhanced our drug discovery and development
programs and funded a portion of our capital requirements by entering into
collaborative agreements with pharmaceutical and biotechnology companies. We
have entered into collaborative agreements based specifically on our
aminoacyl-tRNA synthetase program with Merck & Co., Inc., or Merck and
Bristol-Myers Squibb, and a collaborative agreement with Novartis based on our
VITA functional genomics technology. Under these collaborative agreements, we
have received sponsored research payments and, if drug development milestones
are achieved, we are entitled to milestone payments. In addition, we will be
entitled to receive royalties on worldwide sales of any drug developed and
commercialized from these collaborations. At December 31, 2001, we had received
all of the sponsored research payments that we were entitled to under our
collaborative agreements with Merck and Bristol-Myers Squibb, although Merck and
Bristol-Myers Squibb are still required to make milestone payments and pay
royalties to us for any drug developed and commercialized from these
collaborations.
On November 7, 1997, we entered into a license agreement with Eli Lilly,
pursuant to which we acquired exclusive worldwide rights to develop, manufacture
and market daptomycin. In exchange for such license, we paid to Eli Lilly an
upfront license fee in cash and we have agreed to pay milestone payments in cash
or by issuing shares of our Common Stock to Eli Lilly, if certain drug
development milestones are achieved. In addition, we will be required to pay
royalties to Eli Lilly on worldwide sales of Cidecin. On February 19, 1999, we
issued to Eli Lilly 56,948 shares of our Common Stock as a milestone payment,
which was due upon commencement of Phase III clinical trials of Cidecin. The
value of the Common Stock issued was $250,000 and was recorded as research and
development expense. On October 6, 2000, we entered into a restated assignment
and license agreement whereby we will obtain expanded rights under the Eli Lilly
patents including an exclusive license to make, use and sell daptomycin for use
in the field of infectious disease no longer excluding induced colitis and
complete ownership, control and all rights to other Eli Lilly-assigned patents
relating to daptomycin subject matter claimed therein for all compounds and all
uses.
In September 1998, our Canadian subsidiary entered into a research
collaboration agreement with Schering-Plough Research Institute to access our
recombinant library to discover novel leads with potential activity in the
anti-infective area. As part of the agreement, we provided library-screening
services to Schering-Plough for those strains provided. In exchange for these
services, Schering-Plough made research payments to us. Schering-Plough was
granted an exclusive, worldwide license to use any recombinant microorganism
that produces a lead and an exclusive, worldwide license to all of its rights
and ownership in any resulting patents.
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In May 1999, our Canadian subsidiary entered into a second collaboration
agreement with Schering-Plough under which Schering-Plough was granted an
exclusive, worldwide license to manufacture and sell compounds resulting from
screening Cubist's natural product library. In exchange for the license,
Schering-Plough made research payments and, if scientific and development
milestones are achieved, Schering-Plough will make milestone payments to us. In
addition, Schering-Plough will be required to pay royalties to us on worldwide
sales of any drug developed and commercialized from any products derived from
this collaboration.
On February 3, 1999, we entered into a collaborative research and license
agreement with Novartis to use our VITA functional genomics technology to
validate and develop assays for antimicrobial targets and to identify new
compounds for development as antimicrobial agents. In exchange for the license,
Novartis is making research payments and, if scientific and development
milestones are achieved, Novartis will make milestone payments to us. In
addition, Novartis will be required to pay royalties to us on worldwide sales of
any drug developed and commercialized from any products derived from this
collaboration. Upon the signing of the research and license agreement, we issued
to Novartis, 797,448 shares of our Common Stock for a total purchase price of
$4.0 million in cash.
On March 17, 1999, our Canadian subsidiary purchased the assets of
ChromaXome Corporation, or ChromaXome, for $5.7 million, excluding acquisition
costs, by paying $2.0 million in cash, issuing notes payable of approximately
$3.0 million and issuing 18,231 shares of our Common Stock. The acquisition was
accounted for using the purchase method of accounting with the results of
operations included in our financial statements from the date of acquisition.
On April 8, 1999, our Canadian subsidiary purchased the assets of Xenova
Discovery Ltd., or Xenova, for $5.2 million, excluding acquisition costs, by
paying $400,000 in cash, issuing notes payable of approximately $3.6 million and
issuing 30,386 shares of our Common Stock. The acquisition was accounted for
using the purchase method of accounting with the results of operations included
in our financial statements from the date of acquisition. One note payable of
$1,375,715 was due and repaid as of December 31, 1999. The second note payable
was due April 8, 2002 and repayable at any time by Cubist by converting into
58,282 shares of Common Stock at any time after 24 months from the date of
closing, at the option of either Xenova Group PLC or Cubist. On April 20, 2001,
the convertible note payable was converted to 58,282 shares of Common Stock.
On November 18, 1999, our Canadian subsidiary entered into a cross-license
agreement with Diversa Corporation. Under the terms of the agreement, we granted
a co-exclusive worldwide non-royalty bearing license to certain patented
technology, subject to certain restrictions. The license may not be sublicensed
and Diversa may not use the macrodroplet screening technology for the term of
the agreement. Under the agreement, Diversa paid an upfront license fee of
$2,500,000 and will pay annual license maintenance fees of $100,000 beginning in
2000, until the patents expire. We are required to repay the license fee if we
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merge or are acquired prior to November 18, 2004 by a company whose primary
business is DNA shuffling.
On December 1, 1999, we entered into a clinical services master agreement
with Omnicare Clinical Research, Inc. f/k/a IBAH, Inc. pursuant to which
Omnicare has agreed to provide various clinical research services for our
Cidecin clinical trials, including bacteremia; resistant, refractory or
contraindicated; complicated skin and soft tissue; complicated urinary tract;
and community acquired pneumonia. The related costs are being accrued over the
life of the clinical trials.
On January 10, 2000, we entered into a monitoring services agreement with
Clindev (Proprietary) Limited, pursuant to which Clindev has agreed to provide
monitoring services for our Cidecin international complicated skin and soft
tissue trial. Under the terms of this agreement, the specific responsibilities
and obligations performed by Clindev include study management, clinical trial
initiation and management and clinical data management. The related costs were
accrued over the life of the clinical trial.
In April 2000, we entered into a development and supply agreement with
Abbott pursuant to which Abbott has agreed to assist us in the development of
daptomycin as a parenteral formulation and to manufacture and sell exclusively
to us, daptomycin as a parenteral formulation. Under the terms of this
agreement, we agreed to make certain milestone payments to Abbott for their
development efforts and assistance in obtaining an approved NDA for daptomycin.
We made payments totaling $450,000 through the period ended December 31, 2001,
which were expensed as research and development. If the FDA approves the
daptomycin NDA, we will purchase minimum annual quantities of drug product from
Abbott over a five-year period.
In June 2000, we entered into a services agreement with DSM, an affiliated
company of DSM Capua pursuant to which DSM has agreed to provide supervisory and
advisory services to us relating to the equipping of the manufacturing facility
at DSM Capua. We have also entered into a manufacturing and supply agreement
with DSM Capua pursuant to which DSM Capua has agreed to manufacture and supply
to us bulk daptomycin drug substance for commercial purposes. Under the terms of
the manufacturing and supply agreement, DSM Capua is required to prepare its
manufacturing facility in Italy to manufacture bulk daptomycin drug substance in
accordance with GMP standards. Under the terms of the service agreements, we
will make a series of scheduled payments to DSM over a five-year period
beginning in 2000 in order to reimburse DSM for certain costs to be incurred by
DSM Capua of approximately $8.2 million in connection with the scale-up and
construction of its manufacturing facility. Through 2001, we have reimbursed
$4,862,000 of these costs to DSM Capua and accrued an additional $81,000. These
costs are being recorded as other assets and will begin to be amortized once the
facility is complete and ready for the manufacture of daptomycin for commercial
purposes. In addition, in consideration for the implementation of our technology
in the facility by DSM Capua, we have agreed to
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make milestone payments of $1,400,000 to DSM if specific phases of the
preparation of its manufacturing facility are completed within specified periods
of time. We are accruing these estimated milestone payments based on cost
incurred and recorded research and development expenses of $328,000 and $627,000
in 2001 and 2000, respectively. Upon completion of the preparation of DSM
Capua's manufacturing facility and a determination by the FDA that the
manufacturing facility complies with GMP standards, we will purchase minimum
annual quantities of bulk daptomycin drug substance from DSM over a five-year
period.
On August 1, 2000, we entered into a contract research agreement with Target
Research Associates, Inc., pursuant to which Target agreed to provide various
clinical research services for our Cidecin community-acquired-pneumonia trial.
Under the terms of this agreement, the specific responsibilities and obligations
performed by Target included study management, clinical trial initiation and
management and clinical data management. The related costs are being accrued
over the life of the clinical trial.
On September 8, 2000, we announced the purchase of a new corporate
headquarters building in Lexington, Massachusetts. The new facility is 88,000
square feet, approximately 55,000 of which is constructed as laboratory space.
To finance the purchase, we issued $39.0 million of senior convertible notes to
John Hancock Life Insurance Company. This financing covered the building
purchase price of approximately $34.0 million and included $5.0 million for
facility improvements. The five-year notes carry a coupon rate of 8 1/2% and can
be converted at any time at the option of the holder into our Common Stock at
$63.8625 per share. We retain the right to redeem these notes after three years
at 103% of their principal amount outstanding.
On November 6, 2000, we and Emisphere Technologies, entered into a research
agreement to develop an oral formulation of daptomycin. Under the terms of the
agreement, we paid a license fee of $500,000 upon execution of the license
agreement and could pay milestone payments totaling $30.0 million should a
product be successfully commercialized. In addition, we will fund Emisphere's
research and development efforts at a rate of $250,000 per full-time equivalent
per year. We would also pay a royalty on sales of any product resulting from the
collaboration and would be responsible for drug development and would receive
exclusive worldwide commercialization rights to any oral products.
On January 7, 2001, we and Gilead signed a licensing agreement for the
exclusive rights to commercialize Cidecin and an oral formulation of daptomycin
in 16 European countries following regulatory approval. Gilead has paid us an
up-front licensing fee of $10.0 million for Cidecin and $3.0 million for an oral
formulation of daptomycin, which were recorded to deferred revenue and are being
recognized over the life of the development period of 2 years and 5 years,
respectively. Accordingly, revenue of $5,600,000 was recognized in the year
ended December 31, 2001. We are entitled to receive additional cash payments of
up to $31.0 million upon achievement of certain clinical and regulatory
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milestones. Revenue from milestone payments which are substantive and whose
achievement was not reasonably assured at the inception of the agreement is
recognized once the respective milestone is achieved. Gilead will also pay us a
fixed royalty on net sales. We will continue to be responsible for worldwide
clinical development of Cidecin, while Gilead will be responsible for any
regulatory filings in the covered territories. Gilead's sales force will market
the products in Europe.
On April 10, 2001, we achieved the first milestone in our collaboration with
Gilead following the successful completion of Study 9901, our pivotal Phase III
trial examining the safety and efficacy of Cidecin in the treatment of cSST
caused by Gram-positive bacteria. On April 23, 2001, Gilead paid us
$1.25 million for meeting the primary endpoint of the clinical trial. On
September 6, 2001, the completion of enrollment in the first of two Cidecin
Phase III community-acquired pneumonia clinical trials triggered a $3.0 million
payment to us by Gilead. On October 5, 2001, Gilead paid us $1.25 million for
meeting the primary endpoint in the Phase III clinical trial for cSSTs. All
three milestones were recognized as revenue in 2001.
On April 25, 2001, we entered into a master services agreement with
Quintiles, Inc. pursuant to which Quintiles agreed to provide various clinical
trial, research and other services for our Cidecin community-acquired pneumonia
trial. Under the terms of this agreement, the specific responsibilities and
obligations performed by Quintiles included study management, clinical trial
initiation and management and clinical data management. The related costs are
being accrued over the life of the clinical trial.
On June 27, 2001, we and Syrrx announced the formation of antiinfective drug
discovery collaboration. The joint effort uses Syrrx and Cubist technologies for
the high-throughput characterization of novel antiinfective drug targets and
rational drug design. Under the collaboration, the companies will attempt to
accelerate the discovery of novel classes of antibiotics to treat infectious
diseases, including those resistant to current therapies. Financial incentives
for the collaboration include research and clinical milestones, royalties and an
equity investment in Syrrx by us. We have made an equity investment of $300,000,
which has been accounted for under the cost method of accounting. We have made
one milestone payment under this agreement.
On July 30, 2001, we entered into a collaborative research and license
agreement with Albany Molecular Research, Inc., or Albany Molecular, to identify
novel antiinfective drug candidates. Under this agreement, Albany Molecular
would receive fees from Cubist for the achievement of specific clinical and
regulatory milestones as well as royalties on sales of any commercial products
that result from the collaboration.
In November 2001, we entered into a manufacturing and supply agreement with
ACS pursuant to which ACS has agreed to provide scale-up services and to
construct a production facility dedicated to the manufacture of daptomycin and
to sell bulk daptomycin exclusively to us for commercial purposes. Under
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the terms of this agreement, ACS is required to prepare its manufacturing
facility in Italy to manufacture bulk daptomycin drug substance in accordance
with GMP standards. In consideration, we will make contributions in equity,
milestones, product price premiums, resin investment, process development,
quality systems and facility qualification support. Upon completion of the
preparation of ACS's manufacturing facility and a determination by the FDA that
the manufacturing facility complies with GMP standards, we will purchase minimum
annual quantities of bulk daptomycin drug substance from ACS over a six-year
period. Under the terms of the agreement, we issued to ACS 62,558 shares of our
common stock. These shares had a value of $2.0 million. The cost of these shares
was accounted for as part of the cost of the manufacturing facility and was
recorded as other assets.
In December 7, 2001, we entered into a screening service agreement with
Cetek, whereby Cetek will provide us with screening and dereplication services.
Under this agreement, Cetek would receive fees from us for the achievement of
specific research, clinical and regulatory milestones
While we do not currently maintain cost accounting systems to accurately
track costs on an individual project basis, based on an estimated average
full-time equivalent basis, we estimate that in 2001 we incurred costs in an
approximate aggregate amount of $2.7 million in connection with all of our
research collaborations which generated approximately $2.5 million of revenue in
the aggregate in 2001; and based on an estimated average full-time equivalent
basis, we estimate that in 2000, we incurred costs in an approximate aggregate
amount of $4.5 million in connection with all of our research collaborations
which generated approximately $4.3 million of revenue in the aggregate in 2000.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States. As such, we are
required to make certain estimates, judgments and assumptions that we believe
are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the periods presented. The significant accounting policies that we believe are
the most critical to aid in fully understanding and evaluating our reported
financial results include the following:
I. REVENUE RECOGNITION
We recognize revenue in accordance with the substantive milestone approach
under the SEC Staff Accounting Bulletin No. 101 (SAB 101). Our principal sources
of revenue are license fees and milestone payments, which are derived from our
collaborative agreements with other pharmaceutical and biotechnology companies.
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Non-refundable license fees are recorded as deferred revenue once received
and are recognized ratably over the development period to which they relate. The
relevant time period for the product development phase is based on management
estimates and could vary depending on the outcome of clinical trials and the
regulatory approval process. Such changes could materially impact the revenue
recognized. As a result, management continually reviews the appropriate time
period.
Milestone payments are only recognized as revenue upon achievement of the
milestone when they are deemed to be substantive and therefore have required
significant cost and effort by us. To date, we have determined that all
milestones received have met these criteria. If future performance were to be
required or we considered that the milestone was not substantive, the payment
would be deferred and recognized once the appropriate criteria were met or
recognized over the performance period as appropriate.
II. ACCRUED LIABILITIES, SPECIFICALLY THE CLINICAL RESEARCH ORGANIZATION
COSTS
The preparation of financial statements requires our management to make
estimates and assumptions that affect the reported amount of assets and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Specifically, our management must make estimates of costs incurred to
date but not yet invoiced in relation to external clinical research
organization, or CRO, costs. Management analyzes the progress of clinical
trials, invoices received and budgeted costs when evaluating the adequacy of the
accrued liability. Significant management judgments and estimates must be made
and used in connection with the accrued balance in any accounting period.
Material difference may result in the amount and timing of the accrued balance
for any period if management made different judgments or utilized different
estimates. The CRO accrual amounted to $6.4 million at December 31, 2001.
III. INVESTMENTS
All investments are held to maturity, as the intention is to hold these
assets in accordance with our business plans. However, if the circumstances
regarding an investment were to change, such as a change in a company's external
credit rating, we would consider a sale of the related security to minimize any
losses to us. The appropriateness of the classification is reviewed at each
reporting date.
IV. INTANGIBLE AND LONG-LIVED ASSETS
Purchase accounting requires extensive use of accounting estimates and
judgments to allocate the purchase price to the fair market value of the assets
and liabilities purchased. In relation to the acquisitions made by our Canadian
subsidiary, values were ascribed to intangible assets as explained in the "Notes
C and F to the Consolidated Financial Statements". These assets are amortized
over their useful lives. Long-lived assets consist of our corporate headquarters
building, which we purchased on
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September 8, 2000 and relocated to on September 17, 2001. This building is being
depreciated over its useful life. Useful lives are based on management's
estimates of the period during which the assets will generate revenue.
Intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Our judgments regarding the existence of impairment indicators are
based on historical and projected future operating results, changes in the
manner of our use of the acquired assets or our overall business strategy, and
market and economic trends. Future events could cause us to conclude that
impairment indicators exist and that certain of intangibles assets are impaired.
Any resulting impairment loss could have a material adverse impact on our
financial condition and results of operations.
V. INCOME TAXES
We record deferred tax assets and liabilities based on the net tax effects
of tax credits, operating loss carryforwards and temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. We then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and, to the
extent we believe that recovery is not likely, we establish a valuation
allowance. The valuation allowance is based on our estimates of taxable income
by jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable. Through December 31, 2001, we believe it is more
likely than not that all of our deferred tax assets will not be realized and,
accordingly, we have recorded a valuation allowance against substantially all of
our deferred tax assets. If results of operations in the future indicate that
some or all of the deferred tax assets will be recovered, the reduction of the
valuation allowance will be recorded as a tax benefit during one or over many
periods.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
RESEARCH AND DEVELOPMENT REVENUES. Total research and development revenues
in the year ended December 31, 2001 were $11,827,000 compared to $2,255,000 in
the year ended December 31, 2000, an increase of $9,572,000 or 424.5%. The
research and development revenues earned in the year ended December 31, 2001,
consisted of $5,600,000 in license fee revenue and $5,500,000 in milestone
revenue from Gilead; $591,000 in SBIR funding; $100,000 in license maintenance
fees and $36,000 in other grants. The research and development revenues earned
in the year ended December 31, 2000 consisted of $1,128,000 in research support
funding from the Schering-Plough collaboration; $469,000 in research support
funding from various other collaborative research agreements, $448,000 in SBIR
funding, $100,000 in license maintenance fees and $110,000 in other grants. The
increase in research and development
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revenues in the year ended December 31, 2001 as compared to the year ended
December 31, 2000 was primarily due to the license fees and milestones
recognized as revenue from Gilead, partially offset by the completion in 2000 of
research support funding phases of the Schering-Plough and various other
collaborative research agreements.
RELATED PARTY RESEARCH AND DEVELOPMENT REVENUES. Total related party
research and development revenues in the year ended December 31, 2001 were
$2,561,000 compared to $2,968,000 in the year ended December 31, 2000, a
decrease of $407,000 or 13.7%. The related party research and development
revenues earned in the year ended December 31, 2001, consisted of $2,250,000 in
research support funding and $250,000 in milestone payments from the Novartis
collaboration; and $61,000 in research support funding from the Xenova
collaboration. The related party research and development revenues earned in the
year ended December 31, 2000 consisted of $2,250,000 in research support funding
and $500,000 in milestone payments from the Novartis collaboration and $218,000
in research support funding from the Xenova collaboration. The decrease in
revenues in the year ended December 31, 2001 as compared to the year ended
December 31, 2000 was primarily due to the reduction in milestone payments from
the Novartis collaboration and the reduction of research support funding from
the Xenova collaboration.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses
in the year ended December 31, 2001, were $63,686,000 compared to $44,638,000 in
the year ended December 31, 2000, an increase of $19,048,000 or 42.7%. The
increase was largely due to increased clinical costs related to daptomycin
development including costs associated with our Phase III clinical trials in
community-acquired pneumonia and VRE. Specific costs include clinical research
services performed by CROs and the additional internal personnel that were
required to monitor these CRO activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
the year ended December 31, 2001, were $21,827,000 compared to $12,113,000 in
the year ended December 31, 2000, an increase of $9,714,000 or 80.2%. The
increase was largely due to the addition of 10 medical science liaisons in
February 2001, increased costs related to increased administrative personnel,
and the increased costs of outside marketing services.
INTEREST INCOME AND EXPENSE. Interest income in the year ended
December 31, 2001, was $6,922,000 compared to $8,464,000 in the year ended
December 31, 2000, a decrease of $1,542,000 or 18.2%. The decrease in interest
income was due to lower average cash, cash equivalent and investment balances
during the year ended December 31, 2001 as compared to the year ended
December 31, 2000, and significantly lower interest rates. Interest expense in
the year ended December 31, 2001 was $5,740,000 as compared to $2,314,000 during
the year ended December 31, 2000, an increase of $3,426,000 or 148.1%.
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The increase in interest expense was primarily due to increased long-term debt
related to the issuance of convertible subordinated notes and the purchase of a
new corporate headquarters.
OTHER INCOME. Other Income in the year ended December 31, 2001 was $55,000
compared to $579,000 in the year ended December 31, 2000, a decrease of $524,000
or 90.5%. The decrease in other income was due to a decrease in foreign currency
translation adjustments in 2001, partially offset by reversal of accumulated
other comprehensive income of $163,000 due to the closure and relocation of our
Vancouver operations to our corporate headquarters, which represents a
substantial liquidation of our investment in our Canadian subsidiary.
INCOME TAX BENEFIT. Income tax benefit in the year ended December 31, 2001,
was $34,000 compared to $499,000 in the year ended December 31, 2000, a decrease
of $465,000 or 93.2%. The decrease in income tax benefit was due to Cubist no
longer qualifying for investment tax credits for increased research and
development expenditures related to Cubist's Canadian operations.
NET LOSS. Our net loss for the year ended December 31, 2001 was $69,854,000
compared to $44,301,000 during the year ended December 31, 2000, an increase of
$25,553,000 or 57.7%. The increase was primarily due to an increase clinical
expenses incurred associated with the development of daptomycin, increased costs
associated with our marketing program, increased costs related to additional
personnel and increased costs associated with the addition of 10 medical science
liaisons.
YEARS ENDED DECEMBER 31, 2000 AND 1999
RESEARCH AND DEVELOPMENT REVENUES. Total research and development revenues
in the year ended December 31, 2000 were $2,255,000 compared to $3,872,000 in
the year ended December 31, 1999, a decrease of $1,617,000 or 41.8%. The
research and development revenues earned in the year ended December 31, 2000,
consisted of $1,128,000 in research support funding from the Schering-Plough
collaboration; $469,000 in research support funding from various other
collaborative research agreements, $448,000 in SBIR funding, $100,000 in license
maintenance fees and $110,000 in other grants. The research and development
revenues earned in the year ended December 31, 1999, consisted of $611,000 in
research support funding from the Schering-Plough collaboration; $2,500,000 in
research support funding from the Merck collaboration; $449,000 in research
support funding from various other collaborative research agreements and
$312,000 in SBIR funding. The decrease in research and development revenues in
the year ended December 31, 2000 as compared to the year ended December 31, 1999
was primarily due to the completion of research support funding phase of the
Merck collaboration, partially offset by revenues associated with the
Schering-Plough collaboration.
RELATED PARTY RESEARCH AND DEVELOPMENT REVENUES. Total related party
research and development revenues in the year ended December 31, 2000 were
$2,968,000 compared to $2,975,000 in the year ended
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December 31, 1999, a decrease of $7,000 or 0.2%. The related party research and
development revenues earned in the year ended December 31, 2000, consisted of
$2,250,000 in research support funding and $500,000 in milestone payments from
the Novartis collaboration; and $218,000 in research support funding from the
Xenova collaboration. The related party research and development revenues earned
in the year ended December 31, 1999 consisted of $2,042,000 in research support
funding from the Novartis collaboration; $545,000 in research support funding
from the Bristol-Myers Squibb collaboration and $388,000 in research support
funding from the Xenova collaboration. The decrease in revenues in the year
ended December 31, 2000 as compared to the year ended December 31, 2000 was
primarily due to the completion of research support funding phase of the
Bristol-Myers Squibb collaboration and the reduction of research support funding
from the Xenova collaboration offset by milestone payments from the Novartis
collaboration.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses
in the year ended December 31, 2000, were $44,638,000 compared to $24,786,000 in
the year ended December 31, 1999, an increase of $19,852,000 or 80.1%. The
increase was largely due to increased clinical and manufacturing costs related
to daptomycin development and the additional personnel and purchases that were
required by such development.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES. The write-off of acquired
in-process research and development costs in the year ended December 31, 2000
was $0 compared to $752,000 in the year ended December 31, 1999, a decrease of
$752,000. The decrease was due to a write-off of acquired in-process research
and development costs related to the acquisitions of ChromaXome and Xenova in
1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
the year ended December 31, 2000, were $12,113,000 compared to $6,397,000 in the
year ended December 31, 1999, an increase of $5,716,000 or 89.4%. The increase
was largely due to increased costs related to personnel and recruiting expenses
and increased legal and other professional services expenses, which were
expensed under pooling accounting treatment, related to the acquisition of
TerraGen.
INTEREST INCOME AND EXPENSE. Interest income in the year ended
December 31, 2000, was $8,464,000 compared to $905,000 in the year ended
December 31, 1999, an increase of $7,559,000 or 835.2%. The increase in interest
income was due primarily to higher average cash, cash equivalent and investment
balances during the year ended December 31, 2000 as compared to the year ended
December 31, 1999. Interest expense in the year ended December 31, 2000 was
$2,314,000 as compared to $1,059,000 during the year ended December 31, 1999, an
increase of $1,255,000 or 118.5%. The increase in interest expense was primarily
due to the convertible debt financing of the new corporate headquarters building
in Lexington, Massachusetts, which took place in 2000.
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OTHER INCOME. Other Income in the year ended December 31, 2000 was $579,000
compared to $197,000 in the year ended December 31, 1999, an increase of
$382,000 or 193.9%. The increase in other income was due to an increase in
foreign currency translation adjustments in 2000.
INCOME TAX BENEFIT. Income tax benefit in the year ended December 31, 2000,
was $499,000 compared to $926,000 in year ended December 31, 1999, a decrease of
$427,000 or 46.1%. The decrease in income tax benefit was due to investment tax
credits for increased research and development expenditures related to Cubist's
Canadian operations during the year ended December 31, 1999 as compared to the
year ended December 31, 2000.
NET LOSS. Our net loss for the year ended December 31, 2000 was $44,301,000
compared to $24,122,000 during the year ended December 31, 1999, an increase of
$20,179,000 or 83.7%. The increase was primarily due to an increase in expenses
incurred associated with the development of daptomycin, increased costs
associated with our marketing and investor relations program, increased costs
related to personnel and recruiting expenses and increased legal and other
professional services expenses which were expensed under pooling accounting
treatment related to the acquisition of TerraGen.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through the sale of equity
securities, convertible debt securities, equipment financing, sponsored research
revenues, license revenues and interest earned on invested capital. Our total
cash, cash equivalents and investments balance at December 31, 2001 was
$243,135,000 compared to $139,783,000 at December 31, 2000.
On September 23, 1998, we completed a private placement financing with
investors and raised net proceeds of $12.7 million by issuing 6,065,560 shares
of our common stock at $2.25 per share, along with 3,032,783 warrants
exercisable for our Common Stock at $2.25 per share. During the twelve months
ended December 31, 1999, we issued 285,644 shares of our Common Stock upon the
exercise of 326,668 warrants issued in connection with the private placement
financing completed on September 23, 1998. Such warrants are exercisable at
$2.25 per share or pursuant to a standard cashless net issue provision. Of the
285,644 shares issued, 160,000 shares were issued for an aggregate purchase
price of $360,000 and 125,644 shares were issued upon cashless net issue
exercise pursuant to which the holders of such warrants surrendered the right to
acquire 41,024 additional shares of our Common Stock. During the twelve months
ended December 31, 2000, we issued 1,219,540 shares of our Common Stock upon the
exercise of 1,261,669 warrants issued in connection with the private placement
financing completed on September 23, 1998. Such warrants were exercisable at
$2.25 per share or pursuant to a standard cashless net issue provision. Of the
1,219,540 shares issued, 650,558 shares were issued for an aggregate purchase
price of $1,463,756 and 568,982 shares were issued upon cashless net issue
exercise pursuant to which the holders of such warrants surrendered the right to
acquire 42,129 additional shares of our stock.
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On October 8, 1998, our Canadian subsidiary completed a private placement
financing with investors and raised net proceeds of $3.2 million by issuing
88,848 shares of our Common Stock, along with warrants exercisable for 44,424
shares of our Common Stock. Of these warrants, 312 are outstanding at
December 31, 2001.
On March 15, 1999, our Canadian subsidiary completed a private placement
financing with investors and raised net proceeds of $5.2 million by issuing
142,157 shares of our Common Stock.
Upon the signing of the research and license agreement with Novartis in
February 1999, we issued to Novartis, 797,448 shares of our Common Stock for a
total purchase price of $4.0 million in cash.
On March 17, 1999, our Canadian subsidiary purchased the assets of
ChromaXome for $5.7 million, excluding acquisition costs, by paying
approximately $2.0 million in cash, issuing notes payable of approximately
$3.0 million and issuing 18,231 shares of our Common Stock.
During March 1999, we entered into a term loan agreement with a commercial
bank under which we are able to borrow up to $1,500,000 to finance fixed asset
purchases. In March 2000, we increased the term loan by an additional $2,000,000
to finance leasehold improvements and fixed asset purchases. Advances under this
facility are to be repaid over a 36-month period, commencing on March 31, 2000.
Interest on the borrowings is at the bank's LIBOR rate (4.24% at December 31,
2001). Borrowings under the facility are collateralized by all capital equipment
purchased with the funds from this term loan. In September 2001, we increased
our term loan by an additional $6,500,000 to finance leasehold improvements and
fixed asset purchases for the new corporate headquarters building. Advances
under this facility are to be repaid over a 48-month period, commencing on
March 29, 2002. Interest on the borrowings is at the bank's LIBOR rate (4.24% at
December 31, 2001). Borrowings under the facility are collateralized by all
capital equipment purchased with the funds under this term loan and a minimum
collateral amount of $3,250,000 through March 31, 2002. Thereafter the minimum
collateral amount will at all times be equal to 50% of the aggregate principal
amount of the term loan outstanding. This collateral amount is reflected as
restricted cash. At December 31, 2001, borrowings outstanding totaled
$7,359,466.
On April 8, 1999, our Canadian subsidiary purchased the assets of Xenova for
$5.2 million, excluding acquisition costs, by paying approximately $400,000 in
cash, issuing notes payable of approximately $3.6 million and issuing 30,386
shares of our Common Stock. A note payable of $2,243,948 was converted in
April 2001 into 58,282 shares of our Common Stock.
On October 21, 1999, we completed a private placement financing with
investors and raised net proceeds of $17.5 million by issuing 2,503,333 shares
of our Common Stock at $7.50 per share.
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On November 16, 1999, our Canadian subsidiary issued $1.6 million Cdn of
convertible debentures and warrants to purchase 16,458 shares of Common Stock.
The convertible debentures bear interest at a rate of 12% and are payable on
March 31, 2000. On March 31, 2000, the convertible debentures and related
interest were converted to 30,176 shares of Common Stock.
On January 17, 2000, our Canadian subsidiary issued a note payable totaling
$2,006,667 and warrants to purchase 22,790 shares of Common Stock. The note
payable bears interest at 14.4% and is repayable over 36 months to January 17,
2003. The warrants were exercised in 2000 resulting in gross proceeds of
$599,000. At December 31, 2001, the note payable balance was $554,578.
On January 29, 2000, we completed a private placement financing with
investors and raised net proceeds of $52.0 million by issuing 2,200,000 shares
of our Common Stock at $25.00 per share.
On April 3, 2000, we completed a follow-on public offering and raised
approximately $82.5 million (less financing costs of $4,957,275) by issuing
2,500,000 shares of Common Stock at $33.00 per share. In addition, on May 3,
2000, the underwriters exercised their option to purchase an additional 375,000
shares of Common Stock at $33.00 per share to cover over-allotments, raising an
additional $12.4 million (less financing costs of $680,625).
In September 2000, we purchased a new corporate headquarters building in
Lexington, Massachusetts. To finance the purchase, we issued $39.0 million of
senior convertible notes to John Hancock Life Insurance Company. This financing
covered the building purchase price of approximately $34.0 million and included
$5.0 million for facility improvements. These five-year notes carry a coupon
rate of 8 1/2% and can be converted at any time at the option of the holder into
our Common Stock at $63.8625 per share. We retain the right to redeem these
notes after three years at 103% of the principal outstanding.
On April 10, 2001, we achieved the first milestone in our collaboration with
Gilead following the successful completion of Study 9901, our pivotal Phase III
trial examining the safety and efficacy of Cidecin in the treatment of cSST
caused by Gram-positive bacteria. On April 23, 2001, Gilead paid us
$1.25 million for meeting the primary endpoint of the clinical trial. On
September 6, 2001, the completion of enrollment in the first of two Cidecin
Phase III community-acquired pneumonia clinical trials triggered a $3.0 million
payment to us by Gilead. On October 5, 2001, Gilead paid us $1.25 million for
meeting the primary endpoint in the Phase III clinical trial for cSSTs. All
three milestones were recognized as revenue in 2001.
On October 26, 2001, we completed the private placement of $125 million of
5 1/2% Convertible Subordinated Notes (less estimated financing costs of
$4,055,096). The offering was made through initial purchasers to qualified
institutional buyers under Rule 144A of the Securities Act. The notes are
convertible at any time prior to maturity into Common Stock at a conversion
price of $47.20 per share,
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subject to adjustment upon certain events. Interest is payable on each
November 1 and May 1, beginning May 1, 2002.
On December 28, 2001, the initial purchasers exercised their option to
purchase $40.0 million of 5 1/2% Convertible Subordinated Notes (less estimated
financing costs of $827,320). The offering was made through initial purchasers
to qualified institutional buyers under Rule 144A of the Securities Act. The
notes are convertible at any time prior to maturity into Common Stock at a
conversion price of $47.20 per share, subject to adjustment upon certain events.
Interest is payable on each November 1 and May 1, beginning May 1, 2002. The
notes mature on November 1, 2008. The notes are subordinated to our senior
indebtedness.
COMMITMENTS AND CONTINGENCIES
Our major outstanding contractual obligations relate to our convertible
notes, our term loan and our facilities leases. Our facilities leases expense in
future years will decrease over future years as we have purchased a new
corporate headquarters in 2000.
Our convertible notes outstanding total is $204.0 million in aggregate.
These notes consist of $165.0 million of 5 1/2% Convertible Subordinated Notes
due 2008, and $39.0 million of 8 1/2% of senior convertible notes to John
Hancock Life Insurance Company, due 2005. Both notes require semi-annual
interest payments through maturity.
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The following summarizes Cubist's contractual obligations at December 31,
2001 and the effect such obligations are expected to have on its liquidity and
cash flow in the future periods:
<Table>
<Caption>
2008 AND
2002 2003 2004 2005 2006 2007 THEREAFTER
-------- -------- -------- -------- -------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONTRACTUAL OBLIGATIONS:
Senior convertible notes......................... $ 3.3 $ 3.3 $ 3.3 $42.3 $ -- $ -- $ --
Subordinated convertible notes................... 9.1 9.1 9.1 9.1 9.1 9.1 174.1
Term loan........................................ 2.7 2.0 1.7 1.6 -- -- --
Capital lease obligations........................ 0.5 -- -- -- -- -- --
Operating leases................................. 0.8 0.7 0.5 0.6 0.5 0.6 1.8
----- ----- ----- ----- ----- ----- ------
Total contractual obligations.................. $16.4 $15.1 $14.6 $53.6 $ 9.6 $ 9.7 $175.9
COMMERCIAL COMMITMENTS:
Clinical CRO costs............................... $20.3 $ -- $ -- $ -- $ -- $ -- $ --
Manufacturing.................................... 2.0 1.1 1.1 1.8 0.75 0.75 2.2
Licenses and collaborations...................... 3.4 -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ------
Total commercial commitments................... $25.7 $ 1.1 $ 1.1 $ 1.8 $0.75 $0.75 $ 2.2
</Table>
We conduct our operations internationally. Consequently, the results of our
operations are exposed to movements in foreign currency exchange rates. We enter
into limited forward exchange contracts to reduce exposures associated with
nonfunctional currency accounts receivable and accounts payable denominated in
European euros and the British pound. The forward contracts range from one to
three months in original maturity. In general, we do not hedge anticipated
foreign currency cash flows, nor do we enter into forward contracts for trading
purposes. We do not use any derivatives for trading or speculative purposes. The
forward contracts do not qualify for hedge accounting and accordingly are marked
to market at the end of each reporting period with any unrealized gain or loss
being recognized in the statement of operations. Internationally operations give
rise to a risk that earnings and cash flows may be negatively impacted by
fluctuations in interest and foreign exchange rates. During 2001, Cubist entered
into limited foreign currency hedging transactions between the U.S. dollar, the
European euro and the British pound. At December 31, 2001, Cubist has a
commitment to purchase 312,500 euro, with an approximate U.S. dollar value of
this commitment of $283,063, and a commitment to purchase 62,043 GBP, with an
approximate U.S. dollar value of this commitment of $91,719.
We are party to research and development as well as license agreements for
certain technologies (see "Notes H and I to the Consolidated Financial
Statements"). Certain of these agreements contain provisions for future
royalties to be paid on commercial sales of products developed from the licensed
technologies. Currently the amounts payable under these agreements and the
resulting commitments on
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our behalf are unknown and unestimable since the level of future sales is
unknown and uncertainty of this industry is not possible to accurately estimate
many future obligations such as clinical CRO costs and licenses and
collaborations. This table represents our current obligations and forecasts.
We believe that our existing cash resources, existing capital resources,
projected interest income and future revenues due under our collaborative
agreements, will be sufficient to fund our operating expenses and capital
requirements as currently planned through the next 18 months. Our actual cash
requirements may vary materially from those now planned and will depend on
numerous factors. We cannot be sure that our existing cash, cash equivalents,
other capital resources, interest income and future revenues due under our
collaborative agreements will be sufficient to fund our operating expenses and
capital requirements during that period.
RECENT PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 141, or SFAS 141, Business
Combinations, and No. 142, or SFAS 142, Goodwill and Other Intangible Assets,
collectively referred to as the "Standards". SFAS 141 supersedes Accounting
Principles Board Opinion, or APB No. 16, Business Combination. The provisions of
SFAS 141 (i) require that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (ii) provide specific
criteria for the initial recognition and measurement of intangible assets apart
from goodwill, and (iii) require that amortized negative goodwill be written off
immediately as an extraordinary gain instead of being deferred and amortized.
SFAS 141 also requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill, based on
certain criteria. SFAS 142 supersedes APB 17, Intangible Assets, and is
effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. The provisions of SFAS 142 (i) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangibles assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired),
(iii) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (iv) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step. The Company expects to complete that first step of the goodwill
impairment test during the first quarter of 2002. The second step of the
goodwill impairment test measures the amount of the
61
<Page>
impairment loss (measured as of the beginning of the year of adoption), if any,
and must be completed by the end of the Company's fiscal year. Intangible assets
deemed to have an indefinite life will be tested for impairment using a one-step
process, which compares the fair value to the carrying amount of the asset as of
the beginning of the fiscal year, and pursuant to the requirements of SFAS 142
will be completed during the first quarter of 2002. Any impairment loss
resulting from the transitional impairment tests will be reflected as the
cumulative effect of a change in accounting principle in the first quarter 2002.
The Company has not yet determined what effect these impairment tests will have
on the Company's earnings and financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently own financial instruments that are sensitive to market risks as
part of our investment portfolio. Our investment portfolio is used to preserve
our capital until it is required to fund operations, including our research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. Our investment portfolio includes investment grade debt
instruments. These bonds are subject to interest rate risk, and could decline in
value if interest rates fluctuate. Due to the conservative nature of these
instruments, we do not believe that we have a material exposure to interest rate
risk. We do not own derivative financial instruments.
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to the impact of
interest rate changes and foreign currency fluctuations.
INTEREST RATE RISK
We do not engage in trading market risk sensitive instruments or purchasing
hedging instruments or "other than trading" instruments that are likely to
expose us to market risk, whether interest rate, foreign currency exchange,
commodity price or equity price risk. We have not purchased options or entered
into swaps, forward or futures contracts. Our primary market risk exposure is
that of interest rate risk on borrowings under our credit facility, which are
subject to interest rates based on the bank's base rate. A change in the
applicable interest rate on this loan would affect the rate at which we could
borrow funds. The aggregate hypothetical loss in earnings for one year of those
borrowings held by us at December 31, 2001, which are subject to interest rate
risk, resulting from a hypothetical 10 percent increase in interest rates is
approximately $31,204 after tax. The hypothetical loss was determined by
financial instruments held by us at December 31, 2001. Fixed rate financial
instruments were not evaluated.
62
<Page>
FOREIGN CURRENCY RISK
We face exposure to adverse movements in foreign currency exchange rates.
Our international revenues and expenses are denominated in foreign currencies.
The functional currency of each of our foreign subsidiaries is the United States
dollar. Our international business is subject to risks typical of an
international business, including, but not limited to differing tax structures,
other regulations and restrictions, and foreign exchange rate volatility. Based
on our overall currency rate exposure at December 31, 2001, a 10% change in
foreign exchange rates would have had an immaterial effect on our financial
position, results of operations and cash flows. During 2001, Cubist entered into
limited foreign currency hedging transactions between the U.S. dollar, the
European euro and the British pound.
At December 31, 2001, Cubist has a commitment to purchase 312,500 euro, with
an approximate U.S. dollar value of this commitment of $283,063, and a
commitment to purchase 62,043 GBP, with an approximate U.S. dollar value of this
commitment of $91,719.
63
<Page>
ITEM 8. FINANCIAL STATEMENTS
CUBIST PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<Table>
<S> <C>
Report of Independent Accountants........................... 65
Balance Sheets as of December 31, 2001 and 2000............. 67
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.......................... 68
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.......................... 69
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Loss for the years ended December 31,
2001, 2000 and 1999....................................... 71
Notes to Financial Statements............................... 73
</Table>
64
<Page>
REPORTS OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Cubist Pharmaceuticals, Inc.:
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations and comprehensive loss, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Cubist
Pharmaceuticals, Inc. and its subsidiaries (the "Company") at December 31, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Cubist
Pharmaceuticals Inc. (formerly TerraGen Discovery Inc.), a wholly owned
subsidiary, for the year ended December 31, 1999, which statement reflects total
revenue constituting 21.8% of consolidated total revenue for the year ended
December 31, 1999. That statement was audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Cubist Pharmaceuticals Inc. (formerly
TerraGen Discovery Inc.), is based solely on the report of the other auditors.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 14, 2002
65
<Page>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Cubist Pharmaceuticals Inc.
(formerly TerraGen Discovery Inc.)
We have audited the consolidated statements of operations, stockholders'
equity and comprehensive income and cash flows of Cubist Pharmaceuticals Inc.
(formerly TerraGen Discovery Inc.) (the "Company") for the year ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the results of the Company's operations and its cash
flows for the year ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
Chartered Accountants
/s/ KPMG LLP
Vancouver, Canada
April 3, 2000, except as to
the acquisition of the Company described in
note A which is as of October 23, 2000
66
<Page>
CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
---------------------------
2001 2000
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $120,322,157 $ 46,940,277
Short-term investments.................................... 68,514,144 74,607,683
Accounts receivable....................................... 100,000 363,412
Prepaid expenses and other current assets................. 1,402,334 2,509,766
------------ ------------
Total current assets.................................... 190,338,635 124,421,138
Property and equipment, net................................. 48,056,157 40,142,080
Intangible assets, net...................................... 5,632,659 7,280,062
Restricted cash............................................. 3,250,000 --
Long-term investments....................................... 54,298,378 18,234,857
Other assets................................................ 13,258,366 3,291,713
------------ ------------
Total assets............................................ $314,834,195 $193,369,850
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,336,002 $ 4,541,988
Accrued clinical expenses................................. 6,409,682 2,948,459
Accrued expenses.......................................... 9,300,084 4,476,117
Deferred revenue.......................................... 5,600,000 --
Current portion of long-term debt......................... 3,206,760 1,692,340
Current portion of capital lease obligations.............. 473,725 615,880
------------ ------------
Total current liabilities............................... 32,326,253 14,274,784
Deferred revenue............................................ 4,300,080 2,500,000
Long-term debt, net of current portion...................... 208,707,284 43,257,329
Capital lease obligations, net of current portion........... -- 317,973
------------ ------------
Total liabilities....................................... 245,333,617 60,350,086
Commitments (Notes H, I, M, N, Q and T)
Stockholders' equity:
Preferred stock, non-cumulative; convertible, $.001 par
value; authorized 5,000,000 shares 2001 and 2000; no
shares issued and outstanding 2001 and 2000............. -- --
Common Stock, $.001 par value; authorized 50,000,000
shares; issued and outstanding 2001 is 28,298,566
shares; issued and outstanding 2000 is 27,757,900
shares.................................................. 28,298 27,758
Additional paid-in capital.................................. 247,508,469 241,010,543
Accumulated deficit......................................... (178,036,189) (108,182,032)
Accumulated other comprehensive income...................... -- 163,495
------------ ------------
Total stockholders' equity.............................. 69,500,578 133,019,764
------------ ------------
Total liabilities and stockholders' equity............ $314,834,195 $193,369,850
============ ============
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
67
<Page>
CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
<S> <C> <C> <C>
Research and development revenue....................... $ 11,827,339 $ 2,254,766 $ 3,871,609
Related party research and development revenue......... 2,561,329 2,968,243 2,974,775
------------ ------------ ------------
Total revenue...................................... 14,388,668 5,223,009 6,846,384
Operating expenses:
Research and development............................. 63,686,102 44,638,151 24,786,363
Write-off of acquired in process research and
development........................................ -- -- 752,304
General and administrative........................... 21,827,229 12,112,736 6,397,268
------------ ------------ ------------
Total operating expenses........................... 85,513,331 56,750,887 31,935,935
Interest income........................................ 6,922,293 8,464,211 904,647
Interest expense....................................... (5,739,860) (2,314,225) (1,059,134)
Other income........................................... 54,514 578,622 196,584
------------ ------------ ------------
Net loss before income taxes......................... (69,887,716) (44,799,270) (25,047,454)
Income tax benefit related to Canadian operations...... 33,559 498,694 925,593
------------ ------------ ------------
Net loss........................................... $(69,854,157) $(44,300,576) $(24,121,861)
============ ============ ============
Basic and diluted net loss per common share............ $ (2.49) $ (1.68) $ (1.31)
Weighted average number of common shares outstanding
for basic and diluted net loss per common share...... 28,088,435 26,414,826 18,455,568
============ ============ ============
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
68
<Page>
CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows for operating activities:
Net loss.................................................. $ (69,854,157) $ (44,300,576) $ (24,121,861)
Adjustments to reconcile net loss to net cash used in
operating activities:
Write-off of acquired in-process research and
development............................................. -- -- 752,304
(Gain) loss on the sale of equipment...................... 15,757 (8,600) 7,776
Depreciation and amortization............................. 4,984,740 3,562,988 3,112,976
Amortization of debt issuance costs....................... 370,422 81,029 --
Amortization of deferred compensation..................... 761,267 723,493 --
Amortization of premium on investments.................... 143,677 -- --
Disposal of leasehold improvements........................ 672,792 -- --
Common Stock issued for technology milestone.............. -- -- 250,000
Cashless exercise of warrants related to lease
agreements.............................................. -- -- 38,330
Stock based compensation.................................. 105,034 48,054 58,202
Forgiveness of note receivable related to Common Stock.... 168,750 168,750 --
Deemed discount amortization on convertible debentures.... -- 353,400 372,300
Foreign exchange (gain) loss, net......................... 278,399 (571,208) (209,456)
Changes in assets and liabilities:
Accounts receivable..................................... 250,587 11,945 (201,724)
Investment tax credits receivable....................... -- 925,600 (757,351)
Prepaid expenses and other current assets............... 1,101,352 (1,686,028) (296,594)
Other assets............................................ (9,666,635) (2,129,298) (105,049)
Accounts payable and accrued expenses................... 11,119,373 8,424,131 2,141,412
Deferred revenue........................................ 7,399,997 -- 2,477,626
------------- ------------- -------------
Total adjustments..................................... 17,705,512 9,904,256 7,640,752
------------- ------------- -------------
Net cash used for operating activities.................. (52,148,645) (34,396,320) (16,481,109)
------------- ------------- -------------
Cash flows for (from) investing activities:
Acquisitions, net of cash on hand......................... -- -- (3,062,788)
Purchases of property and equipment....................... (12,155,158) (36,886,604) (899,688)
Proceeds (loss) from the sale of equipment................ (15,757) 8,600 15,150
Purchase of intangible assets............................. -- (185,332) (131,679)
Purchases of investments.................................. (109,985,546) (110,706,986) (15,192,711)
Maturities of investments................................. 79,871,887 32,444,961 13,160,046
Investments in Syrrx, Inc................................. (300,001) -- --
------------- ------------- -------------
Net cash provided used for investing activities....... (42,584,575) (115,325,361) (6,111,670)
------------- ------------- -------------
</Table>
69
<Page>
CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Issuance of Common Stock and warrants, net................ 2,740,832 145,256,184 27,575,740
Proceeds from notes receivable............................ -- -- 101,686
Restricted cash........................................... (3,250,000) -- --
Repayments of long-term debt.............................. (1,483,666) (1,761,207) (3,293,587)
Proceeds from long term debt, net......................... 170,814,818 41,526,157 2,232,261
Principal payments of capital lease obligations........... (452,648) (684,832) (712,464)
------------- ------------- -------------
Net cash provided by financing activities............. 168,369,336 184,336,302 25,903,636
------------- ------------- -------------
Net increase in cash and cash equivalents................... 73,636,116 34,614,621 3,310,857
Effect of changes in foreign exchange rates on cash
balances.................................................. (254,236) 77,049 158,644
Cash and cash equivalents at beginning of year.............. 46,940,277 12,248,607 8,779,106
------------- ------------- -------------
Cash and cash equivalents at end of year.................... $ 120,322,157 $ 46,940,277 $ 12,248,607
============= ============= =============
Supplemental disclosures of cash flow information:
Non-cash investing and financing activities:
Issuance of restricted Common Stock in exchange for a
promissory note......................................... $ 50,000 -- $ 506,250
Issuance of notes payable related to acquisitions......... -- -- 6,632,757
Issuance of Common Stock related to acquisitions.......... -- -- 1,814,166
Beneficial conversion feature on convertible debenture.... -- -- 264,300
Warrants issued with long-term debt....................... -- 658,606 323,000
Issuance of Common Stock on conversion of long-term
debt.................................................... 2,171,004 1,112,097 --
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
70
<Page>
CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
LOSS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<Table>
<Caption>
$ ADDITIONAL
PAID-IN CAPITAL
-------------------------
# OF $ $
SHARES COMMON ISSUANCE $ NOTES
COMMON AT PAR OF SHARES RECEIVABLE
---------- -------- ------------ ----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998................................ 16,912,346 $16,912 $ 62,632,242 $(101,686)
---------- ------- ------------ ---------
Exercise of stock options and warrants...................... 432,626 433 810,983 --
Shares issued in connection with employee stock purchase
plan and 401(k) plan...................................... 40,035 40 144,644 --
Issuance of Common Stock.................................... 3,549,886 3,550 27,410,670 (506,250)
Issuance of Common Stock in connection with acquisitions,
net of offering costs..................................... 48,617 49 1,814,117 --
Issuance of warrants for services........................... -- -- 77,107 --
Deferred compensation related to grant of stock options..... -- -- 707,797 --
Amortization of deferred compensation....................... -- -- -- --
Repayment of promissory notes............................... -- -- -- 101,686
Options granted to non-employees............................ -- -- 58,202 --
Warrants issued in connection with long-term debt........... -- -- 323,000 --
Beneficial conversion feature on convertible debentures..... -- -- 264,300 --
Net loss.................................................... -- -- -- --
Foreign currency translation adjustments.................... -- -- -- --
---------- ------- ------------ ---------
BALANCE AT DECEMBER 31, 1999................................ 20,983,510 $20,984 $ 94,243,062 $(506,250)
---------- ------- ------------ ---------
Exercise of stock options and warrants...................... 1,641,448 1,641 3,610,538 --
Shares issued in connection with employee stock purchase
plan and 401(k) plan...................................... 27,766 28 624,033 --
Issuance of Common Stock.................................... 5,075,000 5,075 141,014,869 --
Issuance of Common Stock upon conversion of convertible
debentures................................................ 30,176 30 1,112,067 --
Deferred compensation related to grant of stock options..... -- -- 2,115,437 --
Amortization of deferred compensation....................... -- -- -- --
Stock options cancelled..................................... (43,838)
Forgiveness of promissory notes............................. -- -- -- 168,750
Options granted to non-employees............................ -- -- 48,054 --
Warrants issued in connection with long-term debt........... -- -- 658,606 --
Net loss.................................................... -- -- --
Foreign currency translation adjustments.................... -- -- -- --
---------- ------- ------------ ---------
BALANCE AT DECEMBER 31, 2000................................ 27,757,900 $27,758 $243,382,828 $(337,500)
---------- ------- ------------ ---------
Exercise of stock options and warrants...................... 455,062 455 2,400,608 --
Shares issued in connection with employee stock purchase
plan and 401(k) plan...................................... 27,322 27 831,418 --
Issuance of Common Stock upon conversion of convertible
debentures................................................ 58,282 58 2,170,946 --
Deferred compensation related to grant of stock options..... -- -- 334,722 (50,000)
Amortization of deferred compensation....................... -- -- -- --
Forgiveness of promissory notes............................. -- -- -- 168,750
Stock-based compensation.................................... -- -- 105,034 --
Net loss.................................................... -- -- --
Foreign currency translation adjustments.................... -- -- -- --
---------- ------- ------------ ---------
BALANCE AT DECEMBER 31, 2001................................ 28,298,566 $28,298 $249,225,556 $(218,750)
========== ======= ============ =========
</Table>
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<Page>
CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
LOSS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<Table>
<Caption>
$ $ ACC. OTHER $ $
$ DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDERS COMPREHENSIVE
COMPENSATION DEFICIT INCOME EQUITY LOSS
------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998........................ $ (46,985) $ (39,759,595) $ (83,299) $ 22,657,589 $(14,428,545)
----------- ------------- ----------- ------------ ------------
Exercise of stock options and warrants.............. -- -- -- 811,416 --
Shares issued in connection with employee stock
purchase plan and 401(k) plan..................... -- -- -- 144,684 --
Issuance of Common Stock............................ -- -- -- 26,907,970 --
Issuance of Common Stock in connection with
acquisitions, net of offering costs............... -- -- -- 1,814,166 --
Issuance of warrants for services................... (77,107) -- -- -- --
Deferred compensation related to grant of stock
options........................................... (703,125) -- -- 4,672 --
Amortization of deferred compensation............... 140,538 -- -- 140,538 --
Repayment of promissory notes....................... -- -- -- 101,686 --
Options granted to non-employees.................... -- -- -- 58,202 --
Warrants issued in connection with long-term debt... -- -- -- 323,000 --
Beneficial conversion feature on convertible
debentures........................................ -- -- -- 264,300 --
Net loss............................................ -- (24,121,861) -- (24,121,861) (24,121,861)
Foreign currency translation adjustments............ -- -- 334,677 334,677 334,677
----------- ------------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1999........................ $ (686,679) $ (63,881,456) $ 251,378 $ 29,441,039 $(23,787,184)
----------- ------------- ----------- ------------ ------------
Exercise of stock options and warrants.............. -- -- -- 3,612,179 --
Shares issued in connection with employee stock
purchase plan and 401(k) plan..................... -- -- -- 624,061 --
Issuance of Common Stock............................ -- -- -- 141,019,944 --
Issuance of Common Stock upon conversion of
convertible debentures............................ -- -- -- 1,112,097 --
Deferred compensation related to grant of stock
options........................................... (2,115,437) -- -- -- --
Amortization of deferred compensation............... 723,493 -- -- 723,493 --
Stock options cancelled............................. 43,838 --
Forgiveness of promissory notes..................... -- -- -- 168,750 --
Options granted to non-employees.................... -- -- -- 48,054 --
Warrants issued in connection with long-term debt... -- -- -- 658,606 --
Net loss............................................ -- (44,300,576) (44,300,576) (44,300,576)
Foreign currency translation adjustments............ -- -- (87,883) (87,883) (87,883)
----------- ------------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 2000........................ $(2,034,785) $(108,182,032) $ 163,495 $133,019,764 $(44,388,459)
----------- ------------- ----------- ------------ ------------
Exercise of stock options and warrants.............. -- -- -- 2,401,063 --
Shares issued in connection with employee stock
purchase plan and 401(k) plan..................... -- -- -- 831,445 --
Issuance of Common Stock upon conversion of
convertible debentures............................ -- -- -- 2,171,004 --
Deferred compensation related to grant of stock
options........................................... (224,818) -- -- 59,904 --
Amortization of deferred compensation............... 761,266 -- -- 761,266 --
Forgiveness of promissory notes..................... -- -- -- 168,750 --
Stock-based compensation............................ -- -- -- 105,034 --
Net loss............................................ -- (69,854,157) (69,854,157) (69,854,157)
Foreign currency translation adjustments............ -- -- (163,495) (163,495) (163,495)
----------- ------------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 2001........................ $(1,498,337) $(178,036,189) -- $ 69,500,578 $(70,017,652)
=========== ============= =========== ============ ============
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
72
<Page>
CUBIST PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Cubist Pharmaceuticals, Inc. is a pharmaceutical company focused on the
research, development and commercialization of novel antimicrobial drugs to
combat serious and life-threatening bacterial and fungal infections. Cubist has
established multiple technology licenses and collaborations and has established
a network of advisors and collaborators. Cubist is headquartered in Lexington,
Massachusetts.
On October 23, 2000, C&T Acquisition Corporation, a subsidiary of Cubist,
acquired TerraGen a natural products discovery company with operations in
Vancouver, Canada and Slough, England. Following the acquisition, the name of
TerraGen was changed to Cubist Pharmaceuticals Inc. TerraGen conducts its
Slough, England operations through a wholly owned subsidiary. With the
acquisition, Cubist acquired proprietary technologies and expertise in the area
of small molecule drug discovery from natural products. This transaction was
accounted for using the pooling-of-interests method of accounting. The
accompanying consolidated financial statements of Cubist have been restated to
include the results and balances of C&T Acquisition Corporation and TerraGen and
its subsidiaries for all periods presented. Prior to December 31, 2001, the
Company decided to relocate the majority of its Vancouver operations to the
Lexington headquarters. As a result, certain employees were terminated and the
lease on the Vancouver property will not be renewed after March 2002.
Cubist is subject to risks common to companies in the industry including,
but not limited to, uncertainty of product development and commercialization,
lack of marketing and sales history, dependence on key personnel, market
acceptance of products, product liability, protection of proprietary technology,
ability to raise additional financing, and compliance with FDA and other
governmental regulations.
Cubist has a limited history of operations and has experienced significant
net losses since inception. At December 31, 2001, Cubist has an accumulated
deficit of $178.0 million. Cubist expects to incur significant additional net
losses over the next several years and expects cumulative losses to increase due
to expanded research and development efforts, preclinical testing and clinical
trials and the development of manufacturing, marketing and sales capabilities.
As a result, Cubist's business plan indicates that additional financing may be
required to support its planned expenditures. Cubist believes that the funds
currently available and future revenues due under its collaborative agreements
(Note H) will be sufficient to fund operations through at least the next
eighteen months.
73
<Page>
B. ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Cubist and its wholly owned subsidiaries. All significant intercompany amounts
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term interest-bearing instruments with
original maturities of three months or less. These investments are carried at
cost, which approximates market value.
Cubist invests its cash and cash equivalents primarily in deposits, U.S.
Government treasuries and money market funds with financial institutions. Cubist
has not recorded any losses to date on its invested cash and cash equivalents.
RESTRICTED CASH
Restricted cash consists of a savings account held in our name and custodied
with a major financial institution. (Note N)
INVESTMENTS
Investments, with an original maturity of more than three months when
purchased, consisted of certificates of deposit and investment-grade commercial
paper at December 31, 2001 and 2000. Investments, which are held to maturity,
are stated at amortized cost plus accrued interest, which approximates market
value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets,
commencing once they are considered available for use. Estimated lives are
generally three years for computer equipment and purchased software, five years
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for laboratory equipment and furniture and fixtures, and forty years for
buildings. Leasehold improvements are stated at cost and are amortized over the
lesser of the life of the lease or their estimated useful lives. Maintenance and
repairs are charged to expense as incurred, while major betterments are
capitalized. When assets are retired or otherwise disposed of, the assets and
related allowances for depreciation and amortization are eliminated from the
accounts and any resulting gain or loss is reflected in income.
INTANGIBLE ASSETS
Intellectual property and processes represents information databases, and
technological process information acquired through Cubist's business
acquisitions. These assets are amortized on a straight-line basis over their
estimated useful life of four years. Patent costs include costs of obtaining
patents through an acquisition transaction. Patent costs are amortized over the
lesser of the patent's remaining legal life and its useful life. Amortization of
intangible assets is included in research and development expense.
IMPAIRMENT OF LONG-LIVED ASSETS
Cubist reviews long-lived assets for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may
not be fully recoverable or that the useful lives of these assets are no longer
appropriate. Each impairment test is based on a comparison of the discounted
cash flows to the recorded value of the asset. If impairment is indicated, the
asset is written down by the amount in which the carrying value of the asset
exceeds the related fair value of the asset. No provisions for impairment have
been recorded to date.
REVENUE RECOGNITION
Cubist has entered into various collaborative agreements with pharmaceutical
and biotechnology companies. The terms of the collaborative arrangements can
include nonrefundable licensing fees, funding of research and development
efforts, payments based on the achievement of certain milestones, and royalties
on product sales.
We recognize revenue in accordance with the substantive milestone approach
under the SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" (SAB 101). We consider this methodology to be the most
appropriate for our business model and current revenue streams. For a milestone
to be considered substantive, we require that substantive effort, both on our
behalf as well as by external parties involved in the research and development
activities, be involved in the achievement of the milestone, and that the
milestone payments must be reasonable in relation to the effort expended. This
determination takes into consideration the level, skill and expertise of
personnel involved and other costs incurred.
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Non-refundable license fees received are recorded as deferred revenue once
received and are recognized ratably over the development period to which they
relate. Where there are two or more distinct phases embedded into one contract
(such as product development and subsequent commercialization or manufacturing),
the contracts may be considered multiple element arrangements. When we can
demonstrate that each of these phases are at fair values, they are treated as
separate earnings processes with upfront fees being recognized over only the
initial product development phase. The relevant time period for the product
development phase is based on management estimates and could vary dependent upon
the outcome of clinical trials and the regulatory approval process. Such changes
could materially impact the revenue recognized. As a result, management
continually reviews the appropriate time period.
Milestone payments are only recognized as revenue when they are deemed to be
substantive, and therefore represent significant cost and effort by us. To date
we have determined that all milestones received have met these criteria. If
future performance were to be required or we considered that the milestone was
not substantive, the payment would be deferred and recognized once the
appropriate criteria were met.
Revenues from research funding are recognized when the services are
performed to match revenues to expenses incurred. Revenue from SBIR government
grants to conduct research and development is recognized as eligible costs are
incurred up to the funding limit.
During 2001, we received $5.5 million in development milestones from Gilead
relating to the advancement of our intravenous formulation through the U.S.
clinical trial process. These milestones were recognized as revenue in 2001
since the achievement of these milestones is considered substantive in that the
furthering of our drug candidate through the regulatory process reduces the
considerable risk associated with development stage candidates. Success in late
stage clinical trials is a substantive step toward filing an NDA with the FDA.
In addition, approximately thirty percent of our total employee population is
dedicated to advancing daptomycin through the regulatory process. These
employees are among our mostly highly skilled employees. Considerable expense is
incurred in the clinical trial process.
In January 2001, we received $13.0 million in upfront license fees from
Gilead in exchange for a license to commercialize an intravenous and oral
formulation of daptomycin in sixteen European countries. Of these fees,
$10.0 million was attributable to the intravenous formulation and $3.0 million
to the oral formulation. The development period of the intravenous formulation
is defined as the time required to fulfill our obligation to file an NDA with
the FDA. This time period has been estimated by management to be two years from
receipt of the initial payment from Gilead Sciences. As such, $5.0 million was
recognized as revenue for the intravenous formulation in 2001. The development
period for the oral formulation is also defined as the time required to fulfill
our obligation to file an NDA with the FDA. We estimate the development phase
for this formulation to be five years from the receipt of
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initial payment from Gilead. Therefore, we recognized $600,000 of revenue in
2001 relating to the development of this formulation. The balance of license
fees is treated as deferred revenue, which will be recognized over the remaining
respective development periods.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred. The portion of
purchase price, if any, in any acquisition allocated to in-process research and
development is charged to expense upon acquisition (Note C). Research and
development expenses consist of compensation, associated fringe benefits,
clinical studies and other research and development related costs, including
recruiting and relocation, fine chemicals, supplies, facilities, depreciation,
outside lab services, non-clinical studies and manufacturing process improvement
costs.
INCOME TAXES
Cubist accounts for income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settled. A deferred tax asset is established for
the expected future benefit of net operating loss and credit carryforwards. A
valuation reserve against net deferred tax assets is required if, based upon
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
INVESTMENT TAX CREDITS
Investment tax credits for research and development expenditures incurred by
Cubist's Canadian operations are recorded as a reduction of tax expense when
collection is reasonably assured.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Cubist's financial instruments, which include cash
and cash equivalents, investments, accounts receivable, accounts payable, and
accrued expenses approximates their fair value due to the short-term nature of
the items. The estimated fair value of long-term debt and capital lease
obligations approximates their carrying value. The estimated fair value of
long-term debt and capital lease obligation has been determined using current
interest rates for similar instruments.
In evaluating the fair value information, considerable judgment is required
to interpret the market data used to develop the estimates. The use of different
market assumptions and/or different valuation
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techniques may have a material effect on the estimated fair value amounts.
Accordingly, the estimates of fair value presented herein may not be indicative
of the amounts that could be realized in a current market exchange.
FOREIGN CURRENCY AND INTEREST RATE RISK
Cubist operates internationally, which gives rise to a risk that earnings
and cash flows may be negatively impacted by fluctuations in interest and
foreign exchange rates. During 2001, Cubist entered into limited foreign
currency hedging transactions between the U.S. dollar, the European euro and the
British pound.
At December 31, 2001, Cubist has a commitment to purchase 312,500 euro, with
an approximate US dollar value of this commitment of $283,063, and a commitment
to purchase 62,043 GBP, with an approximate US dollar value of this commitment
of $91,719.
NET LOSS PER COMMON SHARE
Basic net loss per share is computed using the weighted average number of
shares of Common Stock outstanding. Diluted net loss per share does not differ
from basic net loss per share since potential common shares from stock options,
warrants, convertible debt and notes payable are antidilutive for all periods
presented and are therefore excluded from the calculation. During the years
ended December 31, 2001, 2000 and 1999, options to purchase 3,471,613,
2,920,895, and 2,006,829, shares of Common Stock, respectively, warrants for
1,478,359, 1,578,652, and 2,793,239 shares of Common Stock, respectively, and
convertible debt and notes payable convertible into 4,106,450, 668,969 and
87,158 shares of Common Stock, respectively, were not included in the
computation of diluted net loss per share since their inclusion would be
antidilutive.
OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive loss consists of net loss and foreign currency translation
adjustments, which is presented in the Statement of Stockholders' Equity. In
2001, the decision was made to close and relocate the Vancouver operations to
our corporate headquarters. This is considered to represent a substantial
liquidation of our investment in our Canadian subsidiary, therefore the
cumulative translation adjustment relating to these operations, which amounted
to $163,000, was taken to income during the year.
ACCOUNTING FOR STOCK BASED COMPENSATION
Cubist accounts for stock-based awards to employees using the intrinsic
value method as prescribed by APB No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no
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compensation expense is recorded for options issued to employees in fixed
amounts and with fixed exercise prices at least equal to the fair market value
of Common Stock at the date of grant. Cubist applies the provisions of Statement
of Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
through disclosure only (Note L). All stock-based awards to non-employees are
accounted for at their fair value in accordance with SFAS No. 123.
FOREIGN CURRENCY
Prior to October 1, 2000, the functional currency of Cubist's subsidiaries,
which are located in Canada and United Kingdom, was the Canadian dollar. The
remeasurement of the foreign currency balances into the Canadian dollar
functional currency was performed as follows, according to the remeasurement
method:
- Monetary items are remeasured at the rate of exchange in effect at the
balance sheet date;
- Non-monetary items are remeasured at historical exchange rates; and
- Revenue and expense items are remeasured at the average exchange rate
prevailing in the period.
The translation of the Canadian functional currency financial statements
into the United States dollar was performed as follows:
- Assets and liabilities were translated at period end exchange rates; and
- Revenues and expenses were translated using the average rates prevailing
in the period.
The resulting effects of foreign currency translation adjustments have been
accumulated and are included as other comprehensive income in the statement of
stockholders' equity.
Effective October 1, 2000, the functional currency for all of Cubist's
subsidiaries was changed to the United States dollar. Accordingly, the
remeasurement method is used to convert the foreign currency balances from the
local currency into the United States dollar. Comprehensive loss consists of net
loss and foreign currency translation adjustments, which is presented in the
Statement of Stockholders' Equity. In 2001, we took to income $163,000 of
accumulated other comprehensive income due to the closure and relocation of our
Vancouver operations to our corporate headquarters.
Foreign exchange gains (losses) of $(278,399), $570,022 and $196,584 in the
years ended December 31, 2001, 2000 and 1999 are included in the other income
(expense) for the period.
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DEEMED DEBT DISCOUNTS
As applicable, the consideration received on debt instruments issued is
allocated between the debt, the fair value of detachable warrants issued with
the debt and the intrinsic value of beneficial (in-the-money) conversion
options. Debt is disclosed net of deemed discounts. Discounts attributable to
detachable warrants are amortized to interest expense over the term of the debt.
Discounts attributable to a beneficial conversion option are amortized over the
period to the initial conversion date. Amortization is calculated by the
effective interest method.
RECENT ACCOUNTING PRONOUNCEMENT
In June 2001, FASB issued SFAS 141, Business Combinations, and SFAS 142,
Goodwill and Other Intangible Assets, collectively referred to as the
"Standards". SFAS 141 supersedes APB No. 16, Business Combination. The
provisions of SFAS 141 (i) require that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001, (ii) provide
specific criteria for the initial recognition and measurement of intangible
assets apart from goodwill, and (iii) require that amortized negative goodwill
be written off immediately as an extraordinary gain instead of being deferred
and amortized. SFAS 141 also requires that upon adoption of SFAS 142 the Company
reclassify the carrying amounts of certain intangible assets into or out of
goodwill, based on certain criteria. SFAS 142 supersedes APB 17, Intangible
Assets, and is effective for fiscal years beginning after December 15, 2001.
SFAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. The provisions of SFAS 142
(i) prohibit the amortization of goodwill and indefinite-lived intangible
assets, (ii) require that goodwill and indefinite-lived intangibles assets be
tested annually for impairment (and in interim periods if certain events occur
indicating that the carrying value of goodwill and/or indefinite-lived
intangible assets may be impaired), (iii) require that reporting units be
identified for the purpose of assessing potential future impairments of
goodwill, and (iv) remove the forty-year limitation on the amortization period
of intangible assets that have finite lives.
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step. The Company expects to complete that first step of the goodwill
impairment test during the first quarter of 2002. The second step of the
goodwill impairment test measures the amount of the impairment loss (measured as
of the beginning of the year of adoption), if any, and must be completed by the
end of the Company's fiscal year. Intangible assets deemed to have an indefinite
life will be tested for impairment using a one-step process, which compares the
fair value to the carrying amount of the asset as of the beginning of the fiscal
year, and pursuant to the requirements of SFAS 142 will be completed during the
first quarter of 2002. Any impairment loss resulting from the transitional
impairment tests will
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be reflected as the cumulative effect of a change in accounting principle in the
first quarter 2002. The Company has not yet determined what effect these
impairment tests will have on the Company's earnings and financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 supercedes FASB
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived
Assets to be Disposed of". SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends APB 30, "Reporting Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business".
SFAS 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001, and was adopted by the Company, as required, on
January 1, 2002. Management is currently determining what effect, if any,
SFAS 144 will have on its financial position and results of operations.
C. BUSINESS COMBINATIONS
TERRAGEN DISCOVERY INC.
On October 23, 2000, Cubist indirectly through its subsidiary C&T
Acquisition Corporation acquired all of the issued and outstanding common and
preferred shares of TerraGen, and assumed all of the outstanding options,
warrants and convertible debentures of TerraGen, by issuing 334,933 shares of
Cubist Common Stock and causing C&T Acquisition Corporation to issue 178,491
exchangeable shares.
Each common share of TerraGen was exchanged, at the election of the holder,
for either 0.021323 exchangeable shares or 0.021323 shares of Cubist Common
Stock and each preferred share was exchanged, at the election of the holder, for
either 0.030386 exchangeable shares or 0.030386 shares of Cubist Common Stock.
The exchangeable shares are exchangeable at any time at the option of the
holder, on a one-for-one basis, for shares of Cubist Common Stock. All
exchangeable shares that remain outstanding will be automatically exchanged for
Cubist Common Stock on October 23, 2002. At December 31, 2001, 27,052 of those
shares have been exchanged for Cubist Common Stock. The options, warrants and
convertible debentures of TerraGen assumed by Cubist pursuant to the acquisition
are exercisable for 94,605 shares of Cubist Common Stock. This acquisition had
been accounted for using the pooling-of-interests method of accounting. The
results for the year ended December 31, 1999 have been restated to include the
balances and results of C&T Acquisition Corporation and TerraGen and its
subsidiaries. The financial results for the year ended December 31, 2000 include
the results of the previously separate businesses for the nine months ended
September 30, 2000 prior to the consummation of the transaction. Revenue and net
loss from the previously separate operations of Cubist and TerraGen were
revenues of $2,496,247 and $1,760,573 and net loss of $23,171,029 and
$3,737,752, respectively in the
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nine months ended September 30, 2000, which are included in these consolidated
financial statements. Results on a stand-alone basis were as follows:
<Table>
<Caption>
YEAR ENDED COMBINED
DECEMBER 31, 1999 CUBIST TERRAGEN RESTATED
- ----------------- ------------ ----------- ------------
<S> <C> <C> <C>
Revenue................................. $ 5,353,379 $ 1,493,005 $ 6,846,384
Operating loss.......................... (18,295,676) (6,793,875) (25,089,551)
Net loss................................ $(17,813,510) $(6,308,351) $(24,121,861)
Net loss per share...................... $ (0.99) $ (15.21) $ (1.31)
</Table>
There were no intercompany transactions between the two companies prior to
consummation of the transaction.
CHROMAXOME CORPORATION
On March 17, 1999 Cubist's Canadian subsidiary purchased substantially all
of the assets of ChromaXome under an asset purchase agreement dated March 12,
1999, among Cubist, Trega Biosciences and ChromaXome. The consideration paid,
excluding acquisition costs, for the assets acquired consisted of approximately
$2.0 million in cash, notes payable of approximately $3.0 million and 18,231
shares of Common Stock having an estimated fair value of $673,405. The notes
payable bore interest at a rate of 9.5% and were repaid prior to December 31,
2000.
XENOVA DISCOVERY
On April 8, 1999 Cubist's Canadian subsidiary purchased substantially all of
the assets of Xenova under an asset purchase agreement dated April 8, 1999,
among Cubist, Xenova Group PLC, or Xenova Group, and Xenova. The consideration
paid, excluding acquisition costs, for the assets acquired consisted of $402,250
in cash, notes payable of $3,619,663 and 30,386 shares of Common Stock having an
estimated fair value of $1,140,761. One note payable of $1,375,715 was due and
repaid as of December 31, 1999. The second note payable was due April 8, 2002
and repayable at any time by Cubist by converting into 58,282 shares of Common
Stock at any time after 24 months from the date of closing, at the option of
either Xenova Group or Cubist. On April 20, 2001, the convertible note payable
was converted to 58,282 shares of Common Stock.
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The acquisitions of ChromaXome and Xenova have been accounted for by the
purchase method with results of operations of the acquired entities included in
the financial statements of Cubist from the dates of acquisition.
<Table>
<Caption>
CHROMAXOME XENOVA TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Tangible assets........................................... $ 22,806 $ 1,060,414 $ 1,083,220
Intangible assets......................................... 5,574,326 4,380,939 9,955,265
In-process research and development....................... 407,310 344,994 752,304
Liabilities assumed....................................... (2,511) (278,567) (281,078)
----------- ----------- -----------
Net assets acquired....................................... 6,001,931 5,507,780 11,509,711
Consideration:
Notes payable........................................... (3,013,094) (3,619,663) (6,632,757)
Shares issued........................................... (673,405) (1,140,761) (1,814,166)
----------- ----------- -----------
Cash (including acquisition costs)........................ $ 2,315,432 $ 747,356 $ 3,062,788
=========== =========== ===========
</Table>
Acquired in-process research and development materially represents acquired
tangible assets having no alternative future use outside of specified research
and development activities.
The following table reflects, on an unaudited pro forma basis, the combined
results of Cubist's operations acquired for the year ended December 31, 1999 as
if all such acquisitions had taken place immediately prior to the beginning of
the respective years presented. Appropriate adjustments have been made to
reflect the accounting basis used in recording these acquisitions. No
adjustments have been recorded for nonrecurring charges arising on the
acquisitions. This pro forma information does not purport to be indicative of
the results of operations that would have resulted had the acquisitions been in
effect for the entire years presented, and is not intended to be a projection of
future results or trends.
<Table>
<Caption>
1999
TOTAL
-----------
<S> <C>
Revenues.................................................... $ 6,846,384
Net loss.................................................... $25,851,246
Net loss per share.......................................... $ (1.40)
</Table>
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D. INVESTMENTS
At December 31, 2001 and 2000, all investments were classified as
held-to-maturity and carried at amortized cost. Investments consisted of the
following:
<Table>
<Caption>
2001 2000
----------- -----------
<S> <C> <C>
Short-term:
Commercial Paper................................... -- $ 5,444,093
Corporate Bonds.................................... 53,897,565 69,163,590
Government Bonds................................... 14,616,579 --
----------- -----------
$68,514,144 $74,607,683
=========== ===========
Long-Term:
Corporate Bonds.................................... $30,243,581 $18,234,857
Government Bonds................................... 24,054,797 --
----------- -----------
$54,298,378 $18,234,857
=========== ===========
</Table>
At December 31, 2001, maturities of all investments classified as long-term
were due after one year through two years. Gross realized gains on sales of
held-to-maturity investments during the year ended December 31, 2001 were
immaterial.
The carrying amounts and estimated fair values of our investments at
December 31, 2001 and 2000 were as follows:
<Table>
<Caption>
2001 2000
--------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $120,322,157 $120,322,104 $46,940,277 $46,995,641
Short-term investments.................... 68,514,144 68,770,048 74,607,683 75,031,075
Long-term investments..................... 54,298,378 54,238,778 18,234,857 18,324,806
</Table>
Fair values of all marketable securities are based upon quoted market
prices.
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E. PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of:
<Table>
<Caption>
2001 2000
------------ -----------
<S> <C> <C>
Building............................................. $ 41,807,576 $34,000,000
Leasehold improvements............................... 4,101,473 3,951,361
Laboratory equipment................................. 8,000,167 7,143,333
Furniture and fixtures............................... 933,665 692,104
Computer equipment................................... 3,291,899 1,319,088
------------ -----------
58,134,780 47,105,886
Less accumulated depreciation and amortization....... (10,078,623) (6,963,806)
------------ -----------
Property and equipment, net.......................... $ 48,056,157 $40,142,080
============ ===========
</Table>
Depreciation and amortization expense was $4,042,359, $1,634,512, and
$1,518,511 in 2001, 2000 and 1999, respectively.
On September 8, 2000, Cubist purchased for $34.0 million, a new corporate
headquarters building in Lexington, Massachusetts. In connection with this
purchase, Cubist issued $39.0 million of senior convertible notes (see Note N).
On September 17, 2001, we relocated to the new facility and depreciation expense
commenced on this date.
F. INTANGIBLE ASSETS
At December 31, intangible assets consisted of:
<Table>
<Caption>
2001 2000
----------- -----------
<S> <C> <C>
Patents............................................... $ 5,132,939 $ 5,192,577
Intellectual property and processes and other
intangibles......................................... 4,734,013 5,379,397
----------- -----------
9,866,952 10,571,974
Less accumulated amortization......................... (4,234,293) (3,291,912)
----------- -----------
Intangible assets, net................................ $ 5,632,659 $ 7,280,062
=========== ===========
</Table>
Amortization expense was $942,381, $1,928,476, and $1,393,193 in 2001, 2000
and 1999, respectively.
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G. ACCRUED EXPENSES
At December 31, accrued expenses consisted of:
<Table>
<Caption>
2001 2000
---------- ----------
<S> <C> <C>
Payroll and benefits................................... $1,943,633 $ 908,585
Drug development....................................... 3,223,978 1,445,623
Interest............................................... 2,143,309 1,031,333
Other.................................................. 1,989,164 1,090,576
---------- ----------
Total accrued expenses................................. $9,300,084 $4,476,117
========== ==========
</Table>
H. RESEARCH AND DEVELOPMENT AGREEMENTS
In June 1996, Cubist entered into a collaborative research agreement with
Bristol-Myers Squibb. Under the terms of the agreement, Bristol-Myers Squibb
purchased from Cubist $4,000,000 of Cubist's Preferred Stock upon execution of
the agreement, which was subsequently converted to Common Stock and agreed to
make payments to Cubist upon the achievement of certain milestones. In addition,
Bristol-Myers Squibb reimbursed Cubist a fixed amount for research and
development expenses relating to the production of certain targets and also for
expenses relating to the screening of Bristol-Myers Squibb compounds against
Cubist's targets over three years. Cubist recorded revenue of $500,000 in 1999
for certain research and development revenues and milestone payments in
accordance with the agreement. Bristol-Myers Squibb's exclusive research period
ended in January 2000 and reimbursements of Cubist's research and development
costs ceased. Accordingly, no revenue was recorded in 2001 and 2000.
In June 1996, Cubist entered into a collaborative research agreement with
Merck. Under the terms of the agreement, Merck paid Cubist a technology
licensing fee upon execution and will pay certain milestone payments if earned.
In addition, Merck reimbursed Cubist for research and development expenses
relating to the production of certain targets, for expenses relating to the
screening of Merck compounds against Cubist's targets, and for expenses relating
to compound optimization through August 1999. Cubist recorded revenue of
$2,500,000 in 1999 for certain research and development revenues and milestone
payments, in accordance with the agreement. Merck's exclusive research period
ended in 2000 and reimbursements of Cubist research and development costs
ceased. Accordingly no revenue was recorded in 2001 and 2000.
In September 1998, Cubist's Canadian subsidiary entered into a research and
collaboration agreement with Schering-Plough Research Institute to access
Cubist's recombinant library to discover novel leads with potential activity in
the anti-infective area. As part of the agreement, Cubist provided library
screening services to Schering-Plough for those strains provided. In exchange
for these services, Schering-Plough
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made research payments to Cubist. Schering-Plough was granted an exclusive,
worldwide license to use any recombinant microorganism that produces a lead and
an exclusive, worldwide license to all of its rights and ownership in any
resulting patents. Cubist recorded revenue of $0, $397,000 and $394,000 in 2001,
2000 and 1999, respectively, for certain research and development revenues in
accordance with the agreement. Schering-Plough's exclusive research period ended
in 2000 and reimbursements of Cubist research and development costs ceased.
Accordingly no revenue was recorded in 2001.
In May 1999, Cubist's Canadian subsidiary entered into a second
collaboration agreement with Schering-Plough under which Schering-Plough was
granted an exclusive, worldwide license to manufacture and sell compounds
resulting from screening Cubist's natural product library. In exchange for the
license, Schering-Plough made research payments and, if scientific and
development milestones are achieved, Schering-Plough will make milestone
payments to us. In addition, Schering-Plough will be required to pay royalties
to Cubist on worldwide sales of any drug developed and commercialized from any
products derived from this collaboration. Cubist recorded revenue of $0,
$731,000 and $217,000 in 2001, 2000 and 1999 respectively, for certain research
and development revenues, in accordance with the agreement. Schering-Plough's
exclusive research period ended in 2000 and reimbursements of Cubist research
and development costs ceased. Accordingly no revenue was recorded in 2001.
On February 3, 1999, Cubist entered into a research and license agreement
with Novartis to use Cubist's proprietary VITA functional genomics technology to
validate and develop assays for antiinfective targets and to identify new
compounds for development as antiinfective agents. In exchange for the license,
Novartis funded a research program for a period of three years in
February 2002; this research and license agreement was extended for one
additional year. If certain scientific and development milestones are achieved,
Novartis will make milestone payments to Cubist. In addition, Novartis will be
required to pay royalties to Cubist on worldwide sales of any drug developed and
commercialized from any products derived from this collaboration. Cubist
recorded revenue of $2,500,000, $2,750,000 and $217,000 in 2001, 2000 and 1999
respectively, for certain research and development revenues and milestone
payments in accordance with the agreement. Upon the signing of the research and
license agreement, Novartis was issued 797,448 shares of Common Stock for a
total purchase price of $4.0 million in cash. In February 2002, Cubist announced
the extension by one year of the collaborative research agreement with Novartis.
Concurrently, Cubist announced the achievement of and payment for a third
milestone in the collaboration for the delivery of another validated target and
high-throughput screening assay to be used in antiinfective drug discovery.
On November 6, 2000, Cubist and Emisphere Technologies, entered into a
research agreement to develop an oral formulation of daptomycin. Under the terms
of the agreement, Cubist paid a license fee of $500,000 upon execution of the
license agreement and could pay milestone payments totaling $30 million should a
product be successfully commercialized. In addition, Cubist will fund
Emisphere's
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research and development efforts at a rate of $250,000 per full-time equivalent
per year. Cubist would also pay a royalty on sales of any product resulting from
the collaboration, would be responsible for drug development and would receive
exclusive worldwide commercialization rights to any oral products.
On January 7, 2001, Cubist and Gilead signed a licensing agreement for the
exclusive rights to commercialize Cidecin and an oral formulation of daptomycin
in 16 European countries following regulatory approval. Gilead has paid Cubist
an up-front licensing fee of $10 million for Cidecin and $3 million for an oral
formulation of daptomycin, which were recorded to deferred revenue and are being
recognized over the life of the development period of 2 years and 5 years,
respectively. Accordingly, revenue of $5,600,000 was recognized in the year
ended December 31, 2001. Cubist is entitled to receive additional cash payments
of up to $31 million upon achievement of certain clinical and regulatory
milestones. Revenue from milestone payments that are substantive and whose
achievement was not reasonably assured at the inception of the agreement is
recognized once the respective milestone is achieved. Gilead will also pay
Cubist a fixed royalty on net sales. Cubist will continue to be responsible for
worldwide clinical development of Cidecin, while Gilead will be responsible for
any regulatory filings in the covered territories. Gilead's sales force will
market the products in Europe.
On April 10, 2001, Cubist achieved the first milestone in its collaboration
with Gilead, following the successful completion of Study 9901, Cubist's pivotal
Phase III trial examining the safety and efficacy of Cidecin in the treatment of
cSST caused by Gram-positive bacteria. On April 23, 2001, Gilead paid Cubist
$1.25 million for meeting the primary endpoint of the clinical trial. On
September 6, 2001, the completion of enrollment in the first of two Cidecin
Phase III community-acquired pneumonia clinical trials triggered a $3.0 million
payment to Cubist by Gilead. On October 5, 2001, Gilead paid Cubist
$1.25 million for meeting the primary endpoint in the Phase III clinical trial
for cSSTs. All three payments were for substantive milestones and therefore were
recorded as revenues in 2001.
On April 25, 2001, Cubist entered into a master services agreement with
Quintiles pursuant to which Quintiles agreed to provide various clinical trial,
research and other services for our Cidecin community-acquired pneumonia trial.
Under the terms of this agreement, the specific responsibilities and obligations
performed by Quintiles included study management, clinical trial initiation and
management and clinical data management. The related costs are being accrued
over the life of the clinical trial.
On June 27, 2001, Cubist and Syrrx announced the formation of antiinfective
drug discovery collaboration. The joint effort uses Syrrx and Cubist
technologies for the high-throughput characterization of novel antiinfective
drug targets and rational drug design. As a result of the collaboration, the
companies expect to accelerate the discovery of novel classes of antibiotics to
treat infectious diseases, including those resistant to current therapies.
Financial incentives for the collaboration include research and clinical
milestones, royalties and an equity investment in Syrrx by Cubist. Cubist made
an equity
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investment of $300,000, which has been accounted for under the cost method of
accounting. The first milestone payment under this agreement was met at
December 31, 2001.
On July 30, 2001, Cubist entered into a collaborative research and license
agreement with Albany Molecular to identify novel antiinfective drug candidates.
Under this agreement, Albany Molecular would receive fees from Cubist for the
achievement of specific clinical and regulatory milestones as well as royalties
on sales of any commercial products that result from the collaboration.
In November 2001, Cubist entered into a manufacturing and supply agreement
with ACS pursuant to which ACS has agreed to provide scale-up services and to
construct a production facility dedicated to the manufacture of daptomycin and
to sell bulk daptomycin exclusively to us for commercial purposes. Under the
terms of this agreement, ACS is required to prepare its manufacturing facility
in Italy to manufacture bulk daptomycin drug substance in accordance with GMP
standards. In consideration, we will make substantial contributions in equity,
milestones, product price premiums, resin investment, process development,
quality systems and facility qualification support. Upon completion of the
preparation of ACS's manufacturing facility and a determination by the FDA that
the manufacturing facility complies with GMP standards, we will purchase minimum
annual quantities of bulk daptomycin drug substance from ACS over a six-year
period. Under the terms of the agreement, we issued to ACS 62,558 shares of our
common stock. These shares had a value of $2.0 million. The cost of these shares
was accounted for as part of the cost of the manufacturing facility and was
recorded as other assets.
On December 7, 2001, Cubist entered into a screening service agreement with
Cetek whereby Cetek will provide Cubist with screening and dereplication
services. Under this agreement, Cetek would receive fees from Cubist for the
achievement of specific research, clinical and regulatory milestones.
While we do not currently maintain cost accounting systems to accurately
track costs on an individual project basis, based on an estimated average
full-time equivalent basis, we estimate that in 2001 we incurred costs in an
approximate aggregate amount of $2.7 million in connection with all of our
research collaborations which generated approximately $2.5 million of revenue in
the aggregate in 2001; and based on an estimated average full-time equivalent
basis, we estimate that in 2000, we incurred costs in an approximate aggregate
amount of $4.5 million in connection with all of our research collaborations
which generated approximately $4.3 million of revenue in the aggregate in 2000.
I. LICENSE AGREEMENTS
On November 7, 1997, Cubist entered into a license agreement with Eli Lilly,
which was amended on October 6, 2000, 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 in cash and, if
certain drug development milestones are achieved, has agreed to pay milestone
payments by issuing shares
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of Common Stock to Eli Lilly. In addition, Cubist will be required to pay
royalties to Eli Lilly on worldwide sales of daptomycin. On February 19, 1999
Cubist issued 56,948 shares of Common Stock as a milestone payment pursuant to,
and in accordance with, the terms of the agreement. The value of the Common
Stock was $250,000 and was recorded as research and development expense.
Cubist's Canadian subsidiary and Diversa Corporation entered into a
cross-license agreement dated November 18, 1999, pursuant to which Cubist
granted a co-exclusive world wide non-royalty bearing license to certain
patented technology of Cubist, subject to certain restrictions. Under the
cross-license agreement, Diversa paid an upfront license fee of $2,500,000 and
will pay annual license maintenance fees, until the patents expire. Cubist is
required to repay the upfront license fee if it were to merge or be acquired
prior to November 18, 2004 by a company whose primary business is DNA shuffling.
Accordingly, this upfront license fee will be deferred revenue until
November 18, 2004. Revenue of $100,000 and $100,000 related to the annual
license maintenance fee was recognized in 2001 and 2000, respectively.
On November 22, 2000, Cubist and IHMA signed a license agreement to utilize
IHMA's expertise and experience in "bridge" oral drug delivery techniques to
research, develop and commercialize oral forms of ceftriaxone. In exchange for
such license, Cubist paid an undisclosed upfront license fee, which was recorded
as research and development expense in 2000, and if certain drug development
milestones are achieved, Cubist will pay milestone payments. Cubist will also be
required to pay royalties to IHMA on worldwide sales of any oral formulation of
ceftriaxone.
In order to expand its rights to utilize IHMA's oral drug delivery
technology more broadly to research, develop and commercialize oral forms of
antibiotics and antifungals, Cubist entered into a license agreement with the
University of Utah on December 31, 2001. In return for a small upfront fee plus
possible future milestone and royalty payments, Cubist obtained an exclusive
worldwide license to all of University of Utah's rights to the technology.
J. EQUITY FINANCINGS
On May 1, 1997, Cubist's Canadian subsidiary completed a private placement
financing with investors and raised net proceeds of $3.5 million (less financing
costs of $41,664) by issuing 88,848 shares of Common Stock, along with 44,424
warrants exercisable for Common Stock at $56.28 Cdn per share. On October 8,
1998 there was a second closing of this private placement financing resulting in
Cubist raising an additional $3.2 million by issuing 88,848 shares of Cubist
Common Stock, along with 44,424 warrants exercisable for Cubist Common Stock at
$56.28 Cdn per share. These warrants were exercisable immediately and expired on
May 1, 2001. In connection with the pooling-of-interests transaction consummated
on October 23, 2000 between Cubist and TerraGen, the exercise price for all
warrants
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outstanding as of that date was set at a United States dollar equivalent of
$37.25 per share. At December 31, 2001, 312 warrants remained outstanding.
On September 23, 1998, Cubist completed a private placement financing with
investors and raised approximately $13.6 million (less financing costs of
approximately $901,000) by issuing 6,065,560 shares of Common Stock at $2.25 per
share, along with 3,032,783 warrants exercisable for Common Stock at $2.25 per
share. The warrants are exercisable at any time until September 23, 2003. The
values of the warrants and Common Stock in excess of par value have been
reflected in additional paid-in-capital. At December 31, 2001, 1,444,446
warrants remained outstanding.
On March 15, 1999, Cubist's Canadian subsidiary completed a private
placement financing with investors and raised net proceeds of $5.2 million,
(less financing costs of $9,200) by issuing 142,157 shares of Common Stock.
On October 21, 1999, Cubist completed a private placement financing with
investors and raised approximately $18.8 million (less financing costs of
$1,328,892) by issuing 2,503,333 shares of Common Stock at $7.50 per share.
On January 29, 2000, Cubist completed a private placement financing with
investors and raised approximately $55.0 million (less financing costs of
$3,039,000) by issuing 2,200,000 shares of Common Stock at $25.00 per share.
On April 3, 2000, Cubist completed a follow-on public offering and raised
approximately $82.5 million (less financing costs of $4,957,275) by issuing
2,500,000 shares of Common Stock at $33.00 per share. In addition, on May 3,
2000, the underwriters exercised their option to purchase an additional 375,000
shares of Common Stock at $33.00 per share to cover over-allotments, raising an
additional $12.4 million (less financing costs of $680,625).
K. STOCKHOLDERS' EQUITY
WARRANTS
In May 1995, Cubist issued a warrant exercisable for 17,142 shares Common
Stock at $4.20 per share. The warrant is outstanding at December 31, 2001.
In February 1999, Cubist issued a warrant exercisable for 25,000 shares
Common Stock at $4.31 per share. The value of the warrant was determined using
the Black-Scholes option-pricing model. Cubist recorded general and
administrative expense of $6,427 and $70,680 in 2001 and 2000, respectively. The
warrant was exercised during the year ended December 31, 2000.
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<Page>
In February 2000, Cubist issued a warrant exercisable for 100,000 shares
Common Stock at $23.875 per share. In November 2000, the agreement was modified
to allow exercise of only 10,000 warrants and the remaining 90,000 were
cancelled. The 10,000 warrants were exercised during the year ended
December 31, 2001.
NOTES RECEIVABLE FROM RELATED PARTIES
In September 1999, Cubist accepted a promissory note from a Senior Vice
President in consideration for 50,000 shares of restricted Common Stock issued
to him. The aggregate principal amount of this note at December 31, 2001 is
$168,750 and is reflected in stockholders' equity as a reduction to
paid-in-capital. This note has an annual interest rate of 4% and was due on
September 25, 2002. The terms of the note provide for the note to be forgiven in
three equal annual installments of $168,750, commencing September 2000
contingent upon the Senior Vice President's continued employment. As part of the
Senior Vice President's termination of employment on March 15, 2002, the third
installment was forgiven.
On September 18, 2000, Cubist accepted a promissory note of $250,000 from
the Chief Executive Officer. This note has an annual interest rate of 6.15% and
was due on March 31, 2002. The note was repaid in full prior to December 31,
2001.
In December 2001, Cubist accepted a promissory note from the Vice President,
General Counsel and Secretary. The aggregate principal amount of this note at
December 31, 2001 is $50,000 and is reflected in stockholders' equity as a
reduction to paid-in-capital since the proceeds of the note were used to
purchase shares of Cubist Common Stock. This note has an annual interest rate of
3.97% and is due on December 17, 2006. The note is to be forgiven in four equal
annual installments of $12,500, commencing December 2003, contingent upon the
Vice President's continued employment.
L. STOCK OPTIONS
Under the Cubist 1993 Amended and Restated Stock Option Plan, options to
purchase 5,777,426 shares of Common Stock may be granted to employees,
directors, officers or consultants. The options are generally granted at fair
market value on the date of the grant, vest ratably over a four-year period and
expire ten years from the date of grant. At December 31, 2001, there were
1,742,268 shares available for future grant.
Under the Cubist 2000 Nonstatutory Stock Option Plan, options to purchase
1,650,000 shares of Common Stock may be granted to employees, directors,
officers or consultants. The options are generally granted at fair market value
on the date of the grant, vest ratably over a four-year period and expire ten
years from the date of grant. At December 31, 2001, there were 780,933 shares
available for future grant.
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Under the Cubist 2001 United Kingdom Stock Option Plan, options to purchase
500,000 shares of Common Stock may be granted to employees, directors, officers
or consultants. The options are generally granted at fair market value on the
date of the grant, vest ratably over a four-year period and expire ten years
from the date of grant. At December 31, 2001, there were 471,752 shares
available for future grant.
Under the TerraGen Discovery Inc. Employee Stock Option Plan, incentive and
non-qualified stock options were granted to United Kingdom and Canadian
employees, directors and consultants. Options vested ratably over a maximum
four-year period and expire ten years from the date of grant. In connection with
the acquisition by Cubist, Cubist assumed the TerraGen plan and all of the
TerraGen options were converted at the acquisition exchange ratio of 0.021323
per share of Common Stock into options to acquire Common Stock of Cubist. The
assumed options are exercisable upon the same terms and conditions as provided
in the TerraGen plan except that the assumed options are exercisable for shares
of Cubist Common Stock upon payment of the revised exercise price in United
States dollars.
Had compensation costs for Cubist's stock-based compensation plan been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, Cubist's net loss and loss per share for the years
ended December 31, 2001, 2000, and 1999 would have been increased to the pro
forma amounts indicated below:
<Table>
<Caption>
2001 2000 1999
--------------------------- --------------------------- ---------------------------
BASIC AND BASIC AND BASIC AND
DILUTED LOSS DILUTED LOSS DILUTED LOSS
NET LOSS PER SHARE NET LOSS PER SHARE NET LOSS PER SHARE
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
As Reported................. $(69,854,157) $(2.49) $(44,300,576) $(1.68) $(24,121,861) $(1.31)
Pro forma................... $(84,259,264) $(3.00) $(59,918,426) $(2.27) $(26,713,559) $(1.45)
</Table>
The fair value of each stock option was estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for fiscal 2001:
<Table>
<Caption>
CUBIST
--------
<S> <C>
Expected stock price volatility............................. 88%
Risk free interest rate..................................... 5.1%
Expected annual dividend yield per share.................... 0%
Expected life of options.................................... 7 years
</Table>
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The following weighted-average assumptions were used for fiscal 2000:
<Table>
<Caption>
CUBIST AND TERRAGEN
-------------------
<S> <C>
Expected stock price volatility............................. 87%
Risk free interest rate..................................... 6.2%
Expected annual dividend yield per share.................... 0%
Expected life of options.................................... 7 years
</Table>
The following weighted-average assumptions were used for fiscal 1999:
<Table>
<Caption>
CUBIST TERRAGEN
-------- ----------
<S> <C> <C>
Expected stock price volatility............................ 74% 102%
Risk free interest rate.................................... 5.3% 5.10%
Expected annual dividend yield per share................... 0% 0%
Expected life of options................................... 7 years 3.82 years
</Table>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are anticipated.
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<Page>
A summary of the status of Cubist's stock option plan as of December 31,
2001, 2000 and 1999, and changes during each of the years then ended, is
presented below:
<Table>
<Caption>
2001 2000 1999
--------------------- --------------------- ---------------------
WAEP* WAEP* WAEP*
NUMBER PER SHARE NUMBER PER SHARE NUMBER PER SHARE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1...................... 2,920,895 $ 18.75 2,006,829 $ 5.11 1,535,810 $ 4.01
Granted................................... 1,592,061 29.04 1,316,403 36.09 887,866 6.57
Exercised................................. (450,615) (5.41) (347,731) (3.94) (140,420) (2.94)
Canceled.................................. (590,728) (45.55) (54,606) (29.57) (276,427) (3.97)
--------- ------- --------- ------- --------- ------
Balance at December 31.................... 3,471,613 $ 20.77 2,920,895 $ 18.75 2,006,829 $ 5.11
========= ======= ========= ======= ========= ======
Weighted average grant-date fair value of
options granted during the year:
Exercise price greater than grant date
stock fair value...................... $ 22.88 $ -- $22.66
Exercise price equals grant date stock
fair value............................ $ 23.46 $ 26.70 $ 3.72
Exercise price less than grant date
stock fair value...................... $ 23.33 $ 30.64 $ 7.94
</Table>
- ------------------------
* Weighted-average exercise price
The following table summarizes information about stock options outstanding
at December 31, 2001:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.007--$1.96................. 23,981 4.4 years $ 1.69 23,981 $ 1.69
$2.25--$5.00................. 723,536 7.0 years 3.21 415,662 3.08
$5.25--$7.00................. 244,927 5.9 years 5.87 232,251 5.90
$8.00--$11.625............... 560,902 7.0 years 11.09 232,434 10.95
$12.00--$29.87............... 1,025,251 8.7 years 28.87 186,588 28.80
$30.00--$63.375.............. 893,016 8.8 years 36.39 299,280 40.71
--------- --------- ------ --------- ------
3,471,613 7.9 years $20.77 1,390,196 $16.40
========= ========= ====== ========= ======
</Table>
Cubist records deferred compensation for stock options issued with exercise
prices below the fair value of Common Stock as of the measurement date. Deferred
compensation is amortized and recorded
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as compensation expense ratably over the vesting period of the stock options.
Compensation expense of $761,267, $697,966 and $43,945 was recognized in 2001,
2000 and 1999, respectively.
M. COMMITMENTS AND CONTINGENCIES
Cubist leases certain of its facilities under operating lease agreements,
which extend through 2010. Certain of these leases contain renewal options and
provisions that adjust the base payment based upon changes in the consumer price
index and require Cubist to pay operating costs, including property taxes,
insurance and maintenance. In 1993, Cubist provided a security deposit of
$100,000 upon execution of a lease. The security deposit bears interest in a
segregated account, and was partially refunded ($79,000 plus interest) on the
fifth anniversary.
Cubist leases certain equipment under long-term capital leases. The cost of
this equipment included in fixed assets was approximately $701,918 and
$1,795,888, with associated accumulated depreciation of approximately $498,771
and $1,288,754 at December 31, 2001 and 2000, respectively. Cubist intends to
purchase all of the leased equipment at a price to be negotiated at lease end.
Future lease payments for non-cancelable leases for the respective years ended
December 31 are as follows:
<Table>
<Caption>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
2002............................................... $ 791,199 $499,571
2003............................................... 672,433 --
2004............................................... 562,500 --
2005............................................... 562,500 --
2006............................................... 562,500
Thereafter......................................... 2,400,000
---------- --------
Total minimum lease payments..................... $5,551,132 $499,571
Less amount representing interest payments....... (25,846)
--------
Present value of minimum lease payments.......... $473,725
========
</Table>
Lease payments under operating leases were $1,577,063, $906,889 and $763,503
in 2001, 2000 and 1999 respectively.
Cubist operates internationally, which gives rise to a risk that earnings
and cash flows may be negatively impacted by fluctuations in interest and
foreign exchange rates. During 2001, Cubist entered into limited foreign
currency hedging transactions between the U.S. dollar, the European euro and the
British pound. At December 31, 2001, Cubist has a commitment to purchase 312,500
euro, with an
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approximate U.S. dollar value of this commitment of $283,063, and a commitment
to purchase 62,043 GBP, with an approximate U.S. dollar value of this commitment
of $91,719.
N. LONG TERM DEBT
<Table>
<Caption>
2001 2000
------------ -----------
<S> <C> <C>
Note payable issued in conjunction with the acquisition of
Xenova (Note C)........................................... $ -- $ 2,243,948
Term loan agreement......................................... 7,359,466 2,643,642
Notes payable to MM Venture Finance Partnership............. 554,578 1,062,079
Senior convertible notes.................................... 39,000,000 39,000,000
Subordinated convertible notes.............................. 165,000,000 --
------------ -----------
211,914,044 44,949,669
Less current portion...................................... (3,206,760) (1,692,340)
------------ -----------
Long-term obligation...................................... $208,707,284 $43,257,329
============ ===========
</Table>
During March 1999, Cubist entered into a term loan agreement with a bank
under which Cubist is able to borrow up to $1,500,000 to finance fixed asset
purchases. In March 2000, Cubist increased its term loan by an additional
$2,000,000 to finance leasehold improvements and fixed asset purchases. Advances
under this facility are to be repaid over a 36-month period, commencing on
March 31, 2000. Interest on the borrowings is at the bank's LIBOR rate (4.24% at
December 31, 2001). Borrowings under the facility are collateralized by all
capital equipment purchased with the funds from this term loan. In
September 2001, we increased our term loan by an additional $6,500,000 to
finance leasehold improvements and fixed asset purchases for the new corporate
headquarters building. Advances under this facility are to be repaid over a
48-month period, commencing on March 29, 2002. Interest on the borrowings is at
the bank's LIBOR rate (4.24% at December 31, 2001). Borrowings under the
facility are collateralized by all capital equipment purchased with the funds
under this term loan and a minimum collateral amount of $3,250,000 through
March 31, 2002. Thereafter the minimum collateral amount will at all times be
equal to 50% of the aggregate principal amount of the term loan outstanding.
This collateral amount is reflected as restricted cash. At December 31, 2001,
borrowings outstanding totaled $7,359,466. At December 31, 2001, there was
$685,182 available for borrowing under this term loan agreement. This agreement
contains certain covenants. The most restrictive of which requires Cubist to
maintain an unencumbered cash balance, as defined, of at least $73 million.
Cubist has been in compliance throughout the year with all covenants.
On November 16, 1999, our Canadian subsidiary issued $1.6 million Cdn of
convertible debentures and warrants to purchase 16,458 shares of common stock.
The convertible debentures bore interest at a
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rate of 12% and were payable on March 31, 2000. On March 31, 2000, the
convertible debentures and related interest were converted to 30,176 shares of
common stock at Xenova's option. The warrants became exercisable on
December 31, 1999 and expire November 16, 2004. The estimated value of the
detachable warrants of $323,000 was recorded as a discount on the convertible
debentures and was amortized to interest expense over the term of the debt using
the effective interest method. The convertible debenture has a beneficial
conversion feature valued at $264,300, equal to the aggregate excess market
value of the underlying Common Stock at the agreement date over the conversion
rate. The beneficial conversion feature was recorded as additional paid-in
capital and recognized on issuance as interest expense, as the debenture was
immediately convertible to Common Stock. At December 31, 2001, 16,459 warrants
remained outstanding.
On January 17, 2000, Cubist's Canadian subsidiary issued notes payable to MM
Venture Finance Partnership, or MM, totaling $2,000,667. The notes payable bear
interest at 14.4% and are being repaid over 36 months through January 17, 2003.
The assets of the former TerraGen Discovery Inc., including its patents, were
pledged as collateral for the loan. In addition, MM received and later exercised
warrants to purchase 22,790 shares of Common Stock for gross proceeds of
$606,665. The estimated value of the detachable warrants of $658,606 was
recorded as a discount on the notes payable and is being amortized to interest
expense over the term of the note payable using the effective interest method.
Interest expense of $226,237 and $138,400 was recorded in 2001 and 2000,
respectively. At December 31, 2001, the note payable balance was $554,578.
On September 8, 2000, we purchased a new corporate headquarters building in
Lexington, Massachusetts. To finance the purchase, we issued $39.0 million of
senior convertible notes to John Hancock Life Insurance Company. This financing
covered the building purchase price of approximately $34.0 million and included
$5.0 million for facility improvements. The five-year notes carry a coupon rate
of 8 1/2% and can be converted at any time at the option of the holder into our
Common Stock at $63.8625 per share. We retain the right to redeem these notes
after three years at 103% of their principal amount outstanding. The deferred
costs associated with the sale of the senior convertible notes were $1,324,605
of which $265,239 and $81,029 was amortized to interest expense in 2001 and
2000, respectively.
On October 26, 2001, we completed the private placement of $125.0 million of
5 1/2% Convertible Subordinated Notes (less estimated financing costs of
$4,055,096). The offering was made through initial purchasers to qualified
institutional buyers under Rule 144A of the Securities Act. The notes are
convertible at any time prior to maturity into Common Stock at a conversion
price of $47.20 per share, subject to adjustment upon certain events. Interest
is payable on each November 1 and May 1, beginning May 1, 2002. In addition, on
December 28, 2001, the initial purchasers exercised their option to purchase
$40.0 million of 5 1/2% Convertible Subordinated Notes (less estimated financing
costs of $827,320). The offering was made through the same initial purchasers to
qualified institutional buyers under Rule 144A
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of the Securities Act. The notes are convertible at any time prior to maturity
into Common Stock at a conversion price of $47.20 per share, subject to
adjustment upon certain events. Interest is payable on each November 1 and
May 1, beginning May 1, 2002. The notes mature on November 1, 2008. The notes
are subordinated to our senior indebtedness. The deferred costs associated with
the sale notes were $4,882,416 of which $57,759 was amortized to interest
expense in 2001.
At December 31, 2001, payments of principal and interest on existing debt
were due as follows:
<Table>
<S> <C>
Fiscal year ending December 31,
2002........................................................ $ 15,619,140
2003........................................................ 14,239,214
2004........................................................ 13,843,705
2005........................................................ 52,014,955
2006........................................................ 9,075,000
Thereafter.................................................. 183,150,000
------------
Total payments.............................................. 287,942,014
Less amounts representing interest.......................... (76,027,970)
------------
Total debt.................................................. 211,914,044
Less current portion........................................ (3,206,760)
------------
$208,707,284
============
</Table>
O. EMPLOYEE BENEFITS
Cubist maintains a 401(k) savings plan in which substantially all of its
permanent employees in the United States are eligible to participate.
Participants may contribute up to 15% of their annual compensation to the plan,
subject to certain limitations. Cubist contributes a matching amount in cash of
up to 1.5% of a participant's total compensation or $500 annually, whichever is
less, or a match in Common Stock up to 4.5% of a participant's total
compensation or 75% of a participant's total contribution annually, whichever is
less. Matches distributed in Common Stock have immediate vesting. Cubist
contributed $1,500, $5,227, $5,853 during 2001, 2000 and 1999, respectively.
Cubist issued 10,961, 14,939 and 28,420 shares of Common Stock in 2001, 2000 and
1999, respectively, pursuant to this plan. No shares were issued prior to 1999.
Cubist maintains a Group Registered Retirement Savings Plan independent to
each employee, through a nationally recognized funds manager. Substantially all
of the permanent employees in Canada are eligible to participate. Participants
may contribute up to 18% of their previous years earned income, subject to
certain limitations. Cubist will make a matching contribution of up to 3% of an
employee's
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<Page>
salary. Cubist's Canadian subsidiary contributed $27,666, $23,657 and $33,704
during 2001, 2000 and 1999, respectively.
Cubist maintains a Contracted In Money Purchase Scheme for all employees in
the United Kingdom. Participants may contribute up to 10% of their annual
compensation to the scheme. Cubist matches contributions at a level up to 10% of
an employee's salary. Cubist's United Kingdom subsidiary contributed $55,156,
$50,229 and $42,083 during 2001, 2000 and 1999, respectively.
Cubist instituted an employee stock purchase plan in 1998, in which
substantially all of its permanent employees are eligible to participate.
Participants may contribute up to 15% of their annual compensation to the plan,
subject to certain limitations. The plan allows participants to purchase Cubist
Common Stock, after a pre-determined six-month period, through payroll
deductions at a price 15% less than the lower of the closing price for the
beginning or ending date of the purchase period. The plan allows for the
issuance of 250,000 shares of Common Stock to eligible employees. During 2001,
2000 and 1999, Cubist issued 16,361, 12,827 and 11,615 shares of Common Stock,
respectively, pursuant to this plan.
P. INCOME TAXES
Based on Cubist's current financial status, realization of Cubist's deferred
tax assets does not meet the "more likely than not" criteria under SFAS No. 109
and, accordingly, a valuation allowance for the entire deferred tax asset amount
has been recorded. The components of the net deferred tax asset and the related
valuation allowance are as follows:
<Table>
<Caption>
2001 2000
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards.................... $ 29,703,786 $ 39,231,437
Research and development costs...................... 38,359,711 3,414,689
Tax credit carryforwards............................ 5,036,990 3,657,017
Deferred revenues................................... 3,957,629 997,630
Other, net.......................................... 1,289,816 963,905
------------ ------------
Total deferred tax assets........................... 78,347,932 48,264,678
Valuation allowance................................. (78,347,932) (48,264,678)
------------ ------------
Net deferred tax assets............................. $ -- $ --
============ ============
</Table>
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The effective rate differs from the statutory rate of 34% due to the
following:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
Federal..................................................... (34.0)% (34.0)% (34.0)%
State....................................................... (6.1)% (5.4)% (4.5)%
Foreign Rate Differential................................... (0.6)% 0.5% 1.2%
Foreign Investment Tax Credit............................... (0.0)% (1.1)% (3.7)%
Research and development tax credit......................... (1.3)% (2.0)% (2.0)%
Valuation Allowance......................................... 41.1% 40.3% 38.7%
Other....................................................... 0.9% 0.6% 0.6%
----- ----- -----
Effective Tax Rate.......................................... (0.0)% (1.1)% (3.7)%
===== ===== =====
</Table>
At December 31, 2001, Cubist has federal net operating loss carryforwards of
approximately $61.1 million, which begin to expire in 2007, state net operating
loss carryforwards of $52.0 million, which begin to expire in 2002, and
$14.0 million of foreign net operating loss carryforwards which begin to expire
in 2004. Of the $78.3 million valuation allowance at December 31, 2001,
$4.7 million relates to the tax benefit of the exercise of stock options. This
amount will result in an increase in Additional Paid in Capital upon realization
of these losses in accordance with APB 25. Cubist also has federal and state
credit carryforwards of $4,039,000, $1,513,000, respectively, which begin to
expire in 2008.
Ownership changes resulting from the issuance of capital stock may limit the
amount of net operating loss and tax credit carryforwards that can be utilized
annually to offset future taxable income. The amount of the annual limitation is
determined based on Cubist's value immediately prior to the ownership change.
Subsequent significant changes in ownership could further affect the limitation
in future years.
Q. VENDOR AGREEMENTS
In April 2000, Cubist entered into a development and supply agreement with
Abbott pursuant to which Abbott has agreed to assist Cubist in the development
of daptomycin as a parenteral formulation and to manufacture and sell
exclusively to Cubist, daptomycin as a parenteral formulation. Under the terms
of this agreement, Cubist has agreed to make certain milestone payments to
Abbott for their development efforts and assistance in obtaining an approved NDA
for daptomycin. Cubist has made payments totaling $450,000 through the period
ended December 31, 2001, which were expensed as research and development. If the
FDA approves the daptomycin NDA, Cubist will purchase minimum annual quantities
of drug product from Abbott over a five-year period beginning in 2002.
In June 2000, Cubist entered into a services agreement with DSM an
affiliated company of DSM Capua pursuant to which DSM has agreed to provide
supervisory and advisory services to Cubist relating
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to the equipping of the manufacturing facility at DSM Capua. Cubist has also
entered into a manufacturing and supply agreement with DSM Capua pursuant to
which DSM Capua has agreed to manufacture and supply to Cubist bulk daptomycin
drug substance for commercial purposes. Under the terms of the manufacturing and
supply agreement, DSM Capua is required to prepare its manufacturing facility in
Italy to manufacture bulk daptomycin drug substance in accordance with GMP
standards. Under the terms of the service agreements, Cubist will make a series
of scheduled payments to DSM over a five-year period beginning in 2000 in order
to reimburse DSM for certain costs of approximately $8.2 million to be incurred
by DSM Capua in connection with the scale-up and construction of its
manufacturing facility. Through 2001, Cubist has reimbursed $4,862,000 of these
costs to DSM Capua and accrued an additional $81,000. These costs are being
recorded as other assets and will begin to be amortized upon completion of the
facility and commencement of manufacturing daptomycin for commercial purposes.
In addition, in consideration for the implementation of the Cubist technology in
the facility by DSM Capua, Cubist has agreed to make milestone payments of
$1,400,000 to DSM if specific phases of technical development of the scaled up
manufacturing process to be used in this manufacturing facility are completed
within specified periods of time. Cubist is accruing these estimated milestone
payments based on costs incurred and recorded research and development expenses
of $328,000 and $627,000 in 2001 and 2000, respectively. Upon completion of the
preparation of DSM Capua's manufacturing facility and a determination by the FDA
that the manufacturing facility complies with GMP standards, Cubist will
purchase minimum annual quantities of bulk daptomycin drug substance from DSM
over a five-year period.
In November 2001, we entered into a manufacturing and supply agreement with
ACS pursuant to which ACS has agreed to provide scale-up services and to
construct a production facility dedicated to the manufacture of daptomycin and
to sell bulk daptomycin exclusively to us for commercial purposes. Under the
terms of this agreement, ACS is required to prepare its manufacturing facility
in Italy to manufacture bulk daptomycin drug substance in accordance with GMP
standards. In consideration, we will make contributions in equity, milestones,
product price premiums, resin investment, process development, quality systems
and facility qualification support. Upon completion of the preparation of ACS's
manufacturing facility and a determination by the FDA that the manufacturing
facility complies with GMP standards, we will purchase minimum annual quantities
of bulk daptomycin drug substance from ACS over a six-year period. Under the
terms of the agreement, we issued to ACS 62,558 shares of our common stock.
These shares had a value of $2.0 million. The cost of these shares was accounted
for as part of the cost of the manufacturing facility and was recorded as other
assets.
In December 7, 2001, we entered into a screening service agreement with
Cetek whereby Cetek will provide Cubist with screening and dereplication
services. Under this agreement, Cetek would receive fees from Cubist for the
achievement of specific research, clinical and regulatory milestones
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R. SEGMENT INFORMATION
Cubist operates in one business segment, the research, development and
commercialization of novel antimicrobial drugs. The majority of the Company's
revenues are generated within the U.S.
The following summary discloses long-lived assets by location:
<Table>
<Caption>
DOMESTIC INTERNATIONAL CONSOLIDATED
----------- ------------- ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 2001
Long-lived assets........................................ $60,257,720 $ 6,689,462 $66,947,182
YEAR ENDED DECEMBER 31, 2000
Long-lived assets........................................ $42,019,412 $ 8,694,443 $50,713,855
YEAR ENDED DECEMBER 31, 1999
Long-lived assets........................................ $ 3,626,174 $10,268,317 $13,894,491
</Table>
S. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains Statement of Operations information for each
quarter of 2001 and 2000. Cubist believes that the following information
reflects all normal recurring adjustments necessary for a fair presentation of
the information for the period presented. The operating results for any quarter
are not necessarily indicative of results for any future period. The quarterly
financial information has been restated to reflect the acquisition of TerraGen
Discovery Inc., which was accounted for using the pooling-of-interests method of
accounting:
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
2001
Total revenues......................................... $ 2,379 $ 3,349 $ 5,089 $ 3,572
Net loss............................................... $(17,603) $(16,832) $(13,553) $(21,866)
Net loss per share..................................... $ (0.63) $ (0.60) $ (0.48) $ (0.77)
2000
Total revenues......................................... $ 1,281 $ 1,662 $ 1,314 $ 966
Net loss............................................... $ (8,867) $ (8,733) $ (9,308) $(17,392)
Net loss per share..................................... $ (0.38) $ (0.32) $ (0.34) $ (0.63)
</Table>
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors and compliance with Section 16(a) of
the Securities Exchange Act may be found in the sections captioned "PROPOSAL
NO. 1--ELECTION OF DIRECTORS", "EXECUTIVE COMPENSATION" and "SECTION 16(A)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on June 13, 2002. Information with respect to
Executive Officers may be found under the section captioned "Our Executive
Officers and Directors" in Part I of this Annual Report on Form 10-K. Such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required with respect to this item may be found in the
section captioned "EXECUTIVE COMPENSATION" appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on June 13, 2002. Such information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required with respect to this item may be found in the
sections captioned "PRINCIPAL STOCKHOLDERS" and "PROPOSAL NO. 1--ELECTION OF
DIRECTORS" appearing in the definitive Proxy Statement to be delivered to
Stockholders in connection with the Annual Meeting of Stockholders to be held on
June 13, 2002. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Information required with respect to this item may be found in the
section captioned "CERTAIN TRANSACTIONS" appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on June 13, 2002. Such information is incorporated
herein by reference.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Documents Filed As Part Of Form 10-K
1. FINANCIAL STATEMENTS.
The following financial statements and supplementary data are included in
Part II Item 8 filed as part of this report:
- Report of Independent Accountants
- Balance Sheets as of December 31, 2001 and 2000
- Statements of Operations for the years ended December 31, 2001, 2000 and
1999
- Statements of Cash Flows for the years ended December 31, 2001, 2000 and
1999
- Statements of Stockholders' Equity for the years ended December 31, 2001,
2000 and 1999
- Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
None.
Schedules not listed above have been omitted because they are not
applicable, not required or the information required is shown in the financial
statements or the notes thereto.
3. LIST OF EXHIBITS
<Table>
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3 to Cubist's
Quarterly Report on Form 10-Q filed on August 12, 1999)
(File no. 000-21379)
3.2 Amended and Restated By-Laws of the Registrant, as amended
to date. (Exhibit 3.4, Registration No. 333-6795)
4.1 Specimen certificate for shares of Common Stock
(incorporated by reference to Exhibit 3.4 to Cubist's
Registration Statement on Form S-1) (Registration No.
333-6795)
4.2 Rights Agreement, dated as of July 21, 1999 between Cubist
and BankBoston, N.A. as Rights Agent (incorporated by
reference to Exhibit 99.1 to Cubist's Report on Form 8-K
filed on July 30, 1999) (File No. 000-21379)
</Table>
105
<Page>
<Table>
<C> <S>
4.3 First Amendment dated as of March 7, 2000 to the Rights
Agreement, dated as of July 21, 1999 between Cubist and
Fleet National Bank f/k/a BankBoston, N.A. as Rights Agent
(incorporated by reference to Exhibit 4.2 to Cubist's
Registration Statement on Form 8-A/A filed on March 9,
2000) (File No. 000-21379)
10.1 Employment Agreement between the Registrant and Scott M.
Rocklage, dated June 20, 1994. (Exhibit 10.3, Registration
No. 333-6795)
10.2 Consulting Agreement between the Registrant and Paul R.
Schimmel, dated May 1, 1992. (Exhibit 10.4, Registration
No. 333-6795)
10.3 Amended and Restated 1993 Stock Option Plan. (Exhibit 10.6,
Registration No.333-6795)
10.4 Lease Agreement between Registrant and Stimpson Family
Trust, dated April 30, 1993, regarding 24 Emily Street,
Cambridge, MA., as amended by the First Amendment to
Lease, dated September 19, 1994. (Exhibit 10. 13,
Registration No.333-6795)
10.5 Form of Employee Confidentiality and Nondisclosure
Agreement. (Exhibit 10.15, Registration No. 333-6795)
10.6 Series C Convertible Preferred Stock Purchase Options issued
to Dr. Paul Schimmel and Dr. Julius Rebek in May 1995, as
amended by certain Letter Agreements, dated October 23,
1995, between the Registrant and each of Dr. Schimmel and
Dr. Rebek. (Exhibit 10.19, Registration No. 333-6795)
10.7 Amended and Restated Stockholders Rights Agreement by and
among the Registrant and the parties signatory thereto.
(Exhibit 10.20, Registration No. 333-6795)
10.8 Master Lease Agreement between the Registrant and
Transamerica Business Credit, dated as of February 14,
1997. (Exhibit 10.33, Annual Report on Form 10-K, filed
March 20, 1998, File No. 000-21379)
+10.9 License Agreement, dated November 7, 1997, between Cubist
and Eli Lilly. (Exhibit 10.3, Amendment to Quarterly
Report on Form 10-Q/A, filed October 22, 1998, File No.
000-21379)
10.10 First Amendment to Amended and Restated 1993 Stock Option
Plan (Exhibit 10.3, Quarterly Report on Form 10-Q, filed
August 12, 1998, File No. 000-21379)
10.11 1997 Employee Stock Purchase Plan. (Exhibit 10.4, Quarterly
Report on Form 10-Q, filed August 12, 1998, File No.
000-21379)
10.12 Registration Rights Agreement, dated as of September 10,
1998 between Cubist and each person listed on Exhibit A
thereto (Exhibit 10.2, Quarterly Report on Form 10-Q,
filed November 4, 1998, File No. 000-21379)
</Table>
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<Page>
<Table>
<C> <S>
10.13 Common Stock Purchase Warrants, dated September 23, 1998,
executed by Cubist (Exhibit 10.3, Quarterly Report on Form
10-Q, filed November 4, 1998, File No. 000-21379)
10.14 Collaborative Research and License Agreement between Cubist
and Novartis Pharma AG, dated as of February 3, 1999
(Exhibit 10.1, Quarterly Report on Form 10-Q, filed May
13, 1999, File No. 000-21379)
10.15 Stock Purchase Agreement between Cubist and Novartis Pharma
AG, dated as of February 3, 1999 (Exhibit 10.2, Quarterly
Report on Form 10-Q, filed May 13, 1999, File No.
000-21379)
10.16 Restated Certificate of Incorporation as amended (Exhibit 3,
Quarterly Report on Form 10-Q, filed August 12, 1999, File
No. 000-21379)
10.17 Registration Rights Agreement, dated as of October 15, 1999
between Cubist and each person listed on Exhibit A thereto
(Exhibit 10.1, Quarterly Report on Form 10-Q, filed
November 12, 1999, File No. 000-21379)
10.18 Registration Rights Agreement, dated as of January 27, 2000
among Cubist and each of the Investors party thereto
(Exhibit 10.1, Registration No. 333-96365)
10.19 Second Amendment to Amended and Restated 1993 Stock Option
Plan (Exhibit 10.41, Annual Report on Form 10-K, filed
March 10, 2000, File No. 000-21379)
10.20 Third Amendment to Amended and Restated 1993 Stock Option
Plan (Exhibit 10.42, Annual Report on Form 10-K, filed
March 10, 2000, File No. 000-21379)
10.21 Stock Pledge Agreement, dated as of September 25, 1999 by
and between Alan D. Watson and Cubist (Exhibit 10.43,
Annual Report on Form 10-K, filed March 10, 2000, File No.
000-21379)
10.22 Letter Agreement, dated September 25, 1999 between Alan D.
Watson and Cubist (Exhibit 10.44, Annual Report on Form
10-K, filed March 10, 2000, File No. 000-21379)
10.23 Secured Promissory Note, dated as of September 25, 1999 by
and between Alan D. Watson and Cubist (Exhibit 10.45,
Annual Report on Form 10-K, filed March 10, 2000, File No.
000-21379)
+10.24 Manufacturing and Supply Agreement, entered into as of June
22, 2000, by and between Cubist and DSM Capua S.p.A
(Exhibit 10.1, Quarterly Report on Form 10-Q, filed August
14, 2000, File No. 000-21379)
+10.25 Services Agreement, entered into as of June 22, 2000, by and
between Cubist and Gist- brocades Holding A.G. (Exhibit
10.2, Quarterly Report on Form 10-Q, filed August 14,
2000, File No. 000-21379)
</Table>
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<Page>
<Table>
<C> <S>
+10.26 Development and Supply Agreement, dated April 3, 2000, by
and between Cubist and Abbott Laboratories (Exhibit 10.3,
Quarterly Report on Form 10-Q, filed August 14, 2000, File
No. 000-21379)
+10.27 Clinical Services Master Agreement, dated December 1, 1999,
by and between Cubist and Omnicare Clinical Research, Inc.
f/k/a IBAH, Inc. (Exhibit 10.49, Annual Report on Form
10-K, filed April 2, 2001, File No. 000-21379)
+10.28 Exhibit A to the Clinical Services Master Agreement, dated
December 21, 2000, by and between Cubist and Omnicare
Clinical Research, Inc. f/k/a IBAH, Inc. (Exhibit 10.50,
Annual Report on Form 10-K, filed April 2, 2001, File No.
000-21379)
+10.29 Exhibit B to the Clinical Services Master Agreement, dated
April 12, 2000, by and between Cubist and Omnicare
Clinical Research, Inc. f/k/a IBAH, Inc. (Exhibit 10.51,
Annual Report on Form 10-K, filed April 2, 2001, File No.
000-21379)
+10.30 Exhibit C to the Clinical Services Master Agreement, dated
April 18, 2000, by and between Cubist and Omnicare
Clinical Research, Inc. f/k/a IBAH, Inc. (Exhibit 10.52,
Annual Report on Form 10-K, filed April 2, 2001, File No.
000-21379)
+10.31 Exhibit D to the Clinical Services Master Agreement, dated
May 10, 2000, by and between Cubist and Omnicare Clinical
Research, Inc. f/k/a IBAH, Inc. (Exhibit 10.53, Annual
Report on Form 10-K, filed April 2, 2001, File No.
000-21379)
+10.32 Exhibit E to the Clinical Services Master Agreement, dated
October 17, 2000, by and between Cubist and Omnicare
Clinical Research, Inc. f/k/a IBAH, Inc. (Exhibit 10.54,
Annual Report on Form 10-K, filed April 2, 2001, File No.
000-21379)
+10.33 Contract of Monitoring Services, dated January 10, 2000,
between Cubist and Clindev (Proprietary) Limited (Exhibit
10.55, Annual Report on Form 10-K, filed April 2, 2001,
File No. 000-21379)
+10.34 First Amendment to Contract of Monitoring Services, dated
June 22, 2000, between Cubist and Clindev (Proprietary)
Limited (Exhibit 10.56, Annual Report on Form 10-K, filed
April 2, 2001, File No. 000-21379)
+10.35 Second Amendment to Contract of Monitoring Services, dated
December 20, 2000, between Cubist and Clindev
(Proprietary) Limited (Exhibit 10.57, Annual Report on
Form 10-K, filed April 2, 2001, File No. 000-21379)
+10.36 Contract Research Agreement, dated as of August 1, 2000, by
and between Target Research Associates, Inc. and Cubist
(Exhibit 10.58, Annual Report on Form 10-K, filed April 2,
2001, File No. 000-21379)
</Table>
108
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<Table>
<C> <S>
+10.37 Assignment and License Agreement, dated October 6, 2000, by
and between Eli Lilly & Company and Cubist (Exhibit 10.59,
Annual Report on Form 10-K, filed April 2, 2001, File No.
000-21379)
+10.38 Note Purchase Agreement, dated September 8, 2000, by and
between Cubist and the Purchasers listed on Schedule 1
thereto (Exhibit 10.60, Annual Report on Form 10-K, filed
April 2, 2001, File No. 000-21379)
+10.39 Registration Rights Agreement, dated as of September 8,
2000, by and between John Hancock Life Insurance Company,
John Hancock Variable Life Insurance Company, Signature 4
Limited, Investors Partner Life Insurance Company and
Cubist (Exhibit 10.61, Annual Report on Form 10-K, filed
April 2, 2001, File No. 000-21379)
+10.40 Senior Convertible Promissory Note R-1, dated September 8,
2000, by and between Cubist and John Hancock Life
Insurance Company (Exhibit 10.62, Annual Report on Form
10-K, filed April 2, 2001, File No. 000-21379)
+10.41 Senior Convertible Promissory Note R-2, dated September 8,
2000, by and between Cubist and John Hancock Life
Insurance Company (Exhibit 10.63, Annual Report on Form
10-K, filed April 2, 2001, File No. 000-21379)
+10.42 Senior Convertible Promissory Note R-3, dated September 8,
2000, by and between Cubist and John Hancock Life
Insurance Company (Exhibit 10.64, Annual Report on Form
10-K, filed April 2, 2001, File No. 000-21379)
+10.43 Senior Convertible Promissory Note R-4, dated September 8,
2000, by and between Cubist and John Hancock Variable Life
Insurance Company (Exhibit 10.65, Annual Report on Form
10-K, filed April 2, 2001, File No. 000-21379)
+10.44 Senior Convertible Promissory Note R-5, dated September 8,
2000, by and between Cubist and Hare & Co. (Exhibit 10.66,
Annual Report on Form 10-K, filed April 2, 2001, File No.
000-21379)
+10.45 Senior Convertible Promissory Note R-6, dated September 8,
2000, by and between Cubist and Investors Partner Life
Insurance Company (Exhibit 10.67, Annual Report on Form
10-K, filed April 2, 2001, File No. 000-21379)
+10.46 Research & Development Collaboration and Option Agreement,
dated as of October 4, 2000, by and between Cubist and
Emisphere Technologies, Inc. (Exhibit 10.68, Annual Report
on Form 10-K, filed April 2, 2001, File No. 000-21379)
</Table>
109
<Page>
<Table>
<C> <S>
+10.47 License Agreement, dated as of November 22, 2000, by and
between Cubist and International Health Management
Associates, Inc. (Exhibit 10.69, Annual Report on Form
10-K, filed April 2, 2001, File No. 000-21379)
+10.48 Patent Cross-License Agreement, dated as of November 18,
1999, by and between TerraGen Discovery Inc. and Diversa
Corporation (Exhibit 10.70, Annual Report on Form 10-K,
filed April 2, 2001, File No. 000-21379)
10.49 Audit Committee Charter (Exhibit 10.72, Annual Report on
Form 10-K, filed April 2, 2001, File No. 000-21379)
10.50 Fourth Amendment to Amended and Restated 1993 Stock Option
Plan (Exhibit 10.73, Annual Report on Form 10-K, filed
April 2, 2001, File No. 000-21379)
10.51 Fifth Amendment to Amended and Restated 1993 Stock Option
Plan (Exhibit 10.74, Annual Report on Form 10-K, filed
April 2, 2001, File No. 000-21379)
10.52 Sixth Amendment to Amended and Restated 1993 Stock Option
Plan (Exhibit 10.75, Annual Report on Form 10-K, filed
April 2, 2001, File No. 000-21379)
+10.53 Marketing, Distribution and Development Agreement by and
between Cubist and Gilead Sciences, Inc., dated as of
January 6, 2001 (Exhibit 10.1, Quarterly Report on Form
10-Q, filed May 15, 2001, File No. 000-21379)
10.54 Master Services Agreement by and between Cubist and
Quintiles, Inc., dated as of April 25, 2001 (Exhibit 10.1,
Quarterly Report on Form 10-Q, filed August 14, 2001, File
No. 000-21379)
+10.55 Work Order 1 by and between Cubist and Quintiles, Inc.,
dated as of June 7, 2001 (Exhibit 10.2, Quarterly Report
on Form 10-Q, filed August 14, 2001, File No. 000-21379)
+10.56 Collaboration Agreement by and between Cubist and Syrrx,
Inc., dated as of June 27, 2001 (Exhibit 10.3, Quarterly
Report on Form 10-Q, filed August 14, 2001, File No.
000-21379)
*10.57 Agreement by and between Cubist and Albany Molecular
Research, Inc., dated as of July 30, 2001 (Exhibit 10.1,
Quarterly Report on Form 10-Q, filed November 14, 2001,
File No. 000-21379)
10.58 Indenture by and between Cubist and The Bank of New York,
dated as of October 26, 2001 (Exhibit 10.2, Quarterly
Report on Form 10-Q, filed November 14, 2001, File No.
000-21379)
10.59 Note, dated October 26, 2001 (Exhibit 10.3, Quarterly Report
on Form 10-Q, filed November 14, 2001, File No. 000-21379)
</Table>
110
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<Table>
<C> <S>
10.60 Registration Rights Agreement by and among Cubist and the
Initial Purchasers, dated as of October 26, 2001 (Exhibit
10.4, Quarterly Report on Form 10-Q, filed November 14,
2001, File No. 000-21379)
10.61 Purchase and Sale Agreement, by and between Spaulding and
Slye Hayden Woods LLC and Cubist, dated as of July 28,
2000
10.62 Seventh Amendment to Amended and Restated 1993 Stock Option
Plan
*10.63 Manufacturing and Supply Agreement, dated as of September
30, 2001, by and between Cubist and ACS Dobfar S.p.A.
*10.64 Screening Service Agreement, dated as of December 7, 2001,
by and between Cubist and Cetek Corporation
*10.65 License Agreement, dated as of December 27, 2001, by and
between Cubist and the University of Utah
*10.66 First Amendment to "Collaborative Research and License
Agreement," dated as of February 4, 2002, by and between
Cubist and Novartis Pharma AG
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG LLP
</Table>
- ------------------------
The above-listed Exhibits are incorporated by reference from the Company's
filing indicated next to the title of such exhibit. All other above listed
exhibits have been filed herewith.
+ Confidential Treatment granted.
* Confidential Treatment requested.
(B) No current reports on Form 8-K were filed during the fourth quarter, 2001.
111
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
<Table>
<S> <C> <C>
CUBIST PHARMACEUTICALS, INC.
By: /s/ SCOTT M. ROCKLAGE
--------------------------------------------
Scott M. Rocklage, Ph.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</Table>
Pursuant to the requirements of the Securities Exchange Act, this report has
been signed by the following persons in the capacities and on the dates
indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ SCOTT M. ROCKLAGE Chairman of the Board of
------------------------------------------- Directors And Chief Executive March 25, 2001
Scott M. Rocklage Officer
Vice President and Chief
/s/ THOMAS A. SHEA Financial Officer (Principal
------------------------------------------- Financial and Accounting March 25, 2001
Thomas A. Shea Officer)
/s/ SUSAN B. BAYH
------------------------------------------- Director March 15, 2001
Susan B. Bayh
/s/ BARRY M. BLOOM
------------------------------------------- Director March 14, 2001
Barry M. Bloom
</Table>
112
<Page>
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN K. CLARKE
------------------------------------------- Director March 20, 2001
John K. Clarke
/s/ DAVID W. MARTIN, JR.
------------------------------------------- Director March 15, 2001
David W. Martin, Jr.
/s/ WALTER MAUPAY
------------------------------------------- Director March 22, 2001
Walter Maupay
/s/ PAUL R. SCHIMMEL
------------------------------------------- Director March 19, 2001
Paul R. Schimmel
/s/ JOHN ZABRISKIE
------------------------------------------- Director March 20, 2001
John Zabriskie
</Table>
113
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.61
<SEQUENCE>3
<FILENAME>a2074309zex-10_61.txt
<DESCRIPTION>EXHIBIT 10.61
<TEXT>
<Page>
EXHIBIT 10.61
PURCHASE AND SALE AGREEMENT
BY AND BETWEEN
SPAULDING AND SLYE HAYDEN WOODS LLC
A DELAWARE LIMITED LIABILITY COMPANY
AS SELLER
AND
CUBIST PHARMACEUTICALS, INC.
A DELAWARE CORPORATION
AS PURCHASER
DATE: JULY 28, 2000
65 HAYDEN AVENUE,
LEXINGTON, MASSACHUSETTS
<Page>
TABLE OF CONTENTS
@@
<Table>
<S> <C>
1. PURCHASE AND SALE OF PROPERTY...............................................6
1.1. PURCHASE AND SALE................................................6
1.2. PROPERTY TRANSFERRED.............................................6
2. PURCHASE PRICE, DEPOSIT AND MANNER OF PAYMENT...............................7
2.1. PURCHASE PRICE...................................................7
2.2. UNPAID TAXES AND CHARGES.........................................8
2.3. SATISFACTION OF LIENS AND ENCUMBRANCES...........................8
2.4. INTEREST ON DEPOSIT..............................................9
3. COSTS AND ADJUSTMENTS AT CLOSING............................................9
3.1. ADJUSTMENTS......................................................9
3.2. SELLER'S COSTS...................................................9
3.3. ADJUSTMENTS.....................................................10
3.4. IN GENERAL; PRORATION STATEMENT.................................11
3.5. PURPOSE AND INTENT..............................................11
3.6. TAX REFUNDS.....................................................11
3.7. APPORTIONMENT OF TAXES..........................................12
3.8. UTILITY READINGS................................................12
3.9. SURVIVAL........................................................12
4. PURCHASER'S DUE DILIGENCE/CONDITION OF THE
PROPERTY........................................................................12
4.1. DUE DILIGENCE EXAMINATIONS......................................12
4.2. EXTENSION.......................................................13
4.3. RESTORATION.....................................................13
4.4. DISCLOSURES.....................................................13
4.5. RETURN OF DUE DILIGENCE MATERIALS...............................14
4.6. PURCHASER'S TERMINATION RIGHT...................................14
4.7. AS IS SALE......................................................15
4.8. RELEASE.........................................................15
4.9. SCHEDULES AND EXHIBITS..........................................16
5. TITLE MATTERS..............................................................16
5.1. PERMITTED EXCEPTIONS............................................16
5.2. PRELIMINARY TITLE REPORT........................................17
5.3. TITLE OBJECTIONS; TITLE DEFECT NOTICE...........................17
5.4. REMOVAL OF TITLE OBJECTIONS.....................................18
6. CLOSING AND CLOSING CONDITIONS.............................................19
6.1. CLOSING.........................................................19
</Table>
<Page>
<Table>
<S> <C>
6.2. PURCHASER'S CLOSING CONDITIONS..................................19
6.3. SELLER'S CONDITIONS PRECEDENT...................................21
6.4. ADDITIONAL PURCHASER CONDITIONS PRECEDENT.......................22
6.5. ADDITIONAL SELLER CONDITIONS PRECEDENT..........................24
6.6. GRACE AND CURE PERIODS..........................................25
7. REPRESENTATIONS AND WARRANTIES.............................................25
7.1. PURCHASER'S REPRESENTATIONS AND WARRANTIES......................25
7.2. SELLER'S REPRESENTATIONS AND WARRANTIES.........................27
7.3. SELLER'S KNOWLEDGE..............................................29
7.4. SURVIVAL........................................................30
7.5. UNTRUE REPRESENTATION OR WARRANTY...............................30
7.6. SURVIVAL PERIOD.................................................31
7.7. MATERIAL MISREPRESENTATIONS.....................................31
8. PURCHASER'S COVENANTS......................................................31
8.1. CONFIDENTIALITY.................................................31
8.2. NON-RELIANCE ON REPRESENTATIONS AND WARRANTIES..................33
8.3. PURCHASER INDEMNITY.............................................33
8.4. SURVIVAL........................................................34
9. SELLER'S COVENANTS.........................................................34
9.1. SELLER'S OPERATION OF PROPERTY..................................34
9.2. ACCESS..........................................................34
9.3. NO MARKETING....................................................34
10. COVENANTS OF SELLER AND PURCHASER..........................................34
10.1. PRESS RELEASES.................................................34
10.2. BROKERS........................................................35
10.3. ACCESS TO RECORDS..............................................35
10.4. NON-COMPLIANCE.................................................36
10.5. SURVIVAL.......................................................36
11. FAILURE OF PERFORMANCE.....................................................36
11.1. PURCHASER DEFAULT..............................................36
11.2. SELLER DEFAULT.................................................37
12. CONDEMNATION/CASUALTY......................................................37
12.1. CONDEMNATION...................................................37
12.2. CONDEMNATION AWARD.............................................38
12.3. CASUALTY.......................................................38
12.4. UNINSURED CASUALTY.............................................39
12.5. SELLER INSURANCE...............................................39
12.6. RETURN OF DEPOSIT..............................................39
12.7. PRIMACY OF AGREEMENT...........................................40
</Table>
ii
<Page>
<Table>
<S> <C>
13. SELLER'S AND PURCHASER'S ACTIONS PRIOR TO THE CLOSING .....................40
13.1. NEW AGREEMENTS.................................................40
14. NEW LEASES................................................................40
14.1. EXECUTION OF NEW LEASES........................................40
14.2. AMENDMENT......................................................40
15. NOTICES....................................................................40
16. TIME OF THE ESSENCE........................................................42
17. SUCCESSORS AND ASSIGNS.....................................................42
18. MISCELLANEOUS PROVISIONS..................................................42
18.1. MERGER.........................................................42
18.2. ENTIRE AGREEMENT; WAIVER.......................................42
18.3. GOVERNING LAW..................................................43
18.4. CAPTIONS.......................................................43
18.5. SUCCESSORS AND ASSIGNS.........................................43
18.6. SEVERANCE......................................................43
18.7. COUNTERPARTS...................................................43
18.8. NO RECORDING...................................................43
18.9. ADDITIONAL DOCUMENTS...........................................43
18.10. INTERPRETATION.................................................43
18.11. WAIVER OF JURY TRIAL...........................................44
</Table>
iii
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@@
EXHIBITS
<Table>
<S> <C>
Exhibit A Legal Description of the Land
Exhibit B Schedule of Leases, Subleases, Licenses and Occupancy Agreements Relating to the Real Property
Exhibit C Permit Rights Respecting the Real Property
Exhibit D Owned Equipment, Equipment Leases and Laboratory Fixtures and Equipment Included in Sale
Exhibit E Service Contracts for the Real Property
Exhibit F Form of Escrow Agreement
Exhibit G Form of Deed
Exhibit H Form of Bill of Sale
Exhibit I Form of Assignment and Assumption Agreement
Exhibit J Certificate of Non-Foreign Status
Exhibit K Form of Seller's Closing Certificate
Exhibit L Form of Purchaser's Closing Certificate
Exhibit M Initial Space Lease Termination Area
Exhibit N Violations of Laws
Exhibit O Environmental Reports
Exhibit P Termination Agreement
Exhibit Q Existing Insurance
</Table>
<Page>
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "AGREEMENT"), made as of the 28th
day of July, 2000, by and between SPAULDING AND SLYE HAYDEN WOODS LLC, a
Delaware limited liability company, having an office at c/o Spaulding and Slye
Company, 255 State Street, Boston, Massachusetts 02109 ("SELLER"), and CUBIST
PHARMACEUTICALS, INC., a Delaware corporation, having an office at 24 Emily
Street, Cambridge, Massachusetts 02139 ("PURCHASER").
RECITALS
Seller owns the land, and the buildings, structures and other improvements
situated thereon (collectively, the "IMPROVEMENTS"), more particularly described
on EXHIBIT A attached hereto and made a part hereof, known as and by the street
number 65 Hayden Avenue, Lexington, Middlesex County, Massachusetts (the "REAL
PROPERTY") comprising approximately 11.564 acres of land together with
appurtenant rights and easements. Seller desires to sell, transfer and convey
the Real Property, and Purchaser desires to purchase and acquire the Real
Property, upon and subject to the terms, covenants and conditions of this
Agreement.
WITNESSETH:
In consideration of the mutual covenants and agreements herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby separately acknowledged, and in reliance on all of the
representations, warranties and covenants made by each of the parties hereto,
Seller and Purchaser do hereby agree as follows:
DEFINITIONS
The following terms as used in this Agreement will have the meanings
attributed to such terms as set forth below unless the context clearly requires
another meaning. The terms set forth below do not necessarily constitute all
defined terms set forth in this Agreement; such other defined terms shall have
the meanings ascribed to such terms elsewhere in this Agreement.
"ADDITIONAL DEPOSIT" shall have the meaning specified in SECTION 2.1.2 of
this Agreement.
"ADJUSTMENT DATE" shall have the meaning specified in SECTION 3.3 of this
Agreement.
"AFFILIATE" means, with respect to any Person, (i) any Person directly or
indirectly controlling, controlled by, or under control with, such Person; (ii)
any Person owning or controlling ten percent (10%) or more of the outstanding
voting
<Page>
interest of such Person; (iii) any Person of which such Person owns or controls
ten percent (10%) or more of the voting interests; or (iv) any officer,
director, general partner, member or trustee of such Person or of any such
Person referred to in (i), (ii) and (iii) above.
"AGREEMENT" means this Purchase and Sale Agreement, as the same may be
amended, restated, supplemented or otherwise modified from time to time in
accordance with terms hereof.
"BILL OF SALE" shall have the meaning specified in SECTION 6.2.2 of this
Agreement.
"BROKER" shall have the meaning specified in SECTION 10.2 of this
Agreement.
"BUSINESS DAY" means any day except Saturday, Sunday and any day that shall
be a legal holiday or a day on which banking institutions in the Commonwealth of
Massachusetts generally are authorized or required by Law or other government
actions to close.
"CLOSING" shall have the meaning specified in SECTION 6.1 of this
Agreement.
"CLOSING DATE" shall have the meaning specified in SECTION 6.1 of this
Agreement.
"CLOSING TITLE DEFECT NOTICE" shall have the meaning specified in
SECTION 5.3.
"DEED" shall have the meaning specified in SECTION 6.2.1 of this Agreement.
"DEPOSIT" shall have the meaning specified in SECTION 2.1.3 of this
Agreement.
"DUE DILIGENCE" shall have the meaning specified in SECTION 4.1 of this
Agreement.
"DUE DILIGENCE EXPIRATION DATE" shall have the meaning specified in SECTION
4.6 of this Agreement.
"ELECTION NOTICE" shall have the meaning specified in SECTION 12.3 of this
Agreement.
"EQUIPMENT" shall have the meaning specified in SECTION 1.2.5 of this
Agreement.
"EQUIPMENT LEASES" shall have the meaning specified in SECTION 1.2.6 of
this Agreement.
"ESCROW AGENT" shall mean First American Title Insurance Company.
2
<Page>
"ESCROW AGREEMENT" shall have the meaning specified in SECTION 2.1.3 of
this Agreement.
"EXTENSION NOTICE" shall have the meaning specified in SECTION 4.2 of this
Agreement.
"GOVERNMENTAL ENTITY" means any agency, bureau, commission, court,
department, official, political subdivision, tribunal or other instrumentality
of any government, whether federal, state or local, domestic or foreign.
"HAZARDOUS MATERIALS" means any substance, chemical, waste or material that
is or becomes regulated by any federal, state or local Governmental Entity
because of its toxicity, infectiousness, radioactivity, explosiveness,
ignitability, corrosiveness or reactivity, including, without limitation,
asbestos or any substance containing more than 0.1 percent asbestos, the group
of compounds known as polychlorinated biphenyls, flammable explosives, petroleum
or any refined petroleum product.
"IMPROVEMENTS" shall have the meaning specified in the Recitals of this
Agreement.
"INITIAL DEPOSIT" shall have the meaning specified in SECTION 2.1.1 of this
Agreement.
"INITIAL SPACE LEASE TERMINATION AREA" shall have the meaning set forth in
SECTION 6.4.5.
"LAW" means any present or future constitutional provision, federal, state
or local law, statute, ordinance, law, rule, regulation and any Order of any
Governmental Entity.
"MATERIAL MISREPRESENTATIONS" shall have the meaning specified in SECTION
7.7 of this Agreement.
"MONETARY ENCUMBRANCE" shall have the meaning specified in SECTION 5.2 of
this Agreement.
"NEW LEASE" shall have the meaning specified in SECTION 14.1 of this
Agreement.
"ORDER" means any decree, injunction, judgment, order, ruling, assessment
or writ, including, without limitation, any executive mandate of any
Governmental Entity.
"PERMIT RIGHTS" shall have the meaning specified in SECTION 1.2.3 of this
Agreement.
3
<Page>
"PERMITTED EXCEPTIONS" shall have the meaning specified in SECTION 5.1 of
this Agreement.
"PERSON" means an individual, partnership, corporation, limited liability
company, trust or unincorporated organization, or a government or agency or
political subdivision thereof.
"PERSONAL PROPERTY" has the meaning specified in SECTION 1.2 of this
Agreement.
"PRELIMINARY TITLE DEFECT NOTICE" shall have the meaning specified in
SECTION 5.3.
"PRELIMINARY TITLE REPORT" shall have the meaning specified in SECTION 5.2
of this Agreement.
"PRESS RELEASE" shall have the meaning specified in SECTION 10.1 of this
Agreement.
"PROPERTY" shall have the meaning specified in SECTION 1.2 of this
Agreement.
"PURCHASE PRICE" shall have the meaning specified in SECTION 2.1 of this
Agreement.
"PURCHASER" shall have the meaning specified in the introduction of this
Agreement.
"PURCHASER PARTIES" shall have the meaning specified in SECTION 8.1.1 of
this Agreement.
"PURCHASER'S DOCUMENTS" shall mean this Agreement together with the
assumptions and other documents contemplated by this Agreement to be executed
and performed by Purchaser at or prior to the Closing.
"PURCHASER'S REPRESENTATIVES" shall have the meaning specified in SECTION
4.1 of this Agreement.
"PURCHASER'S TERMINATION NOTICE" shall have the meaning specified in
SECTION 4.6 of this Agreement.
"REAL PROPERTY" shall have the meaning specified in the Recitals of this
Agreement.
"REAL PROPERTY AGREEMENTS" shall have the meaning specified in SECTION
1.2.1 of this Agreement.
"RECORDS" shall have the meaning specified in SECTION 1.2.4 of this
Agreement.
4
<Page>
"REMOVE", "REMOVED," OR "REMOVING" shall have the meaning specified in
SECTION 5.4 of this Agreement.
"REPRESENTATION EXPIRATION DATE" shall have the meaning specified in
SECTION 7.6 of this Agreement.
"SELLER" shall have the meaning specified in the introduction of this
Agreement.
"SELLER'S ACTUAL KNOWLEDGE" shall have the meaning specified in SECTION 7.3
of this Agreement.
"SELLER'S DOCUMENTS" shall mean this Agreement and the assignments and
other documents contemplated by this Agreement to be executed and performed by
Seller at the Closing.
"SELLER PARTIES" shall have the meaning specified in SECTION 8.3 of this
Agreement.
"SELLER'S REPRESENTATIVE" shall mean Peter A. Bailey.
"SERVICE CONTRACTS" shall have the meaning specified in SECTION 1.2.6 of
this Agreement.
"SIGNIFICANT PORTION" shall have the meaning specified in SECTION 12.1 of
this Agreement.
"SPACE LEASE" shall mean that certain lease for the majority of the space
in the main office building at the Real Property, which lease is described on
EXHIBIT B attached hereto.
"SURVEY" shall have the meaning specified in SECTION 5.1(b) of this
Agreement.
"TERMINATION AGREEMENT" shall have the meaning specified in SECTION 6.4.5.
"TITLE COMPANY" shall mean First American Title Insurance Company.
"TITLE DEFECT NOTICE" shall have the meaning specified in SECTION 5.3 of
this Agreement.
"TITLE OBJECTION" shall have the meaning specified in SECTION 5.3 of this
Agreement.
"TITLE STANDARDS" shall have the meaning specified in SECTION 5.3.
"TRANSACTION DOCUMENTS" shall mean this Agreement, the Purchaser's
Documents and the Seller's Documents.
5
<Page>
1. PURCHASE AND SALE OF PROPERTY
1.1. PURCHASE AND SALE.
Seller agrees to sell, transfer and convey to Purchaser, and Purchaser
agrees to purchase and acquire from Seller, upon and subject to all of the
terms and conditions of this Agreement, the Real Property, including all
and any right, title and interest, if any, of Seller in and to any land
lying in the bed of any street, road or avenue opened or proposed, in front
of or adjoining the Real Property, to the center line thereof, and all
strips and gores adjoining the Real Property or any part thereof.
1.2. PROPERTY TRANSFERRED.
There shall be included in the sale of the Real Property:
1.2.1. All of Seller's right, title and interest, if any, in and
to any easements, declarations or other title agreements or
instruments affecting or in any way connected to, restricting or
benefiting the Real Property (the "REAL PROPERTY AGREEMENTS");
1.2.2. All of Seller's right, title and interest, in and to (a)
all leases, subleases, tenancies, subtenancies and occupancies for any
part of the Real Property set forth on EXHIBIT B, as attached hereto
and made a part hereof, and (b) unapplied security deposits, if any,
and accrued and undistributed interest thereon and advance rents in
respect of any period subsequent to the Closing Date paid by the
tenant thereunder (the "SECURITY DEPOSITS");
1.2.3. All of Seller's right, title and interest, if any, in and
to all certificates of occupancy and transferable licenses and permits
for the use, operation and ownership of the Real Property as currently
operated, including, without limitation, those set forth on EXHIBIT C
attached hereto and made a part hereof (the "PERMIT RIGHTS");
1.2.4. All of Seller's right, title and interest, if any, and to
the extent assignable, in (i) all drawings, plans and specifications
in Seller's possession or control substantially relating to the Real
Property or any part thereof, (ii) all third party studies and reports
located at and covering the Real Property or any part thereof, (iii)
all guaranties, warranties, indemnifications, undertakings and other
assurances relating to the Real Property or any part thereof (but
specifically excluding any such rights to the extent they relate to
(1) any property other than the Property, or (2) any periods of time
or portions thereof occurring prior to the Closing, which rights
Seller shall retain), (iv) all operating and maintenance files, any
management files and any other
6
<Page>
books, records and files (excluding appraisals, budgets, Seller's
strategic plans for the Real Property, internal analyses, marketing
information, submissions relating to Seller's obtaining entity
authorization, attorney and accountant work product, or other
information in the possession or control of Seller which Seller,
acting reasonably, deems proprietary), which substantially relate to
or are used in the ownership or operation of the Real Property and
which are located at the situs of the Real Property or which are in
the possession and control of Seller, subject, however, in all cases,
to Seller's access rights as set forth in SECTION 10.3 below (all
hereinafter collectively referred to as the "RECORDS").
1.2.5. All of Seller's right, title and interest in and to the
equipment and fixtures used exclusively in connection with the
operation and maintenance of the Real Property, but excluding
therefrom all of the personal property, equipment, computers,
machinery and trade fixtures owned or leased (a) by the tenant under
the Space Lease with the exception of all laboratory fixtures and
equipment of said tenant contained in the largest building on the Real
Property as of the date hereof and described on EXHIBIT D
(collectively, the "LAB EQUIPMENT") , or (b) by any of the parties,
other than Seller, to the Service Contracts (as defined in SECTION
1.2.6), but which shall include, without limitation, the items listed
on EXHIBIT D attached hereto or equivalent replacements thereof except
to the extent that such items are depleted in the ordinary course of
Seller's operation of the Real Property (the "EQUIPMENT") as well as
all equipment leases relating to the Property listed on EXHIBIT D
hereto (the "EQUIPMENT LEASES").
1.2.6. All of Seller's right, title and interest in and to the
contracts and agreements of which Seller is a party relating to the
maintenance or operation of the Real Property, which are in effect on
the Closing Date and which are listed on EXHIBIT E attached hereto, to
the extent transferable by their terms (the "SERVICE CONTRACTS").
The Permit Rights, Records and Equipment are hereinafter collectively
referred to as the "PERSONAL PROPERTY". The Real Property and the Personal
Property are hereinafter collectively referred to as the "PROPERTY".
2. PURCHASE PRICE, DEPOSIT AND MANNER OF PAYMENT
2.1. PURCHASE PRICE.
The purchase price for the Property is Thirty-Four Million Dollars
($34,000,000) (the "PURCHASE PRICE"), payable as follows:
7
<Page>
2.1.1. Within one (1) Business Day after the execution of this
Agreement, Purchaser, by wire transfer in immediately available
federal funds, shall deposit with the Escrow Agent, in an escrow
account designated by the Escrow Agent, the sum of One Million Dollars
($1,000,000) (the "INITIAL DEPOSIT").
2.1.2. Within one (1) Business Day after the date on which
Purchaser delivers the Extension Notice to Seller, Purchaser, by wire
transfer of immediately available federal funds, shall deposit with
the Escrow Agent, in an escrow account designed by the Escrow Agent,
the additional sum of Two Million Dollars ($2,000,000) (the
"ADDITIONAL DEPOSIT").
2.1.3. The Initial Deposit and the Additional Deposit shall be
collectively referred to as the "DEPOSIT". The Deposit shall be held
by the Escrow Agent in an interest bearing account in accordance with
that certain Escrow Agreement of even date and execution herewith
among Seller, Purchaser and the Escrow Agent (the "ESCROW AGREEMENT"),
a copy of which is attached as EXHIBIT F to this Agreement. The
Deposit shall be disbursed in accordance with the terms of this
Agreement and the Escrow Agreement.
2.1.4. At the Closing, the balance of the Purchase Price, plus or
minus net adjustments and prorations provided for in ARTICLE 3 of this
Agreement shall be payable by Purchaser by wire transfer (to an
account designated in writing by Seller at or prior to the Closing) in
immediately available federal funds.
2.2. UNPAID TAXES AND CHARGES.
The amount of any past due unpaid taxes, assessments, business
improvement district charges, public assembly charges, water charges and
sewer charges which Seller is obligated to pay and discharge, with the
interest and penalties thereon to the Closing Date shall be credited to
Purchaser out of the balance of the Purchase Price. The existence of any
such taxes shall not be deemed objections to title if Seller shall comply
with the foregoing requirements unless a taking for non-payment has been
made.
2.3. SATISFACTION OF LIENS AND ENCUMBRANCES.
If on the Closing Date there are any other liens or encumbrances on
the Property other than those to which Purchaser's title is to be subject
hereunder, Seller may use any portion of the balance of the Purchase Price
to satisfy the same, provided Seller shall simultaneously either (a)
deliver to Purchaser at the Closing instruments in recordable form and
sufficient to satisfy such liens and encumbrances of record, together with
the cost of
8
<Page>
recording or filing said instruments, or (b) make arrangements with the
Title Company employed by Purchaser in advance of Closing, satisfactory to
the Title Company, to allow the issuance of title insurance to Purchaser
free of any such liens and encumbrances.
2.4. INTEREST ON DEPOSIT.
Whether or not the Closing shall occur hereunder, the party, whether
Seller or Purchaser, entitled to receive the Deposit deposited with the
Escrow Agent pursuant to SECTION 2.1. shall also be entitled to receive,
and Escrow Agent shall deliver to such Person, all interest earned on such
sums. The party receiving such sums and interest shall pay any income taxes
on such interest. Each party's taxpayer identification number is set forth
after the signature of such party at the end of this Agreement. Any such
interest shall not be deemed to be a credit to Purchaser against the
Purchase Price.
3. COSTS AND ADJUSTMENTS AT CLOSING
3.1. ADJUSTMENTS. Purchaser will pay the following costs of closing
this transaction:
3.1.1. The fees and disbursements of its counsel, consultants,
agents, contractors and advisors, if any;
3.1.2. Recording fees to record and register the Deed and any
other conveyance documents which are to be recorded to consummate the
transaction set forth herein and the costs of municipal lien
certificates and utility readings;
3.1.3. One-half (1/2) of any escrow fees due to the Escrow Agent;
3.1.4. The cost of preparing and issuing the Title Policy and any
and all endorsements, issued in connection with this transaction,
whether pursuant to the Preliminary Title Report or otherwise; and
3.1.5. Any other expense(s) incurred by Purchaser or its
consultants, agents, contractors and advisors in inspecting or
evaluating the Property or closing this transaction or customarily
paid by a purchaser of similar properties in the greater Boston area.
3.2. SELLER'S COSTS.
Seller will pay the following costs of closing this transaction:
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3.2.1. The fees and disbursements of Seller's counsel;
3.2.2. Recording fees to record and register any instruments
necessary to remove title exceptions which are not Permitted
Exceptions and documentary stamps;
3.2.3. One-half (1/2) of any escrow fees due to the Escrow Agent;
3.2.4. The Broker's fee to the extent any such fee is payable
pursuant to any separate agreements between Seller and the Broker; and
3.2.5. Any other expense(s) incurred by Seller or its
consultants, agents, contractors and advisors in inspecting or
evaluating the Property or closing this transaction or customarily
paid by a seller of similar properties in the greater Boston area.
3.3. ADJUSTMENTS.
The following adjustments are to be made at the Closing as of 11:59
P.M. of the day immediately preceding the Closing Date (the "ADJUSTMENT
DATE"):
3.3.1. All current period's rents and other charges under the
Space Lease and any New Leases.
3.3.2. Prepaid and accrued items, such as fees for transferable
licenses and permits, if any.
3.3.3. Current charges and payments under the Service Contracts
and Equipment Leases, if any.
3.3.4. Water charges, sewer charges, gas, telephone, electricity
and other utility services on the basis of the most recently issued
bills therefor, in accordance with the provisions of SECTION 3.8,
subject to adjustment after the Closing when the next bills are
available, or if current meter readings are available, on the basis of
such readings.
3.3.5. Real estate taxes and assessments and excise taxes, for
and on the basis of the fiscal year for which assessed, if assessed on
or prior to the Closing Date subject, however, to the provisions of
SECTION 3.6.
3.3.6. Value of fuel, if any, stored on the Real Property, at
Seller's cost, including any taxes, on the basis of a statement from
Seller's supplier.
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3.3.7. Personal property taxes on the Personal Property, if any,
on the basis of the fiscal year for which assessed.
3.3.8. To the extent transferred to Purchaser, transferable
deposits with any utility companies or other Persons who supply goods
or services in connection with the operation of the Real Property
which will remain on deposit after the Closing.
3.3.9. If, on the Closing Date, the Real Property or any part
thereof shall be or shall have been affected by an assessment or
assessments which are or may become payable in annual installments, of
which the first installment is then a charge or lien, or has been
paid, then for the purposes of this Agreement all of the installments
of any such assessments, including those which are to become due and
payable after the Closing Date, shall be apportioned between the
parties on the basis of amortizing the same on a straight-line basis
over the term of such installments. This provision shall survive the
Closing and delivery of the Deed to the Real Property.
3.4. IN GENERAL; PRORATION STATEMENT.
Any other costs or charges of closing this transaction not
specifically mentioned in this Agreement shall be paid and adjusted in
accordance with Boston, Massachusetts custom. Not later than five (5) days
prior to the Date of Closing Seller will give Purchaser a proposed
proration statement (the "PRORATION STATEMENT") (which shall contain per
diem amounts). Not later than two (2) days prior to the Date of Closing,
Purchaser may deliver to Seller a written statement of objections to such
Proration Statement with the reasons for such objections state in
reasonable detail. Purchaser and Seller shall then work together in good
faith to finalize the Proration Statement prior to Closing.
3.5. PURPOSE AND INTENT.
Except as expressly provided herein, the purpose and intent as to the
provisions of prorations and apportionments set forth in this Section 3 and
elsewhere in this Agreement is that Seller shall bear all expenses of
ownership and operation of the Property and shall receive all income
therefrom accruing through midnight at the end of the day preceding the
Closing and Purchaser shall bear all such expenses and receive all such
income accruing thereafter; PROVIDED, however, that if Seller does not
receive the Purchase Price in immediately-available funds by 2:00 p.m.
local Boston time on the Date of Closing, all adjustments and prorations
shall be made as of midnight on the day before the day on which Seller
receives the Purchase Price (provided that said receipt occurs on or before
2:00 p.m. on said day). Funds received after
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2:00 p.m. on any day shall be deemed received before 2:00 p.m. on the following
Business Day.
3.6. TAX REFUNDS.
Purchaser hereby assigns to Seller all rights which it would otherwise
have, if any, for a tax saving or refund for all real estate and other
taxes due with respect to the Property for all tax years or portions
thereof prior to the Closing Date and hereby authorizes Seller to commence
or continue whatever actions or proceedings Seller may deem advisable in
order to effect any such saving or refund, in the name of Seller; PROVIDED,
HOWEVER, that all costs and expenses in respect to the prosecution of any
such claim, action or proceeding by Seller shall be borne entirely by
Seller; PROVIDED FURTHER, HOWEVER, that Seller shall not take any action in
connection with any such claim, action or proceeding which shall adversely
affect Purchaser's claim for a tax savings or refund for the portion of the
tax year subsequent to the Closing and for tax years subsequent to the tax
year in which the Closing shall occur. Seller and Purchaser shall not
withdraw, compromise or settle any such proceedings for the tax year in
which the Closing shall occur without the prior written consent of the
other, which consent Seller and Purchaser agree shall not be unreasonably
withheld or delayed. All tax savings which Purchaser may recover for the
tax year in which the Closing shall occur shall, after deducting all
reasonable costs and expenses in obtaining such savings (including, without
limitation, attorneys' fees), be apportioned between Seller and Purchaser,
and Purchaser shall promptly pay to Seller the Seller's allocable share of
the balance for the period prior to the Closing Date. Each of Seller and
Purchaser further agree to execute any and all further instruments and
documents which Purchaser or Seller, in its reasonable discretion, may deem
necessary in order to effect the provisions of this SECTION 3.6. The
provisions of this SECTION 3.6 shall survive the Closing and delivery of
the Deed to the Real Property.
3.7. APPORTIONMENT OF TAXES.
If the closing of the title shall occur before the tax rate is fixed,
the apportionment of taxes shall be upon the basis of the taxes actually
billed, but when the final tax rate is determined, there shall be a ratable
adjustment on a per diem basis between Seller and Purchaser if final taxes
vary from such billed taxes, with such adjustment to be completed within
ten (10) Business Days after either party has informed the other that
adjustment is necessary. The provisions of this SECTION 3.7 shall survive
the Closing and delivery of the Deed to the Real Property.
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3.8. UTILITY READINGS.
As to charges for water, electricity, gas and other utilities for the
Property, Seller shall endeavor to furnish a current meter reading at the
Closing, which readings shall have been made not earlier than two (2)
Business Days prior to the time herein set for Closing, and Seller shall
pay the charges therefor to such date. In the event that such a meter
reading cannot be obtained, Seller shall furnish a reading to a date not
more than thirty (30) days prior to the time herein set for Closing, and
the unfixed meter charge based thereon for the intervening time shall be
apportioned on the basis of such last reading; in such event the parties
agree to notify the utility company to read the meters as soon as possible
after Closing and to render a final bill to Seller. The final bill shall be
apportioned as of the Closing Date. The provisions of this SECTION 3.8
shall survive the Closing and delivery of the Deed to the Real Property.
3.9. SURVIVAL.
The provisions of this Article 3 which require any act to be performed
after the Closing shall survive the Closing.
4. PURCHASER'S DUE DILIGENCE/CONDITION OF THE PROPERTY
4.1. DUE DILIGENCE EXAMINATIONS.
Subject to the provisions of this Agreement, Purchaser, its employees,
agents, contractors, consultants, attorneys and other authorized
representatives (collectively, "PURCHASER'S REPRESENTATIVES") shall have
the right to conduct or cause to be conducted, at Purchaser's sole cost and
expense, such examinations, inspections, testing, studies and/or
investigation (herein collectively called the "DUE DILIGENCE") of the
Property and information regarding the Property, as Purchaser deems
necessary or desirable. Purchaser and Purchaser's Representatives shall be
allowed access to the Real Property for the purpose of making all
inspections and tests it deems necessary in the conduct of its Due
Diligence, provided that Purchaser has given notice to Seller's
Representative of its intent to make such entry and, with respect to the
performance of any environmental tests or studies of the Real Property
involving sampling, testing or analyzing samples of air, water or soil:
(a) Purchaser shall first notify Seller's Representative at least
one (1) Business Day in advance as to the (i) identity of the Persons who
shall perform such tests or studies, and (ii) the proposed scope of such
tests and studies; within one (1) Business Day of receipt of Purchaser's
notice Seller shall notify Purchaser of its approval or of any requested
changes to the scope of work; failure to give notice within such one (1)
Business Day period shall be deemed to constitute approval; and
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(b) Purchaser shall not perform any environmental tests or
studies of the Real Property which exceed the scope of the work as so
approved by Seller.
4.2. EXTENSION.
Notwithstanding any other provision set forth herein Purchaser shall
have the right, exercisable in its sole discretion at any time on or prior
to the Due Diligence Expiration Date by delivery of written notice to
Seller (the "EXTENSION NOTICE"), to extend the Closing Date until September
8, 2000, PROVIDED that the Extension Notice shall be deemed valid only if
Purchaser wires to Seller the Additional Deposit in accordance with SECTION
2.1.2 within one (1) Business Day of the date on which the Extension Notice
is delivered to Seller.
4.3. RESTORATION.
Purchaser shall, immediately after the conclusion of each portion of
Purchaser's testing, restore the Real Property at its sole cost to its
pre-existing condition, including replacing paving and landscaping. The
foregoing restoration obligation of Purchaser contained in this SECTION 4.3
shall survive any termination of this Agreement.
4.4. DISCLOSURES.
In the event the need arises to notify under applicable Law any
federal, state or local public agencies of any environmental conditions at
the Real Property, as a result of Purchaser's Due Diligence investigations,
Purchaser shall immediately notify Seller and agrees that Seller, and not
Purchaser or Purchaser's Representatives, shall make such disclosure as
Seller deems appropriate, unless such disclosure is required by Law to be
made by Purchaser or Purchaser's Representatives, in which instance
Purchaser or Purchaser's Representatives shall immediately notify Seller in
writing of their intention to make said disclosure and unless Seller
informs Purchaser or Purchaser's Representatives in writing within one (1)
Business Day of Seller's intention to make said disclosure Purchaser and
Purchaser's Representatives shall be free to make said disclosure. If
Seller gives such notice but fails within three (3) Business Days to
provide Purchaser with reasonable evidence that said disclosure has been
made Purchaser shall again be free to make said disclosure.
4.5. RETURN OF DUE DILIGENCE MATERIALS.
If for any reason the Closing does not occur, Purchaser shall (i)
return to Seller all materials and other information regarding the Property
that Seller has provided to Purchaser and all photocopies thereof, and (ii)
deliver
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immediately to Seller copies of all written studies, analyses, reports and
assessments (both final and interim versions) relating to any of
Purchaser's Due Diligence investigations involving environmental testing,
soil testing or inspection of the Real Property, and copies of all surveys
and title reports or commitments (and copies of the underlying recorded
documents referenced therein). Notwithstanding such termination of this
Agreement, Purchaser shall maintain the confidentiality of all materials
and information described in clauses (i) and (ii) of the preceding
sentence, except as otherwise required by Law or by Order of any
Governmental Entity, in accordance with the provisions of SECTION 8.1.1.
The provisions of this SECTION 4.5 shall survive the termination of this
Agreement but shall not survive the Closing.
4.6. PURCHASER'S TERMINATION RIGHT.
Subject to the provisions of the last paragraph of this SECTION 4.6,
Purchaser shall have the right to elect to terminate this Agreement by
giving written notice (the "PURCHASER'S TERMINATION NOTICE") of such
election to the Seller at any time prior to 5:00 p.m. on August 12, 2000
(the "DUE DILIGENCE EXPIRATION DATE") if the Purchaser shall determine in
its sole and absolute discretion that it is not absolutely satisfied with
any aspect of the Property.
If for any reason whatsoever the Seller shall not have received the
Purchaser's Termination Notice prior to the Due Diligence Expiration Date,
the Purchaser shall be deemed to have irrevocably waived the right of
termination granted under this SECTION 4.6, and such right of termination
shall be of no further force or effect.
If this Agreement is terminated pursuant to this SECTION 4.6,
Purchaser shall comply with the requirements of SECTION 4.5 above, and
Purchaser shall be entitled to and shall receive the immediate return of
the Deposit, together with all interest accrued thereon. In such event,
except as expressly provided otherwise herein, this Agreement shall be of
no further force and effect and the parties hereto shall have no further
rights, obligations or liabilities hereunder.
4.7. AS IS SALE.
If, pursuant to the provisions of SECTION 4.6 hereof, this Agreement
is not terminated and remains in effect on the Due Diligence Expiration
Date, Purchaser shall be deemed to have acknowledged that it is satisfied
with the results of its Due Diligence, having relied upon its own Due
Diligence of the Property and not upon any information (including,
specifically, without limitation, any offering memorandum or other property
information packages or Due Diligence documents distributed with respect to
the Property) provided by or on behalf of Seller, Seller's Affiliates, or
their respective agents,
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consultants, employees or other representatives with respect thereto, other
than such representations, warranties and covenants of Seller as are
expressly set forth in this Agreement, and Purchaser agrees that the
Property shall be sold, and that Purchaser shall accept possession of the
Property on the Closing Date, "AS IS, WHERE IS, WITH ALL FAULTS". Pursuant
to and subject to the conditions set forth in SECTION 4.1 hereof, Purchaser
shall continue to have access to the Property subsequent to the Due
Diligence Expiration Date for further review and inspection, but Purchaser
shall not be entitled to terminate this Agreement based on such inspection.
4.8. RELEASE.
Upon the Due Diligence Expiration Date, except as provided in Article
7 and 11 and otherwise expressly provided in this Agreement, Purchaser
shall assume the risk that adverse matters, including but not limited to,
construction defects and adverse physical and environmental conditions, may
not have been revealed by Purchaser's Due Diligence investigations, and
Purchaser shall, except as otherwise expressly provided in this Agreement,
be deemed to have waived, relinquished and released Seller, Seller's
Affiliates (and Seller's and Seller's Affiliates members, representatives,
officers, directors, and employees) from and against any and all claims,
demands, causes of action (including causes of action in tort), losses,
damages, liabilities, costs and expenses (including attorneys' fees and
court costs) of any and every kind or character, known or unknown, which
Purchaser might have asserted or alleged against Seller, Seller's
Affiliates (and Seller's and Seller's Affiliates members, representatives,
officers, directors, and employees) at any time by reason of or arising out
of any latent or patent construction defects or physical conditions,
violations of any applicable Law (including, without limitation, any
environmental Laws) and any and all other acts, omissions, events,
circumstances or matters regarding the Property, PROVIDED that nothing in
this SECTION 4.8 shall be deemed to prevent Purchaser and each of its
affiliates, successors, assigns, employees, agents, participants,
shareholders, or directors from naming Seller as a third party defendant in
a proceeding against Purchaser asserting claims relating to the generation,
storage or release of Hazardous Materials at the Property brought by
parties other than Purchaser, which relate to a period of time during which
Seller held fee simple title to the Property. Notwithstanding the foregoing
provisions, nothing set forth in this SECTION 4.8 shall be interpreted or
construed as limiting, restricting, extinguishing or otherwise affecting
Seller's representations and warranties made in this Agreement or the
survivability thereof for the time limitation herein provided.
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4.9. SCHEDULES AND EXHIBITS.
Purchaser and Seller acknowledge that the Exhibits to this Agreement
are currently being prepared and will not be available at the time of
execution of this Agreement. Seller and Purchaser agree to complete all of
the Exhibits for attachment to this Agreement on or before seven (7) days
after the date hereof. In the event that such Exhibits are not completed by
such date, either Purchaser or Seller may elect to terminate this
Agreement, in which event the Deposit shall be returned to Purchaser, and
Seller and Purchaser shall have no further rights or obligations hereunder,
except with respect to those terms and provisions of this Agreement which
survive such a termination.
5. TITLE MATTERS
5.1. PERMITTED EXCEPTIONS.
Except as provided in SECTION 5.2, and unless this Agreement is
terminated by Purchaser pursuant to SECTION 4.6 or SECTION 5.3, Seller
shall cause the Real Property to be transferred and conveyed to Purchaser,
and Purchaser shall accept fee title to the Real Property at Closing,
subject to the following matters (collectively, the "PERMITTED
EXCEPTIONS"):
(a) Any title matters;
(b) Any state of facts which a current and accurate ALTA/ACSM
survey of the Real Property (a "SURVEY") obtained prior to the Closing
would disclose;
(c) All Laws including, without limitation, all historical
preservation, environmental, building, subdivision and zoning restrictions,
codes, ordinances and regulations, affecting the Real Property or the
ownership, use or operation thereof adopted by the United States, the
Commonwealth of Massachusetts, the Town of Lexington, and any and every
other agency, department, instrumentality and/or political subdivision of
government of every kind whatsoever having jurisdiction thereof, and all
amendments or additions thereto now in effect or which may be in force and
effect on the Closing Date;
(d) Unpaid personal property taxes owed by Seller for the
Property, unpaid real estate taxes, unpaid excise taxes, water and sewer
charges which are not yet due and payable but which may be a lien on all or
a portion of the Property, subject to adjustment as hereinabove provided in
ARTICLE 3;
(e) The Space Lease, subject to the Termination Agreement
described below in SECTION 6.4.5;
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(f) The Equipment Leases, if there be any identified on EXHIBIT D
attached hereto if assumed by Purchaser at its election as hereinafter
provided; and
(g) The Service Contracts listed in EXHIBIT E attached hereto
which Purchaser elects to assume as hereinafter provided.
5.2. PRELIMINARY TITLE REPORT.
On or before the date which is fifteen (15) days after the execution
hereof, Purchaser, at its sole expense, shall obtain a commitment for the
issuance of an Owner's Policy of Title Insurance (the "PRELIMINARY TITLE
REPORT") from the Title Company, together with copies of all documents
constituting exceptions to Seller's title as reflected in the Preliminary
Title Report, and shall obtain a Survey of the Real Property, and promptly
shall provide copies thereof (and any updates thereto) to Seller. Purchaser
may cause the Preliminary Title Report to be updated and may cause such
Survey to be updated, revised and/or re-certified at Purchaser's sole cost
and expense. All matters identified on the Preliminary Title Report and the
Survey shall be a Permitted Exception except for any matters which
Purchaser includes in its Title Objection Notice pursuant to SECTION 5.3
below.
5.3. TITLE OBJECTIONS; TITLE DEFECT NOTICE.
Purchaser shall have the right to object in writing (a "TITLE DEFECT
NOTICE") (i) to any title matters disclosed by the Preliminary Title Report
or the Survey by a Title Defect Notice delivered to Seller by Purchaser on
or before the Due Diligence Expiration Date (the "PRELIMINARY TITLE DEFECT
NOTICE"), and (ii) to any title matters that first arise after the later of
July 15, 2000 or the date of the Preliminary Title Report that materially
interfere with the use of the Property for laboratory and office use or
would cause title to be unmarketable (based on the most recent standards as
of the date hereof published in "The Massachusetts Conveyancers
Association's Handbook of Standards and Forms", sometimes referred to
herein as the "TITLE STANDARDS") by a Title Defect Notice delivered at or
before the Closing (a "CLOSING TITLE DEFECT NOTICE"). Any such title
matters to which Purchaser shall have timely objected in the Title Defect
Notice shall be collectively referred to herein as a "TITLE OBJECTION".
Within one (1) Business Day of Seller's receipt of a Closing Title Defect
Notice and within three (3) Business Days of Seller's receipt of a
Preliminary Title Defect Notice, Seller shall notify Purchaser in writing
of those matters in the Title Defect Notice which Seller is willing to
cure, PROVIDED THAT, (i) Seller shall be obligated to Remove any mortgage
or other lien against the Property securing a liquidated sum that is a
Title Objection which Seller shall have voluntarily placed or permitted to
be placed upon or against the Real Property (collectively, a "MONETARY
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ENCUMBRANCE") and, (ii) Seller shall use reasonable efforts to Remove any
Title Objections which would render title to the Property unmarketable
(based on the Title Standards) provided that Seller shall not be required
to spend in the aggregate more than One Hundred Thousand Dollars ($100,000)
to Remove or cure the same, exclusive of any Monetary Encumbrances, which
Seller shall be obligated to Remove without regard to the amount thereof.
Unless Seller notifies Purchaser that it elects to cure the Title Objection
and thereafter timely cures the Title Objection in accordance with the
Title Standards, then if Purchaser is not satisfied, in its sole
discretion, with Seller's response to the Title Defect Notice, Purchaser
shall have the right to terminate this Agreement by delivering written
notice to Seller within three (3) Business Days of Purchaser's receipt of
said response notice from Seller. If Purchaser does not so terminate it
shall be deemed to have waived the Title Objection. Seller shall be
entitled at Seller's election by notice to Purchaser to extend the Closing
(not to exceed thirty (30) calendar days) in order to provide Seller
additional time in which to Remove any such Title Objection. If Seller is
unable to Remove any Title Objection prior to the Closing or any extended
Closing as provided herein, Purchaser may elect either to (a) terminate
this Agreement by notice to Seller and the Escrow Agent, in which event the
Deposit plus all interest accrued thereon shall be returned to Purchaser
and, thereafter, the parties shall have no further rights or obligations
hereunder, except as provided in any Section hereof that by its terms
expressly provides that it survives any termination of this Agreement, or
(b) waive such Title Objections, in which event such Title Objections shall
be deemed Permitted Exceptions and the Closing shall occur as herein
provided without any reduction of or credit against the Purchase Price. The
provisions of the preceding sentence shall not be construed or interpreted
so as to permit Seller to avoid Removing any Monetary Encumbrance which,
pursuant to the terms of this Agreement, are required to be Removed by
Seller prior to or concurrently with the Closing.
5.4. REMOVAL OF TITLE OBJECTIONS.
If on the Closing Date, as the same may be extended pursuant to SECTION
5.3, there are any Title Objections that Seller is required to Remove as
provided herein, Seller shall Remove the same at the Closing. The term "REMOVE,"
"REMOVED," or "REMOVING", as used in this Agreement, shall mean that Seller
shall remove or cause the Title Company to remove the same as an exception to
title in Purchaser's title policy or to insure against the same in a manner
reasonably acceptable to Purchaser, without any additional cost to Purchaser,
whether such insurance is made available in consideration of payment, bonding,
indemnity of Seller or otherwise. If the Closing occurs, Seller may use the
proceeds of the Purchase Price to Remove Title Objections.
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6. CLOSING AND CLOSING CONDITIONS
6.1. CLOSING.
The closing ("CLOSING") of the transactions contemplated hereby shall occur
on August 22, 2000 as such date may be extended or accelerated upon the mutual
written agreement of Seller and Purchaser (the "CLOSING DATE"), provided, that
if the Extension Notice has been given in accordance with SECTION 4.2 the
Closing Date shall be extended to September 8, 2000 as such date may be further
extended or accelerated upon the mutual written agreement of Seller and
Purchaser. The Closing shall be conducted through the use of an escrow with the
Title Company, under which all conveyance, assignment and other documents, and
the balance of the cash Purchase Price shall be deposited in such escrow, in
accordance with reasonable and customary closing instructions jointly given by
Seller and Purchaser (which may require a "New York Style" or "Gap" closing);
provided that all documents and funds shall be delivered as of the Closing Date.
The Closing shall take place at 10:00 A.M., Eastern Time, at the offices of
Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts 02110, or at such
other place and time of day as may be agreed upon in writing by Seller and
Purchaser. Seller and Purchaser shall conduct a "pre-closing" on the day
immediately prior to the Closing Date. Seller and Purchaser, separately or
collectively, as appropriate for each item, shall escrow with the Title Company
on the day immediately prior to the Closing Date the fully executed, notarized
and recordable Deed (as hereinafter defined) for the Real Property, Bill of Sale
for the Personal Property, and each of the additional items listed in this
ARTICLE 6 as documents to be respectively delivered by Seller and Purchaser,
such documents to be held by the Title Company pursuant to an escrow letter or
letters to be provided by Seller and Purchaser on or before the Closing Date. If
Seller and Purchaser execute separate escrow instructions, such separate escrow
instructions shall constitute separate agreements between the Title Company on
the one hand and Seller or Purchaser, as the case may be, on the other hand, and
shall not constitute agreements between Seller and Purchaser. Such separate
escrow instructions shall be enforceable only to the extent not inconsistent
with this Agreement. Title transfer and delivery of the Purchase Price is to be
completed on the Closing Date as set forth in this SECTION 6.1. Time is of the
essence with respect to the Closing Date.
6.2. PURCHASER'S CLOSING CONDITIONS.
At the Closing, and as a condition to Purchaser's obligation to purchase
the Property and pay the Purchase Price and deliver the Purchaser's Documents,
Seller will duly execute, acknowledge (where appropriate) and/or deliver to
Purchaser or the Title Company, as applicable, the following:
6.2.1. A statutory quitclaim deed in the form of EXHIBIT G attached
hereto duly executed and acknowledged by Seller, conveying to
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Purchaser fee simple title to the Real Property, subject to and in
accordance with the provisions of this Agreement (the "DEED").
6.2.2. A Bill of Sale, in the form of EXHIBIT H attached hereto,
transferring all of Seller's right, title and interest in and to the
Personal Property owned by Seller (the "BILL OF SALE").
6.2.3. The landlord's executed counterparts (or, where originals are
unavailable, copies thereof certified by Seller) of all Service Contracts
and Equipment Leases assumed by Purchaser hereunder (which shall be made
available to Purchaser at Seller's address first set forth above).
6.2.4. An assignment from Seller, in the form of EXHIBIT I attached
hereto, of (a) the Space Lease (subject to the Termination Agreement), (b)
any Service Contracts and Equipment Leases assumed by Purchaser hereunder,
(c) the Real Property Agreements, (d) transferable Permit Rights, (e)
Equipment Leases, if any, (f) warranties and guaranties if any, respecting
the Property (provided that said assignment shall explicitly exclude any
warranty or guaranty rights relating to (1) any property other than the
Property, and (2) any periods of time or portions thereof occurring prior
to the Closing, which rights Seller shall retain), and (g) Records.
6.2.5. Any Security Deposits and the accrued and undistributed
interest on any such Security Deposits, less permitted administrative
charges, if any, together with a schedule thereof. Such Security Deposits
and interest shall be delivered by Seller by (i) wire transfer in
immediately available federal funds to an account designated by Purchaser
at least one (1) Business Day prior to the Closing, or if no such account
is so designated by Purchaser, by a separate certified or official bank
check payable to the order of Purchaser, or (ii) by a credit to Purchaser
against the Purchase Price, provided that with respect to any Security
Deposits which are other than cash, Seller's Nominee shall execute and
deliver to Purchaser at the Closing any appropriate instruments of
assignment or transfer.
6.2.6. Notices addressed to the tenant under the Space Lease, executed
by or on behalf of the landlord named in the Space Lease, dated the Closing
Date, notifying the tenant of the transfer of the Property to Purchaser,
and advising the tenant that Purchaser as landlord is responsible for and
shall hold the Security Deposit (and interest thereon) provided for under
said tenant's Space Lease in accordance with the terms of such Space Lease
and with the provisions of Law, and directing that rents and other payments
under such
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tenant's Space Lease thereafter be sent to Purchaser or as Purchaser may
direct. Purchaser and Seller shall immediately after the Closing jointly
cause such letters to be mailed by certified mail to said tenant at the
address provided in the Space Lease for the delivery of notices or other
communications to said tenant.
6.2.7. All available keys to entrance doors to, and equipment and
utility rooms located in, the Real Property.
6.2.8. (a) Originals or copies of all Records which are being sold to
Purchaser by Seller pursuant to SECTION 1.2.
6.2.9. an original Termination Agreement executed and delivered by
Seller and all tenants or occupants of the Property shown on EXHIBIT B in
accordance with the provisions of SECTION 6.4.5.
6.2.10. Documentation to establish to the reasonable satisfaction of
the Title Company the due authorization of Seller's consummation of the
transaction and delivery of the Seller's Documents to be delivered by it
pursuant to this Agreement, and a certificate of an authorized officer or
official, evidencing that the individual signing all Seller's Documents
hereunder on behalf of Seller is authorized to do so.
6.2.11. A so-called FIRPTA affidavit duly executed by Seller stating
that Seller is not a "FOREIGN PERSON" within the meaning of Section 1445 or 7701
of the Code in the form of EXHIBIT J attached hereto.
6.2.12. Affidavits and indemnifications executed by Seller regarding
mechanics' and materialmen's liens and parties in possession sufficient to
eliminate on Purchaser's title insurance policy exceptions for these matters,
other than those matters as to which Purchaser has agreed pursuant to this
Agreement to accept title to the Real Property subject thereto.
6.2.13. Such other and further documents and instruments as may be
reasonably required by Seller or the Title Company to consummate the transaction
or as may otherwise be required by the terms of this Agreement.
6.3. SELLER'S CONDITIONS PRECEDENT.
At the Closing, and as a condition to Seller's obligation to sell the
Property and deliver the Deed and other Seller's Documents, Purchaser will duly
execute, acknowledge (where appropriate) and/or deliver to Seller or the Title
Company, as applicable, the following:
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6.3.1. The balance of the Purchase Price in accordance with SECTION
2.1.4 hereof.
6.3.2. An assumption from Purchaser, in the form of EXHIBIT I attached
hereto, from and after the Closing Date, of the Space Lease (subject to the
Termination Agreement), any Service Contracts and Equipment Leases assumed
by Purchaser hereunder, Real Property Agreements, transferable Permit
Rights, and, if applicable, Equipment Leases.
6.3.3. The letters to tenants referred to in SECTION 6.2.6 signed by
or on behalf of Purchaser.
6.3.4. Documentation to establish to Seller's reasonable satisfaction
the due authorization of Purchaser's acquisition of the Property and
Purchaser's delivery of the Purchaser's Documents required to be delivered
by Purchaser pursuant to this Agreement, including an incumbency
certificate of an authorized officer or official with respect to the
authority to act on behalf of Purchaser of the individual executing on
behalf of Purchaser all closing documents contemplated by this Agreement.
6.3.5. Such other and further documents and instruments as may be
reasonably required by Seller or the Title Company or as may be agreed upon
by Seller and Purchaser to consummate the transaction or as may otherwise
be required by the terms of this Agreement.
6.4. ADDITIONAL PURCHASER CONDITIONS PRECEDENT.
Purchaser's obligation to close the transaction is conditioned further upon
the satisfaction of all of the following, any or all of which may be waived by
Purchaser by an express written waiver, at its sole option:
6.4.1. All representations and warranties made by Seller in SECTION 7
this Agreement shall be true and correct in all material respects on and as
of the Closing Date, as if made on and as of such date except to the extent
that they expressly relate to an earlier date and Seller shall have
complied in all respects with all agreements required to be performed by it
hereunder at or prior to the Closing Date.
6.4.2. At the Closing Date, Purchaser shall have received a
certificate, dated the Closing Date, signed by Seller to the effect set
forth in SUBSECTION 6.4.1, certifying that Seller has received all
necessary internal approvals and authorizations necessary in connection
with its sale of the Property to Purchaser pursuant to the Agreement, and
stating that the conditions specified in this SECTION 6.4 have been
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satisfied at the Closing Date, in substantially the form attached hereto as
EXHIBIT K.
6.4.3. Seller shall have delivered all the Seller's Documents and
other items required pursuant to SECTION 6.2 and shall have performed all
other covenants, undertakings and obligations in all respects, and complied
with all conditions required by this Agreement, to be performed or complied
with by Seller at or prior to the Closing.
6.4.4. No Law or Order shall have been enacted, entered, issued,
promulgated or enforced by any Governmental Entity between the Due
Diligence Expiration Date and the Closing which prohibits or substantially
restricts the use of the Property as laboratory and office facilities as
contemplated by this Agreement.
6.4.5. Seller shall have delivered to the Escrow Agent at or prior to
the Closing an original Termination of Lease Agreement ("TERMINATION
AGREEMENT") in recordable form executed and delivered by Seller and the
tenants or occupants listed on EXHIBIT B providing for (i) the termination
of all said tenancies or occupancies with respect to that certain portion
of the premises commonly known as the "Chemical" outbuilding at the rear of
the Real Property containing approximately Eleven Thousand (11,000) square
feet and shown on EXHIBIT M attached hereto (the "INITIAL SPACE LEASE
TERMINATION AREA") effective as of a date not later than September 1, 2000,
and (ii) the termination of all said tenancies or occupancies in their
entirety as of December 31, 2000. The form of the Termination Agreement is
attached hereto as EXHIBIT P.
6.4.6. Seller shall not have entered into any lease, sublease, license
or occupancy agreement in any form with respect to the Property other than
those listed on EXHIBIT B attached hereto.
6.4.7. Seller shall have used reasonable efforts to obtain and deliver
to Purchaser an estoppel certificate from the "Declarant" or its successor
in interest under the Amended and Restated Declaration of Covenants and
Easements dated as of November 8, 1999 as to the absence of amendments
thereto or defaults thereunder. For purposes of the preceding sentence,
"reasonable efforts" shall mean that Seller shall have forwarded said
document to the Declarant and requested said Declarant to execute and
deliver same and shall include a limited number of follow up telephone
calls and a limited number of follow up letters requesting such execution
and delivery, but shall not require Seller to expend monies.
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6.4.8. Seller shall have used reasonable efforts to obtain and deliver
to Purchaser, subordination, non-disturbance and attornment agreements from
all tenants or occupants of the Property as of the Closing. For purposes of
the preceding sentence, "reasonable efforts" shall mean that Seller shall
have forwarded said document(s) to said tenants and occupants and requested
them to execute and deliver same and shall include a limited number of
follow up telephone calls and a limited number of follow up letters
requesting such execution and delivery, but shall not require Seller to
expend monies.
6.4.9. All of the Lab Equipment shall be on the Property as of the
Closing, free of any claims of any current or former tenant or occupant of
the Property and in substantially the same condition as it was in as of the
of date hereof, reasonable wear and tear excepted.
6.5. ADDITIONAL SELLER CONDITIONS PRECEDENT.
Seller's obligation to close the transaction is conditioned further upon
the satisfaction of all of the following, any or all of which may be waived by
Seller by an express written waiver at its sole option:
6.5.1. All representations and warranties made by Purchaser in this
Agreement shall be true and correct in all respects on and as of the
Closing Date, as if made on and as of such date except to the extent they
expressly relate to an earlier date and Purchaser shall have complied in
all respects with all agreements required to be performed by it hereunder
at or prior to the Closing Date.
6.5.2. Purchaser shall have delivered all of the Purchaser's Documents
to be executed by Purchaser set forth in SECTION 6.3 and shall have
performed all of the covenants, undertakings and obligations in all
respects, and complied with all conditions required by this Agreement, to
be performed or complied with by Purchaser at or prior to the Closing.
6.5.3. At the Closing Date, Seller shall have received a certificate,
dated the Closing Date, signed by Purchaser to the effect set forth in
SUBSECTION 6.5.1, certifying that Purchaser has received all necessary
internal approvals and authorizations necessary in connection with its
purchase of the Property from Seller pursuant to this Agreement, and
stating that the conditions specified in this SECTION 6.5 have been
satisfied at the Closing Date, in substantially the form attached hereto as
EXHIBIT L.
6.5.4. No Law or Order shall have been enacted, entered, issued,
promulgated or enforced by any Governmental Entity between the Due
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Diligence Expiration Date and the Closing which prohibits or restricts the
use of the Property as laboratory and office facilities as contemplated by
this Agreement. No Governmental Entity shall have notified any party to
this Agreement that consummation of the transactions contemplated by this
Agreement would constitute a violation of any Law of any jurisdiction or
that it intends to commence proceedings to restrain or prohibit such
transactions or force divestiture or rescission, unless such Governmental
Entity shall have withdrawn such notice and abandoned any such proceedings
prior to the time which otherwise would have been the Closing Date.
6.6. GRACE AND CURE PERIODS.
Notwithstanding any other provisions set forth herein, in the event that a
party to this Agreement shall not have satisfied any condition precedent to the
Closing on the Closing Date the other party shall notify the party required to
satisfy the condition of the action that is necessary to satisfy the outstanding
condition and the party required to satisfy the condition shall then have one
(1) Business Day to satisfy said condition. In the event that a notice is given
pursuant to the preceding sentence the Closing shall be automatically extended
for one (1) Business Day.
7. REPRESENTATIONS AND WARRANTIES
7.1. PURCHASER'S REPRESENTATIONS AND WARRANTIES.
In order to induce Seller to enter into the transactions provided for in
this Agreement, Purchaser hereby represents and warrants to Seller that as of
the date of this Agreement:
7.1.1. Purchaser is a corporation duly organized and validly existing
under the laws of the State of Delaware, is duly qualified to do business
in all jurisdictions where such qualification is necessary to carry on its
business as now conducted, and is duly qualified in the Commonwealth of
Massachusetts, and has the power to acquire, own and operate the Property.
Purchaser has the power to enter into the transactions contemplated by this
Agreement and to execute, deliver and perform this Agreement, and the
Purchaser's Documents. The execution, delivery and performance by Purchaser
of this Agreement and the other Purchaser's Documents has been duly
authorized by all necessary requisite entity action of Purchaser, and this
Agreement is, and at the Closing the other Purchaser's Documents will, when
executed and delivered by Purchaser, constitute the legal, valid and
binding obligations of Purchaser enforceable against Purchaser in
accordance with their respective terms and provisions, subject to
applicable
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bankruptcy and other like laws affecting the rights of contractual parties
and creditors generally, and the exercise of judicial or administrative
discretion in accordance with general equitable principles (whether such
enforceability is considered in a proceeding in equity or at law).
7.1.2. There is no action, suit, notice of violation, proceeding or
investigation pending or, to the knowledge of Purchaser, threatened against
or affecting Purchaser or any of its respective properties before or by any
Governmental Entity which (i) challenges the legality, validity or
enforceability of any of the documents relating to the transaction provided
for in this Agreement, or (ii) could (individually or in the aggregate)
materially and adversely affect the ability of the Purchaser to perform its
obligations under this Agreement and the Purchaser's Documents.
7.1.3. No authorization, consent, approval, waiver, license,
qualification or formal exemption from, or other action of, nor any filing,
declaration, qualification or registration with, any Governmental Entity or
any securities exchange is required in connection with the execution,
delivery, observance or performance by Purchaser of this Agreement, or any
of the Purchaser's Documents, or any of the transactions provided for
herein.
7.1.4. There has not been filed by or against Purchaser, or any
corporation, partnership, or other entity with respect to which Purchaser
is a principal shareholder, controlling person, general partner or managing
member, as the case may be, a petition in bankruptcy or insolvency
proceedings or for reorganization, or for the appointment of a receiver or
trustee, nor has any such entity made an assignment for the benefit of
creditors or filed a petition for an arrangement or entered into an
arrangement with creditors or admitted in writing the inability to pay its
debts as they become due.
7.1.5. The execution and delivery of this Agreement and the
Purchaser's Documents, and the transactions provided for herein and
therein, respectively, and compliance with or fulfillment of the terms
hereof and thereof, will not (a) conflict with, result in a breach of, or
constitute a default under, any of the organizational documents of
Purchaser, (b) require any consent, approval or notice under, or conflict
with or result in the breach of, constitute a default or accelerate any
right under, any note, bond, mortgage, license, indenture or loan or credit
agreement, or any other agreement or instrument, to which Purchaser is a
party or by which any of Purchaser's respective properties is bound, or (c)
violate any provision of any Law presently in
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effect or in effect at the Closing Date having applicability to Purchaser
or any of its properties including, without limitation, the Property.
7.2. SELLER'S REPRESENTATIONS AND WARRANTIES.
In order to induce Purchaser to enter into the transactions provided for in
this Agreement, Seller hereby represents and warrants to Purchaser that as of
the date of this Agreement:
7.2.1. Seller is a limited liability company duly organized and
validly existing under the laws of the State of Delaware, is duly qualified
to do business in all jurisdictions where such qualification is necessary
to carry on its business as now conducted, and is duly qualified in the
Commonwealth of Massachusetts and has full power and authority to enter
into the transactions contemplated by this Agreement and to execute,
deliver and perform this Agreement and the Seller's Documents. The
execution, delivery and performance by Seller of this Agreement and the
other Seller's Documents have been duly authorized by all necessary
requisite entity action of Seller and this Agreement is, and at the Closing
the other Seller's Documents will, when executed and delivered by Seller,
constitute the legal, valid and binding obligations of Seller enforceable
against Seller in accordance with their respective terms and provisions,
subject to applicable bankruptcy and other like laws affecting the rights
of contractual parties and creditors generally, and the exercise of
judicial or administrative discretion in accordance with general equitable
principles (whether such enforceability is considered in a proceeding in
equity or at law).
7.2.2. There is no action, suit, proceeding or investigation pending
or, to the knowledge of Seller, threatened against or affecting Seller or
any of its respective properties before or by any Governmental Entity which
(i) challenges the legality, validity or enforceability of any of the
documents relating to the transaction provided for by this Agreement, or
(ii) could (individually or in the aggregate) materially and adversely
affect the ability of the Seller to perform its obligations under this
Agreement and the Seller's Documents.
7.2.3. No authorization, consent, approval, waiver, license,
qualification or formal exemption from, or other action of, nor any filing,
declaration, qualification or registration with, any Governmental Entity or
any securities exchange is required in connection with the execution,
delivery, observance or performance by Seller of this Agreement, or any of
the Seller's Documents, or any of the transactions provided for herein.
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7.2.4. There has not been filed by or, to Seller's Knowledge, against
Seller a petition in bankruptcy or insolvency proceedings or for
reorganization, or for the appointment of a receiver or trustee, nor has
Seller made an assignment for the benefit of creditors or filed a petition
for an arrangement or entered into an arrangement with creditors or
admitted in writing the inability to pay its debts as they become due.
7.2.5. The execution and delivery of this Agreement by Seller and the
Seller's Documents by Seller, and Seller's compliance with or fulfillment
of the terms hereof and thereof, will not (a) conflict with, or result in a
breach of, or constitute a default under, any of the organizational
documents of Seller, (b) require any consent, approval or notice under, or
conflict with or result in the breach of, constitute a default or
accelerate any right under, any note, bond, mortgage, license, indenture or
loan or credit agreement, or any other agreement or instrument, to which
Seller is a party or by which any of Seller's respective properties is
bound, or (c) violate any provision of any Law presently in effect or in
effect at the Closing Date having applicability to Seller or any of its
properties including, without limitation, the Property.
7.2.6. As of the date hereof, there are no written agreements in
force or rights of occupancy or possession, for the use, lease, sublease or
occupancy of space in or at the Property or any portion thereof (whether or
not the terms thereof have commenced) to which the Seller or any of its
designees are a party or are bound as landlord other than as listed in
EXHIBIT B hereto.
7.2.7. There are no pending real property tax reduction or abatement
proceedings affecting the Real Property.
7.2.8. (a) There are no material Service Contracts with respect to
the Property other than those listed on EXHIBIT E attached hereto. Such
Service Contracts are accurately and completely set forth in EXHIBIT E, and
the copies thereof furnished by Seller to Purchaser are true and complete.
(b) There are no material claims or any basis for material
claims in respect of the Property or its operation by any of the parties to
such Service Contracts.
7.2.9. Seller has not, as of the date of this Agreement, received
written notice from any Governmental Entity with respect to any actual or
threatened taking of the Property or any portion thereof for any public or
quasi-public purpose by the exercise of the right of
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condemnation or eminent domain, and to Seller's Actual Knowledge, there are
no such actions or proceedings pending, presently threatened or
contemplated by any Governmental Entity.
7.2.10. Except as may have been disclosed in writing to Purchaser
prior to the date of the Agreement, there are no suits, actions or
proceedings pending against or affecting the Property or any portion
thereof before or by any court or administrative agency or officer, and to
the Seller's Actual Knowledge, there are no such actions or proceedings
threatened.
7.2.11. To the Seller's Actual Knowledge, Seller has not received any
notices from any insurer or its agent requiring performance of any work
with respect to the Property or canceling or threatening to cancel any
policy, which notices have not been discharged or resolved.
7.2.12. To the Seller's Actual Knowledge, Seller has received no
notice from any third party as to a material breach or violation by Seller
nor, to the Seller's Actual Knowledge, is Seller in material breach or
violation, of Seller's covenants and obligations under the Real Property
Agreements.
7.2.13. Except as listed on EXHIBIT N hereto to Seller's Actual
Knowledge, Seller has not received, with respect to the Property, any
written notices from any governmental agency or other third party of any
violations or claimed violations of Laws, which have not been cured or
corrected or which notices have not been rescinded.
7.2.14. Seller has delivered to Purchaser true, correct and complete
copies of all written environmental site assessments, reports and summaries
and asbestos surveys (collectively, the "ENVIRONMENTAL REPORTS") described
on EXHIBIT O. To Seller's Knowledge, the Environmental Reports are the only
reports in Seller's possession regarding environmental matters and
Hazardous Materials at the Real Property. Except as set forth on EXHIBIT O,
Seller has not received any written Notice of any alleged claims relating
to environmental matters or of the presence of any Hazardous Material on
the Real Property which is not permitted by applicable Law.
7.3. SELLER'S KNOWLEDGE.
All references in this Agreement to "SELLER'S ACTUAL KNOWLEDGE" or words of
similar import shall refer only to the current actual knowledge of Seller's
Representative and shall not be construed to refer to the knowledge of any other
officer, agent, or employee of, Seller, or any Affiliate of Seller, or to
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impose or have imposed upon the Designated Representative any duty to
investigate the matters to which such knowledge, or the absence thereof,
pertains, including, but not limited to, the contents of the files, documents
and materials made available to or disclosed to Purchaser or the contents of
files maintained by the Designated Representative, the Seller, or the Affiliates
of any of them. There shall be no personal liability on the part of the
Designated Representative arising out of any representations or warranties made
herein.
7.4. SURVIVAL.
Except as otherwise expressly provided in SECTION 7.6 or elsewhere in this
Agreement, no representations, warranties, covenants or other obligations of
Seller set forth in this Agreement shall survive the Closing and delivery of the
Deed to the Real Property, and except as to representations and warranties which
survive the Closing, no action based thereon shall be commenced after the
Closing.
7.5. UNTRUE REPRESENTATION OR WARRANTY.
If any representation or warranty made herein by Purchaser or Seller is
untrue, inaccurate or incorrect at any time prior to Closing, the provisions of
this SECTION 7.5 shall govern. If any party discovers prior to the Closing that
any such representation or warranty is untrue, inaccurate or incorrect it shall
notify the other party within three (3) Business Days of its discovery of same,
failing which said discovering party shall have no right to make any claim in
connection with said representation or warranty. If the party having made such
representation or warranty is Seller, then the Purchaser, as its sole remedy for
any such breach, shall elect either (a) to waive (but without releasing Seller
from its covenants made in SECTIONS 7.6 and 7.7 hereof) said breach of this
Agreement and consummate the sale and purchase of the Property, without any
reduction of or credit against the Purchase Price, or (b) to require Seller to
either (1) cure said breach to Purchaser's reasonable satisfaction prior to the
Closing; or (2) provide Purchaser with a credit sufficient in Purchaser's
reasonable discretion to compensate Purchaser for said breach, which credit
amount shall be set forth in the notice. If Purchaser does not waive such breach
pursuant to clause (a) above or if Seller fails to comply with the provisions of
clause (b) above, Purchaser may terminate this Agreement by written notice given
to Seller on the Closing Date, in which event this Agreement will be terminated,
Purchaser shall be entitled to the immediate return of the Deposit and Seller
shall so instruct the Title Company in writing and thereafter neither party will
have any further rights or obligations hereunder except as provided in any
Section hereof that by its terms expressly provides that it survives any
termination of this Agreement. If however the breaching party is the Purchaser
and the Purchaser is unwilling or unable to so cure any such breach, then the
Seller, as its sole
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remedy in respect of any such breach of Purchaser, shall elect either to (c)
waive (but without releasing Purchaser from its covenants made in SECTION 7.6
hereof) such breach of Purchaser and consummate the sale and purchase of the
Property, or (d) terminate this Agreement by written notice given to Purchaser
at the Closing Date in which event this Agreement shall be terminated, Seller
shall be entitled to the Deposit as liquidated damages in accordance with
SECTION 11.1 and Purchaser shall so instruct the Title Company in writing and
thereafter neither party shall have any further rights or obligations hereunder
except as provided in any Section hereof that by its terms expressly provides
that it survives any termination of this Agreement.
7.6. SURVIVAL PERIOD.
The representations and warranties contained in ARTICLE 7 and in the
certificates delivered by (i) Seller pursuant to SECTION 6.4.2 and (ii)
Purchaser pursuant to SECTION 6.5.3, and the limitations on Seller's liability
in SECTION 7.7 hereof, shall survive the Closing, with said representations and
warranties surviving the execution and delivery of the Deed for a period of
twelve (12) months following the Closing Date (the "REPRESENTATION EXPIRATION
DATE"), and no action based thereon shall be commenced either by Seller or
Purchaser following the Representation Expiration Date; PROVIDED THAT, if
written notice asserting a claim for breach of any such representation or
warranty shall have been given by either party prior to the Representation
Expiration Date and an action based thereon shall have been commenced prior to
the expiration of the twelfth (12th) month following the Representation
Expiration Date, such representation and warranty and any right to
indemnification for breach thereof, shall survive, to the extent of such claim
only, until such claim is resolved. The indemnification and other agreements of
the parties set forth herein which expressly provide that they shall survive the
Closing or the earlier termination of this Agreement shall not expire, except as
specifically set forth in those Sections. Any rights a party may have in the
event such party terminates this Agreement pursuant to the terms hereof shall
survive such termination.
7.7. MATERIAL MISREPRESENTATIONS.
Anything in this Agreement to the contrary notwithstanding, (i) Seller
shall only be liable to Purchaser hereunder for untrue, inaccurate or incorrect
representations and warranties made herein or in any of Seller's Documents, but
only if such representations or warranties are untrue, inaccurate or incorrect
in any material respect ("MATERIAL MISREPRESENTATIONS"), and where the actual
direct damages to Purchaser for all such Material Misrepresentations of Seller
made herein or in any other of Seller's Documents, in the aggregate, when taken
together with all other Material Misrepresentations, exceeds Two Hundred
Thousand Dollars ($200,000), and
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(ii) the maximum aggregate liability of Seller, and the maximum aggregate amount
which may be awarded to and collected by Purchaser, for all Material
Misrepresentations of Seller made herein or in any other of Seller's Documents
shall not exceed the lesser of (A) the actual, direct damages proximately caused
by any such Material Misrepresentations of Seller, and (B) Three Million Dollars
($3,000,000).
8. PURCHASER'S COVENANTS
8.1. CONFIDENTIALITY.
Purchaser hereby covenants as follows:
8.1.1. Purchaser covenants and agrees that it shall not communicate
the terms or any aspect of this transaction to any Person prior to the
Closing except for Purchaser's advisors, attorneys, accountants and lenders
(the "PURCHASER PARTIES"), on condition that said Purchaser Parties first
agree to respect the obligations of Purchaser set forth in this SECTION
8.1. The foregoing confidentiality obligations shall not apply to the
extent that such (a) information (i) is a matter of public record or is
provided in other sources readily available to the real estate industry
other than as a result of disclosure by Seller or Broker, (ii) was
available to Purchaser on a non-confidential basis prior to its disclosure
to Purchaser or the Purchaser Parties, (iii) becomes available to Purchaser
or the Purchaser Parties from a source known to Purchaser or the Purchaser
Parties not having a duty of confidentiality with regard to the information
or (iv) was or is independently developed by Purchaser or the Purchaser
Parties from non-confidential sources, or (b) disclosure is compelled by
Law. Notwithstanding anything contained herein to the contrary, in the
event Purchaser is required by Law to disclose any confidential documents
or information, prior to disclosing same, Purchaser shall notify Seller in
writing of such required disclosure, shall exercise all commercially
reasonable efforts to preserve the confidentiality of the confidential
documents or information, as the case may be, including, without
limitation, reasonably cooperating with Seller to obtain an appropriate
Order or other reliable assurance that confidential treatment will be
accorded such confidential documents or information, as the case may be, by
such tribunal or authority and shall disclose only that portion of the
confidential documents or information which it is legally required to
disclose. If this Agreement is terminated such confidentiality shall be
maintained and Purchaser and the Purchaser Parties will destroy or deliver
to Seller, upon request, all documents and other materials, and all copies
thereof, obtained by Purchaser and the Purchaser Parties in connection with
this Agreement that are subject to such confidence, with
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any such destruction confirmed by Purchaser and the Purchaser Parties to
Seller in writing. The provisions of this SECTION 8.1.1 shall survive
Closing or termination of this Agreement and any other prior agreements
between the parties concerning confidentiality.
8.1.2. Neither Purchaser nor Seller shall announce or disclose
publicly the terms or provisions hereof without the prior written approval
of the other party, except as such disclosure may be required by Law and
except that this provision shall not prohibit either party from disclosing
such terms or provisions to its Purchaser Parties.
8.1.3. The provisions of this Agreement relating to confidentiality
shall supersede the provisions of that certain confidentiality letter
agreement dated July 13, 2000 between Seller and Purchaser, and any other
prior agreements between the parties concerning confidentiality.
8.2. NON-RELIANCE ON REPRESENTATIONS AND WARRANTIES.
Purchaser affirms that, except as expressly provided for in this Agreement,
Seller has not made nor has Purchaser relied upon any representation, warranty
or promise with respect to the subject matter of this Agreement, including,
without limitation, any warranties or representations, express or implied, as to
(a) the value, use, tax status or physical condition of the Property, or any
part thereof, repairs thereto, income therefrom, expenses of maintenance or
operation thereof, or as to the accuracy of any survey or plans thereof, (b) the
adequacy of any plans, specifications or site plans for the Real Property or
their compliance with Law, (c) any Space Leases or tenancies of any part of the
Real Property, or regulations affecting the Property, (d) the availability of
any financing for the purchase, alteration or operation of the Property from any
source, including but not limited to, State, City or Federal governments or any
institutional lender, (e) the applicability or effect of or compliance with any
building, subdivision, zoning, land use, securities, ecology, environmental
protection and like Laws of Governmental Entities, including those of any and
all regulatory agencies and administrative officials having or asserting
jurisdiction over the Property, (f) habitability, merchantability or fitness for
a particular purpose, (g) title, (h) latent or patent physical or environmental
conditions, or (i) valuation.
8.3. PURCHASER INDEMNITY.
Purchaser hereby agrees to indemnify, defend, and hold Seller, its counsel,
the Broker (hereinafter defined), its sales agents, and each partner, officer,
director, employee, agent or attorney of Seller, its counsel, Broker, or its
sales agents, and any other party related in any way to the foregoing (all of
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which parties are herein collectively called the "Seller Parties"), free and
harmless from and against any and all costs, loss, damages and expenses, of any
kind or nature whatsoever (including attorneys fees' and costs), arising out of
damage to persons or property arising out of or resulting from the entry and/or
the conduct of activities upon the Property by Purchaser, its agents,
contractors and/or subcontractors in connection with the inspections,
examinations, testings and investigations of the Property conducted at any time
prior to the Closing, which indemnity shall survive the Closing (and not be
merged therein) or any earlier termination of this Agreement. The foregoing
indemnity shall not be deemed to apply to any actual or alleged loss or damage
to the value of any of the Property or any loss of the sale contemplated by this
Agreement, to the extent due solely from (i) any test results, studies, or
evaluations made by Purchaser (or by any of Purchaser's consultants to
Purchaser) being unfavorable, or (ii) Purchaser's decision not to proceed with
the purchase of the Property. The provisions of this Section 8.3 shall survive
the Closing or any termination of this Agreement.
8.4. SURVIVAL.
The covenants of Purchaser in this ARTICLE 8 shall survive the Closing in
accordance with their terms and shall not be merged therein.
9. SELLER'S COVENANTS
Seller hereby covenants as follows:
9.1. SELLER'S OPERATION OF PROPERTY.
Except to the extent Seller is relieved of such obligations by ARTICLE 12
hereof, between the date hereof and the Closing Date, Seller shall maintain and
keep the Property in good order and condition, but in no event shall Seller be
obligated to maintain and keep the Property to a standard greater than that
which is consistent with Seller's past practices with respect to the Property.
From the date hereof through the Closing Date, Seller (a) will advise Purchaser
of any written notice Seller receives from any Governmental Entity relating to
the violation of any Law regulating the condition or use of the Property, and
(b) will promptly notify Purchaser of any material change affecting the Property
of which Seller has Actual Knowledge.
9.2. ACCESS.
Prior to the Closing, Seller shall allow Purchaser or Purchaser's
Representatives access to the Property upon reasonable prior notice at
reasonable times provided such access does not interfere with the operation of
the Property or the rights of any tenant or occupant of the Property and subject
to Purchaser's indemnification agreement set forth in SECTION 8.3 and
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provided further that Seller or any representative of Seller shall have the
right to accompany Purchaser and Purchaser's Representatives whenever they are
on the Property.
9.3. NO MARKETING.
Seller agrees not to offer to sell, negotiate for or solicit or otherwise
pursue any other offers for the purchase of the Property or any part thereof
from any party other than Purchaser for the period of time beginning immediately
after this Agreement is fully executed and ending on the termination of this
Agreement, as applicable, by either party hereto in accordance with this
Agreement or the Closing, as applicable. Purchaser agrees not to offer to
purchase, negotiate for or solicit or otherwise pursue any other offers for the
sale of real property located within a one hundred (100) mile radius of the
Property for the period of time beginning immediately after this Agreement is
fully executed and ending on the termination of this Agreement by either party
hereto in accordance with this Agreement or the Closing, as applicable.
10. COVENANTS OF SELLER AND PURCHASER
10.1. PRESS RELEASES.
Seller and Purchaser each hereby covenant that at, prior to or immediately
after the Closing neither Seller nor Purchaser shall issue any press release or
public statement (a "PRESS RELEASE") with respect to the transaction provided
for by this Agreement without the prior consent of the other, except to the
extent required by Law or by any securities exchange on which Purchaser's stock
is listed. If either Seller or Purchaser is required by Law to issue a Press
Release, such party shall, at least two (2) Business Days prior to the issuance
of the same, deliver a copy of the proposed Press Release to the other party for
its review and approval within such two (2) Business Day period, such approval
not to be unreasonably withheld.
10.2. BROKERS.
Seller and Purchaser expressly acknowledge that Spaulding & Slye and Grubb
& Ellis (collectively, the "BROKER") have acted as Seller's exclusive brokers
with respect to the transaction contemplated herein and with respect to this
Agreement, and that Seller shall pay any brokerage commissions due to Broker in
accordance with separate agreements between Seller and each Broker. Seller and
Purchaser each represents and warrants to the other that it has not dealt with
any other broker in this transaction and each agrees to hold harmless the other
and indemnify the other from and against any and all damages, costs or expenses
(including, but not limited to, reasonable attorneys' fees and disbursements)
suffered by the indemnified party as a result of acts of
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the indemnifying party that would constitute a breach of its representation and
warranty in this Section.
10.3. ACCESS TO RECORDS.
Where there is a legitimate reason (including, without limitation, a tax
audit, other governmental inquiry, or actual or prospective claim by or against
either Seller or Purchaser, or to which Seller or Purchaser may become a party)
for Seller or Purchaser to require access to records or other information
relating to the Property that is in the possession or control of the other
party, and if providing such access would not adversely affect the party whose
records are being sought (in the good faith judgment of such party), each party
will, subject to the confidentiality covenants between Purchaser and Seller in
SECTION 8.1.1 hereof, allow the other reasonable access to such records and
information at their then-current location (or such other location as the party
in possession of such records or information may reasonably designate), in order
to analyze and/or copy the same (at the requesting party's sole cost and
expense), for use solely for the purposes for which the same are being
requested. In any case in which a party hereto desires to obtain any records or
information pursuant to this Section, such party shall notify the other in
writing of such request, setting forth in such notice the purposes for which
such records and information are being requested and the expected use thereof
(including, if applicable, the nature of any claim or other proceeding in which
the same will be used and the parties thereto), and the party receiving such
request may, as a condition to granting the same, require that the requesting
party enter into an agreement protecting the confidentiality of such records and
information. In no event shall a party be obligated to provide access to records
or other information under this Section in connection with any litigation,
claim, or dispute between Purchaser and Seller, or in which Purchaser and Seller
are or may become adverse parties, other than in accordance with applicable
discovery and evidentiary rules and procedures applicable to such matter, and no
access to or disclosure of records or information shall be required hereunder if
the same would or reasonably could result in the loss of any attorney-client
privilege or other applicable evidentiary privileges that may be applicable to
such records or information. Each party shall maintain its records for use under
this Section for a period of not less than three (3) years after the Closing
Date; PROVIDED THAT prior to such date no such records shall be destroyed unless
the holder provides the other party hereunder with at least ninety (90) days
prior written notice. Upon receipt of notice of destruction, the non-holder
shall have the option, at its sole cost and expense, to take possession of the
records set for destruction, in which case the non-holder shall assume all
further cost of storage and destruction of such records. The terms of this
SECTION 10.3 shall survive the Closing and not be merged therein.
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10.4. NON-COMPLIANCE.
Purchaser shall give prompt notice to Seller, and Seller shall give prompt
notice to Purchaser, of (a) the occurrence, or failure to occur, of any event
that causes any representation or warranty contained in any document relating to
this Agreement to be untrue or inaccurate in any material respect at any time
from the date of this Agreement to the Closing Date, and (b) any failure of
Purchaser, on the one hand, or Seller, on the other hand, to comply with or
satisfy, in any material respect, any covenant, condition or agreement to be
complied with or satisfied by it under any document relating to this Agreement.
10.5. SURVIVAL.
The provisions of this ARTICLE 10 shall survive the Closing (and not be
merged therein) or earlier termination of this Agreement.
11. FAILURE OF PERFORMANCE
11.1. PURCHASER DEFAULT.
If, on the Closing Date, (i) Purchaser is in default of any of its
obligations hereunder, or (ii) any of Purchaser's representations or warranties
made herein are untrue, inaccurate or incorrect in any material respect, or
(iii) any condition to the obligation of Seller to close hereunder has not been
satisfied as a result of the failure by Purchaser to perform its obligations
under this Agreement, or otherwise, then Seller may elect as its sole remedy,
after first having given Purchaser notice and one (1) Business Day's opportunity
to cure the same, either to (x) terminate this Agreement by written notice to
Purchaser and the Escrow Agent, promptly after which the Deposit with any
accrued interest thereon shall be paid over to Seller, (y) waive such default,
misrepresentation or condition and proceed to close the transaction under this
Agreement, or (z) seek specific performance of this Agreement. If this Agreement
is so terminated, then Seller shall be entitled immediately to the proceeds of
the Deposit plus any interest accrued thereon as liquidated damages (and
Purchaser shall so instruct the Title Company in writing), and thereafter
neither party to this Agreement shall have any further rights or obligations
hereunder other than any arising under any Section herein which expressly
provides that it survives the termination of this Agreement. The amount of
liquidated damages set forth in this SECTION 11.1 shall be for all loss, damage
and expense suffered by Seller, including, without limitation, the loss of its
bargain, it being agreed that Seller's damages are difficult if not impossible
to ascertain.
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11.2. SELLER DEFAULT.
If, on the Closing Date, (i) Seller is in default of any of its obligations
hereunder, (ii) any of Seller's representations or warranties made herein are
untrue, inaccurate or incorrect in any material respect, or (iii) any condition
to the obligation of Purchaser to close hereunder has not been satisfied as a
result of the failure by Seller to perform its obligations under this Agreement,
or otherwise, then Purchaser may elect, as its sole remedy, after first having
given Seller notice and one (1) Business Day's opportunity to cure the same,
either to (x) terminate this Agreement by written notice to Seller and the
Escrow Agent, promptly after which the Deposit plus any interest accrued thereon
shall be returned to Purchaser, (y) waive such default, misrepresentation or
condition and proceed to close the transaction under this Agreement without any
reduction of or credit against the Purchase Price, or (z) seek specific
performance of this Agreement. If this Agreement is so terminated, then
Purchaser shall be entitled immediately to the proceeds of the Deposit plus any
interest accrued thereon as liquidated damages (and Seller shall so instruct the
Title Company in writing), and thereafter neither party to this Agreement shall
have any further rights or obligations hereunder other than any arising under
any Section herein which expressly provides that it survives the termination of
this Agreement.
12. CONDEMNATION/CASUALTY
12.1. CONDEMNATION.
If, prior to the Closing Date, all or any Significant Portion (as
hereinafter defined) of the Property is taken by eminent domain (or is the
subject of a pending taking which has not yet been consummated), Seller shall
notify Purchaser in writing of such fact promptly after obtaining knowledge
thereof and provide to Purchaser all information, to the extent in Seller's
possession or control, regarding such takings, and Purchaser shall have the
right to terminate this Agreement by giving written notice to Seller no later
than ten (10) Business Days after the giving of Seller's notice, and the Closing
Date shall be extended, if necessary, to provide sufficient time for Purchaser
to make such election. The failure by Purchaser to so elect in writing to
terminate this Agreement within such ten (10) calendar day period shall be
deemed an election not to terminate this Agreement. For purposes hereof', a
"SIGNIFICANT PORTION" of the Property shall mean such portion as (i) shall have
a value, as reasonably determined by Seller, in excess of One Million Dollars
($1,000,000.00), (ii) shall materially impair access to or parking at the
Property, or (iii) the suitability of the Property for use as a laboratory
office facility. If Purchaser elects to terminate this Agreement as aforesaid,
the provisions of SECTION 12.6 shall apply.
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12.2. CONDEMNATION AWARD.
If (a) Purchaser does not elect to terminate this Agreement as aforesaid in
the event all or any Significant Portion of the Property is taken, or if (b) a
portion of the Property not constituting a Significant Portion of the Property
is taken or becomes subject to a pending taking, by eminent domain, there shall
be no abatement of the Purchase Price; PROVIDED, HOWEVER, that, at the Closing,
Seller shall pay to Purchaser the amount of any award for or other proceeds on
account of such taking which have been actually paid to Seller prior to the
Closing Date as a result of such taking and, to the extent such award or
proceeds have not been paid, Seller shall assign to Purchaser at the Closing
(without recourse to Seller) the rights of Seller to, and Purchaser shall be
entitled to receive and retain, all awards for the taking of the Property or
such portion thereof.
12.3. CASUALTY.
In the event the Property is damaged or destroyed by fire or other casualty
prior to the Closing Date, Seller shall notify Purchaser in writing of such fact
promptly after obtaining knowledge thereof and provide to Purchaser all such
information as Seller may have in its possession or control regarding the extent
and nature of such casualty. If any such damage or destruction (a) is caused by
an insured casualty, and (b) would cost less than or equal to Two Million
Dollars ($2,000,000.00) to repair or restore, then this Agreement shall remain
in full force and effect and Purchaser shall acquire the Property upon the terms
and conditions set forth herein. In such event, unless prior to the Closing
Seller restores the damaged Property to its original condition, Purchaser shall
receive a credit against the Purchase Price equal to the deductible amount
applicable under Seller's casualty insurance policy, and Seller shall assign to
Purchaser all of Seller's right, title and interest in and to all proceeds of
insurance on account of such damage or destruction. In the event the Property is
damaged or destroyed prior to the Closing Date by an insured casualty and as a
result the cost of repair or restoration would cost more than Two Million
Dollars ($2,000,000.00), then, notwithstanding anything to the contrary set
forth above in this Section, Purchaser shall have the right, at its election,
either (i) to terminate this Agreement or (ii) to proceed to purchase the
Property in accordance with the terms of this Agreement. Purchaser shall have
ten (10) calendar days after Seller notifies Purchaser that a casualty has
occurred to make such election by delivery to Seller of a written election
notice (the "ELECTION NOTICE") and the Closing Date shall be extended, if
necessary, to provide sufficient time for Purchaser to make such election. The
failure by Purchaser to deliver the Election Notice within such ten (10) day
calendar period shall be deemed an election not to terminate this Agreement. In
the event that Purchaser does not elect to terminate this Agreement as set forth
above, this Agreement shall remain in
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full force and effect and unless the Seller shall have repaired the Property as
herein described at the Closing, Seller shall assign to Purchaser all of
Seller's right, title and interest in and to any and all proceeds of insurance
on account of such damage or destruction, if any, and, if the casualty was an
insured casualty, Purchaser shall receive a credit against the Purchase Price
equal to the deductible amount under Seller's casualty insurance policy.
12.4. UNINSURED CASUALTY.
In the event the Property is damaged or destroyed prior to the Closing Date
and such damage or destruction (a) is caused by an uninsured casualty, and (b)
would cost less than Five Hundred Thousand Dollars ($500,000.00) to repair or
restore, then this Agreement shall remain in full force and effect and Purchaser
shall acquire the Property upon the terms and conditions set forth herein. In
such event, at Seller's election either (i) Purchaser shall receive a credit
against the Purchase Price equal to the amount required to repair such damage or
destruction, or (ii) if Seller reasonably determines that the damage or
destruction can be repaired prior to Closing, Seller shall repair the Property
to substantially the same condition as existed prior to the damage or
destruction. In the event the Property is damaged or destroyed prior to the
Closing Date by uninsured casualty and the cost of repair or restoration would
equal or exceed Five Hundred Thousand Dollars ($500,000.00), then,
notwithstanding anything to the contrary set forth above in this Section,
Purchaser shall have the right, at its election, either (i) to terminate this
Agreement, or (ii) proceed to close in accordance with the terms of this
Agreement. Purchaser shall have ten (10) calendar days after Seller notifies
Purchaser that an uninsured casualty has occurred to make such election by
delivery to Seller of an Election Notice. The failure by Purchaser to deliver
the Election Notice within such ten (10) calendar day period shall be deemed an
election not to terminate this Agreement. In the event Purchaser does not elect
to terminate this Agreement as set forth above, this Agreement shall remain in
full force and effect, and at the Closing, Purchaser shall receive a credit
against the Purchase Price equal to the amount required to repair such damage or
destruction but in no event shall such credit exceed Five Hundred Thousand
Dollars ($500,000.00).
12.5. SELLER INSURANCE.
Seller shall maintain or cause the tenant under the Space Lease to maintain
the property insurance coverage currently in effect for the Property through the
Closing Date, which coverage is listed on EXHIBIT Q. Seller shall not be
obligated to assign to Purchaser any insurance policies in connection with the
Property at the Closing.
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12.6. RETURN OF DEPOSIT.
If this Agreement is terminated pursuant to SECTIONS 12.1, 12.3 or 12.4
hereof, Seller shall cause the Escrow Agent to promptly return the Deposit
together with any accrued interest thereon to Purchaser. Upon such return
neither party to this Agreement shall have any further rights or obligations
hereunder other than any arising under any Section herein which expressly
provides that it shall survive the termination of this Agreement.
12.7. PRIMACY OF AGREEMENT.
The provisions of this ARTICLE 12 supersede the provisions of any
applicable statutory or decisional law with respect to the subject matter of
this ARTICLE 12.
13. SELLER'S AND PURCHASER'S ACTIONS PRIOR TO THE CLOSING
13.1. NEW AGREEMENTS.
Between the date hereof and the Closing Date, Seller shall not enter into
any new service contract, equipment lease, lease, license, or occupancy
agreement which would be binding on Purchaser at Closing without Purchaser's
express prior written consent. Within ten (10) Business Days following the date
of this Agreement, Purchaser shall notify Seller of those Service Contracts
listed in EXHIBIT E attached hereto, and those Equipment Leases, if any, noted
in EXHIBIT D attached hereto and made a part hereof that it does not desire to
assume, and Seller shall send termination notices of such Service Contracts and
Equipment Leases at or prior to Closing, provided that Seller shall have
provided Purchaser with copies of all such Agreements by no later than the date
hereof.
14. NEW LEASES
14.1. EXECUTION OF NEW LEASES.
After the date of this Agreement, Seller shall not, without Purchaser's
prior written consent in each instance enter into a new lease for space in the
Real Property (a "NEW LEASE").
14.2. AMENDMENT.
Without the prior written consent of Purchaser, which shall not be
unreasonably withheld, no existing Space Lease shall be modified or amended.
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15. NOTICES
Any notice pursuant to this Agreement shall be given in writing by (a)
personal delivery, or (b) reputable national overnight delivery service with
proof of delivery, or (c) legible facsimile transmission sent to the intended
addressee at the address set forth below, or to such address or to the attention
of such other Person as the addressee shall have designated by written notice
sent in accordance herewith, and shall be deemed to have been given upon receipt
or refusal to accept delivery, or, in the case of facsimile transmission, as of
the date of the transmission provided that (i) an original of said facsimile is
also sent to the intended addressee by means described in clauses (a), or (b)
above, and (ii) if said facsimile is received by any party after 5:00 p.m. on
any Business Day it shall be deemed received by said party on the next Business
Day. Unless changed in accordance with the preceding sentence, the addresses for
notice given pursuant to this Agreement shall be as follows:
If to Seller:
SPAULDING AND SLYE HAYDEN WOODS LLC
c/o Spaulding and Slye Company
255 State Street
Boston, MA 02109
Attention: Mr. Peter A. Bailey
TELEPHONE: (617) 523-8000
TELECOPIER: (617) 531-4295
With a copy to:
Bernkopf, Goodman & Baseman, LLP
125 Summer Street
Boston, Massachusetts 02110
ATTENTION: David L. Doyle, Esq.
TELEPHONE: (617) 790-3000
TELECOPIER: (617) 790-3300
IF TO PURCHASER:
CUBIST PHARMACEUTICALS, INC.
24 Emily Street
Cambridge, MA 02139
ATTENTION: Mr. Tom Shea
TELEPHONE: (617) 576-4155
TELECOPIER: (617) 234-5592
43
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With a copy to:
Bingham Data LLP
150 Federal Street
Boston, MA 02110
ATTENTION: Henry S. Healy, Esq.
TELEPHONE: (617) 951-8271
TELECOPIER: (617) 951-8736
16. TIME OF THE ESSENCE
It is understood and agreed, any rule of law or equity to the contrary
notwithstanding, that time is of the essence of each and every provision of this
Agreement, whether or not so stated therein.
17. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and inure to the benefit of Seller and
Purchaser and their respective legal representatives, designees, successors and
assigns, PROVIDED THAT, except as provided in the next sentence, neither party
may assign, pledge or otherwise transfer its rights and obligations hereunder
without the prior written consent of the other party, which such party may
withhold in its sole discretion, and, without limiting either party's other
rights and remedies, any such assignment, pledge or transfer made without the
prior written consent of the other party shall be void and of no force and
effect. Notwithstanding the foregoing provisions, Purchaser shall have the right
to assign its rights and obligations under this Agreement to an Affiliate of
Purchaser, PROVIDED THAT (a) at least five (5) Business Days prior written
notice thereof is given by Purchaser to Seller, identifying Purchaser's
Affiliate by name and address, explaining the relationship by which such
assignee is an Affiliate of Seller, (b) the assignee shall assume all of the
obligations of Purchaser under the terms of this Agreement in writing, and (c)
the originally named Purchaser shall remain liable to Seller for all obligations
of the assignee under the terms of this Agreement.
18. MISCELLANEOUS PROVISIONS
18.1. MERGER.
Except for the provisions of this Agreement which are explicitly stated to
survive the Closing, (a) none of the terms of this Agreement shall survive the
Closing, and (b) the delivery of the Deed and any other of Seller's Documents by
Seller and the acceptance thereof by Purchaser shall effect a merger, and be
deemed the full performance and discharge of every obligation on the part of
Purchaser and Seller to be performed hereunder.
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18.2. ENTIRE AGREEMENT; WAIVER.
This Agreement, together with Exhibits hereto, embodies and constitutes the
entire understanding between the parties with respect to the transaction
provided for by this Agreement and all prior agreements (including, without
limitation, any letter of intent), understandings, representations and
statements, oral or written, are merged into this Agreement. Neither this
Agreement nor any provision hereof may be waived, modified, amended, discharged
or terminated except by an instrument signed by the party against whom the
enforcement of such waiver, modification, amendment, discharge or termination is
sought, and then only to the extent set forth in such instrument. No waiver by
either party hereto of any failure or refusal by the other party to comply with
its obligations hereunder shall be deemed a waiver of any other or subsequent
failure or refusal to so comply.
18.3. GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the
law of The Commonwealth of Massachusetts.
18.4. CAPTIONS.
The captions in this Agreement are inserted for reference only and in no
way define, describe or limit the scope or intent of this Agreement or of any of
the provisions hereof. All Exhibits attached hereto shall be incorporated by
reference as if set out herein in full.
18.5. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
18.6. SEVERANCE.
If any term or provision of this Agreement or the application thereof to
any Persons or circumstances shall, to any extent, be invalid or unenforceable,
the remainder of this Agreement or the application of such term or provision to
Persons or circumstances other than those as to which it is held invalid or
unenforceable shall not be affected thereby, and each term and provision of this
Agreement shall be valid and enforced to the fullest extent permitted by law.
18.7. COUNTERPARTS.
This Agreement may be executed in counterparts, each of which shall be an
original and all of which counterparts taken together shall constitute one and
the same agreement.
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18.8. NO RECORDING.
Seller and Purchaser each agrees that neither this Agreement nor any
memorandum or notice hereof shall be recorded and Purchaser agrees not to file
any notice of pendency or other instrument (other than a judgment filed by
Purchaser in connection with Purchaser's enforcement of its rights hereunder)
against any of the Property or any portion thereof in connection herewith.
18.9. ADDITIONAL DOCUMENTS.
Subject to the terms and conditions herein provided, each of the parties
hereto shall execute and deliver such documents as the other party shall
reasonably request in order to consummate and make effective the transactions
provided for by this Agreement; PROVIDED, HOWEVER, that the execution and
delivery of such documents by such party shall not result in any additional
liability or cost to such party.
18.10. INTERPRETATION.
The parties acknowledge that each party and its counsel have reviewed this
Agreement and that the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of this Agreement, or any amendment or Exhibit hereto.
18.11. WAIVER OF JURY TRIAL.
18.11.1.
PURCHASER AND SELLER HEREBY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW,
THE RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM FILED BY
PURCHASER OR SELLER, WHETHER IN CONTRACT, TORT OR OTHERWISE, WHICH RIGHT OR
CLAIM RELATES DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, ANY DOCUMENTATION
RELATED THERETO, OR ANY ACTS OR OMISSIONS IN CONNECTION WITH THIS AGREEMENT.
THIS WAIVER HAS BEEN AGREED TO AFTER CONSULTATION WITH LEGAL COUNSEL SELECTED BY
PURCHASER AND SELLER.
This Waiver is agreed to:
Purchaser's Initials ( )
Seller's Initials ( )
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[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
47
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IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly
executed on its behalf, under seal, the day and year first above written.
SELLER:
SPAULDING AND SLYE HAYDEN WOODS LLC
By: Spaulding and Slye Real Estate Services Company, Inc., a Delaware
corporation, its Managing Member
By: /s/ James B. Karman
---------------------------------
Name: James B. Karman
-------------------------------
Title: President
------------------------------
Taxpayer Identification No. 04-339-1286
PURCHASER:
CUBIST PHARMACEUTICALS, INC.
By: /s/ Thomas A. Shea
----------------------------------
Name: Thomas A. Shea
----------------------------------
Title: CFO
----------------------------------
Taxpayer Identification No. 22-319-2085
Q-1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.62
<SEQUENCE>4
<FILENAME>a2074309zex-10_62.txt
<DESCRIPTION>EXHIBIT 10.62
<TEXT>
<Page>
EXHIBIT 10.62
CUBIST PHARMACEUTICALS, INC.
SEVENTH AMENDMENT
TO
1993 AMENDED AND RESTATED STOCK OPTION PLAN
This SEVENTH AMENDMENT (this "Amendment") to the Amended and Restated 1993
Stock Option Plan, as amended (the "Plan"), of Cubist Pharmaceuticals, Inc., a
Delaware corporation (the "Company"), is being adopted by resolution of the
Board of Directors at a meeting held on December 17, 2001 (the "Effective
Date"). Effective from and after the Effective Date, the Plan is hereby amended
as follows:
1. Section 5 of the Plan hereby is amended by deleting such Section in
its entirety and replacing it with the following:
"5. ADMINISTRATION. The Plan shall be administered by the Committee,
PROVIDED HOWEVER, that the Committee may delegate to the Chief Executive
Officer of the Corporation the authority to grant Options hereunder to
employees who are not officers, and to consultants, in accordance with the
guidelines as the Committee shall set forth at any time and from time to
time. Subject to the provisions of the Plan, the Committee or its designee
shall have complete authority, in its discretion, to make or to select the
manner of making the following determinations with respect to each Awarded
Option to be granted by the Company: (a) the officer, employee or
consultant to receive such Awarded Option; (b) whether the Awarded Option
(if granted to an employee) will be an Incentive Option or Nonstatutory
Option; (c) the time of granting the Awarded Option; (d) the number of
Shares subject to the Awarded Option; (e) the Option Price; (f) the option
period; (g) the exercise date or dates or, if the Awarded Option is
immediately exercisable in full on its grant date, the vesting schedule, if
any, applicable to the Shares issuable upon the exercise of the Awarded
Option; (h) the effect of termination of employment, consulting or
association with the Company on the subsequent exercisability of the
Awarded Option; and (i) if the Awarded Option is a Nonstatutory Option,
whether such Nonstatutory Option may be transferred by the Holder to a
third party. Subject to the provisions of the Plan, the Committee shall
have complete authority, in its discretion, to determine whether any
Formula Option may be transferred by the Holder to a third party. In making
such determinations, the Committee may take into account the nature of the
services rendered by the respective officers, employees and consultants,
their present and potential contributions to the success of the Company and
its Subsidiaries, and such other factors as the Committee in its discretion
shall deem relevant. Subject to the provisions of the Plan, the Committee
shall also have complete authority to interpret the Plan, to prescribe,
amend and rescind rules and regulations relating to it, to determine the
terms and provisions of the respective Option Agreements (which need not be
identical), and to make all other determinations necessary or advisable for
the administration of the Plan. The Committee's determinations on the
matters referred to in this Section 5 shall be conclusive."
Except to the extent amended hereby, all of the terms, provisions and
conditions set forth in the Plan are hereby ratified and confirmed and shall
remain in full force and effect. The Plan and this Amendment shall be read and
construed together as a single instrument.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.63
<SEQUENCE>5
<FILENAME>a2074309zex-10_63.txt
<DESCRIPTION>EXHIBIT 10.63
<TEXT>
<Page>
EXHIBIT 10.63
CONFIDENTIAL TREATMENT
MANUFACTURING AND SUPPLY AGREEMENT
This Manufacturing and Supply Agreement (AGREEMENT) IS entered into as of
September 30, 2001 (EFFECTIVE DATE) by and between ACS Dobfar, SpA, an Italian
corporation (ACSD) and Cubist Pharmaceuticals, Inc., a Delaware corporation
(CUBIST).
BACKGROUND
Cubist is a drug company focused on the development and commercialization of
daptomycin antibiotic drug. Cubist has commenced Phase III clinical trials of
daptomycin and intends to obtain approval to market and sell the drug for the
treatment of serious and life threatening infections in humans.
ACSD has expertise in the manufacture of drugs on a contract basis. ACSD wishes
to provide scale-up services and to construct a production facility dedicated to
the manufacturing of daptomycin for Cubist, and to sell bulk daptomycin
exclusively to Cubist. Cubist desires to have ACSD construct a production
facility, and manufacture and supply Cubist with daptomycin for marketing and
sale in all jurisdictions. This Agreement sets forth the terms under which ACSD
will construct a dedicated production facility and manufacture and supply
daptomycin to Cubist.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, ACSD and Cubist agree as follows:
1. DEFINITIONS
Capitalized terms used in this Agreement and not otherwise defined herein shall
have the meaning set forth below.
AFFILIATE means with respect to either party, any entity that, directly or
indirectly, is controlled by, controls or is under common control with such
party. For purposes of this Agreement, control means, with respect to any party,
the direct or indirect ownership of more than fifty percent (50%) of the voting
or income interest in such party or the possession otherwise, directly or
indirectly, of the power to direct the management or policies of such party.
BATCH RECORD means a record of the procedures followed by ACS with respect to
the manufacture, handling and storage of Product. The Batch Record consists of
[ * ], such as [ * ].
[ * ]
CERTIFICATE OF ANALYSIS (COA) means a document which is generated for each batch
of Product and which certifies that Product was manufactured in a cGMP compliant
facility and meets the filed regulatory release testing specifications.
CHANGE ORDER is defined in Section 2.4 herein.
CHANGE ORDER REQUEST is defined in Section 2.4 herein.
CONFIDENTIAL INFORMATION means all data, specifications, training and any other
know-how related to the design, development, manufacture, or performance of the
Product, as well as all other information and data provided by either party to
the other party pursuant to this Agreement in written or other tangible
* Confidential Treatment Requested. Omitted portions filed with the Commission.
Page 1 of 37
<Page>
medium and marked as confidential, or if disclosed orally or displayed,
confirmed in writing within [ * ] days after disclosure, except any portion
thereof which:
(a) is known to the receiving party, as evidenced by the receiving
party's written records, before receipt thereof under this
Agreement;
(b) is disclosed to the receiving party by a third person who is
under no obligation of confidentiality to the disclosing party
hereunder with respect to such information and who otherwise has
a right to make such disclosure;
(c) is or becomes generally known in the trade through no fault of
the receiving party; or
(d) is independently developed by the receiving party without access
to such information, as evidenced by the receiving party's
written records.
CONTRACT YEAR means each twelve (12) month period during the term of this
Agreement beginning on the Effective Date.
CONTRACTOR means any manufacturer, packager, or other Product support service
provider who performs processing and/or packaging of a Product or any
intermediate step of manufacture, or other Product support service.
CRITICAL EQUIPMENT means any equipment that comes into contact with Product or
is essential to the manufacturing process or is designed to assure that Product
has the identity, strength, quality and purity that it is represented to
possess.
CUBIST TECHNOLOGY means individually and collectively the:
(a) intellectual property rights embodied or disclosed in:
(i) Cubist patent application(s) and patents,
(ii) any patent application filed as a continuation, division,
or continuation-in-part of the application(s) described in
clause (a)(i), patents issuing therefrom and reissues,
reexaminations and extensions of such patents; and
(iii) any foreign counterpart to the application(s) described in
clauses (a)(i)-(ii) (including divisions, continuations,
confirmations, additions, renewals or
continuations-in-part of such patent applications),
patents issuing therefrom and extensions thereof, and
(b) all other Confidential Information, discoveries, inventions,
know-how, techniques, methodologies, modifications, improvements,
works of authorship, designs and data (whether or not protectable
under patent, copyright, trade secrecy or similar laws) that are
conceived, discovered, developed, created or reduced to practice
or tangible medium of expression by consultants (other than those
consultants that are also affiliated with ACSD in connection with
the transactions contemplated by this Agreement) or employees of
Cubist at any time, concurrent with or related to the
transactions contemplated by the Development and Facility
Construction Timetable, or based on the results of the
transactions contemplated by the Timetable and Facility
Construction Plan. Cubist Technology specifically includes, but
is not limited to, all process development technology developed
for Cubist as part of the Materials Transfer & Confidentiality
Agreement between Cubist and ACSD dated February 11, 1998.
CGMP means Current Good Manufacturing Practices and is further defined in
Section 3.1 herein.
DAPTOMYCIN means the compound daptomycin the chemical structure of which is
detailed in Exhibit A or a pharmaceutically acceptable salt thereof or a
pharmaceutically acceptable formulation thereof.
DEVIATION means documented evidence of an excursion from operating,
manufacturing, testing instructions or procedures. A Deviation does not
permanently change an existing procedure, it is intended to be a specific or one
time excursion.
* Confidential Treatment Requested. Omitted portions filed with the Commission.
Page 2 of 37
<Page>
DRUG MASTER FILE (DMF) is a submission to the FDA that provides detailed
information about the Facility, Process and Materials used in the manufacture of
Product, and that is used to support an NDA and other regulatory submissions.
FACILITY means the cGMP drug production facility in Anagni, Italy constructed
and equipped by ACSD exclusively for the manufacture of Product.
FACILITY APPROVAL means the FDA approval of the NDA Manufacturing Supplement for
the Facility.
FACILITY APPROVAL TARGET DATE is defined in Section 2.1 herein.
FACILITY COMPLETION means the construction, equipment, testing, and
qualification of the Facility according to the terms of this Agreement.
FACILITY COMPLETION TARGET DATE is defined in Section 2.1 herein
FDA means the United States Food and Drug Administration or any successor entity
thereto or any equivalent U.S. or foreign governmental regulatory agency with
jurisdiction to grant Product Approvals.
FORCE MAJEURE means any event beyond the control of the parties, including, but
not limited to, fire, earthquakes, flood, riots, epidemics, war, or embargoes.
FORMAL INVESTIGATION means a written report detailing the specifics of an
investigation resulting from an exceptional event, and which includes a
description of the incident, investigation, conclusions and corrective action or
action plan, if applicable.
IN-PROCESS SPECIFICATIONS mean the chemical, physical, biological and microbial
testing methods and results required for the commercial manufacture of Product
in accordance with Process, and which are listed in Exhibit B herein, provided
that such specifications shall at all times comply with the relevant regulations
of the FDA or other regulatory agency in the country of sale, and provided that
such specifications may be modified from time to time in accordance with this
Agreement.
LOT NUMBER means a controlled number used to identify a specific lot or batch of
Product or Material.
MATERIAL means any actives, excipients, or components, which are used in the
manufacture of Product.
NONCONFORMING MATERIALS REPORT means a document used to describe the disposition
of Product or Material that fails to meet established specifications.
MANUFACTURING COMPLIANCE REPORT is defined in Section 8.3 herein.
MATERIAL REVIEW BOARD (MRB) means a Cubist multidisciplinary committee
responsible for the review, evaluation and disposition of non-conforming
materials and Product.
NDA means a new drug application filed with the FDA to obtain marketing approval
for Product in the United States or any comparable application fled with the
regulatory authorities of a country other than the United States to obtain
marketing approval for Product in that country.
NDA MANUFACTURING SUPPLEMENT means an application filed with the FDA, or any
comparable application filed with the regulatory authorities of a country other
than the United States, to obtain approval to manufacture Product at the
Facility.
PROCESS means the commercial process employing the [ * ].
PRODUCT means Daptomycin bulk drug substance that meets Product Specifications
and is manufactured for Cubist in accordance with Sections 2 and 3 and Exhibits
B, C and D of this Agreement.
* Confidential Treatment Requested. Omitted portions filed with the Commission.
Page 3 of 37
<Page>
PRODUCT APPROVAL means those regulatory or other approvals required for the
manufacture, importation, promotion, pricing, marketing and sale of the Product
in any particular country.
PRODUCT PRICE PREMIUM is defined in Section 6.2 herein.
PRODUCT SPECIFICATIONS mean the chemical, physical, biological and microbial
testing methods and results required for the release of Product and listed in
Exhibit C herein, provided that such specifications shall at all times comply
with the relevant regulations of the FDA or other regulatory agency in the
country of sale, and provided that such specifications may be modified from time
to time in accordance with this Agreement.
PURCHASE FORECAST is defined in Section 5.3 herein.
REPROCESSING means duplication of a step or steps in a manufacturing process in
order to bring Product into conformance with Product Specifications without
altering the safety, identity, strength, quality, or purity of Product beyond
established requirements.
RMA means Return Material Authorization and is further defined in Section 6.5(b)
herein.
SOP means standard operating procedure.
SPECIFICATION REVIEW COMMITTEE (SRC) means a Cubist multidisciplinary committee
responsible for the review and approval of new specifications and changes to
existing specifications as they relate to Product or Process.
STABILITY REVIEW GROUP (SRG) means a Cubist multidisciplinary committee
responsible for the review and approval of new stability protocols and changes
to existing stability protocols as they relate to Product. In addition it is
responsible for the routine review of stability data and evaluation of any
trends that are noted.
USD means United States Dollars.
VIALED DRUG PRODUCT means Product that has been filled into single dosage vials,
lyophilized, and released according to Cubist's secondary manufacturing process
specifications.
2. CONSTRUCTION OF PRODUCTION FACILITY IN ANAGNI
2.1 FACILITY CONSTRUCTION AND TIMETABLE
By [ * ] (the FACILITY COMPLETION TARGET DATE), ACSD will [ * ] and make [ * ]
in accordance with current Good Manufacturing Practices. ACSD's obligations
hereunder include, but are not limited to:
(a) construction of [ * ] to perform the Process in a dedicated
Facility;
(b) provision of [ * ] of Product;
(c) the installation of all [ * ] and [ * ]; and
(d) obtaining approval from the [ * ].
Subject to adjustment in accordance with Section 2.2, ACSD will make its best
efforts to complete all activities and to meet all dates set forth in this
Agreement. The performance of [ * ] of the Facility is expected no later than
[ * ] with all data and reports [ * ] by [ * ]. The target date for [ * ] for
the ACSD facility (the FACILITY APPROVAL TARGET DATE) is [ * ].
* Confidential Treatment Requested. Omitted portions filed with the Commission.
Page 4 of 37
<Page>
2.2 DATE ADJUSTMENTS
Cubist and ACSD each agree to perform the tasks assigned to each in this
Agreement. Each party acknowledges that delays in performance by either party
may cause delays in performance by the other party. If [ * ] fails to meet its
obligations under this Agreement in a timely manner so as to cause a [ * ] delay
in [ * ] performance, all dependent dates shall be adjusted day-for-day to
account for the delay caused by [ * ]. If [ * ] failure is due to additional
written requirements from [ * ], then such dates may be adjusted by mutual
written agreement.
2.3 INSPECTION
Cubist will have the right to observe and inspect the progress of work at the
Facility at all reasonable times, both during the construction process and at
any time thereafter, and to confer with ACSD regarding compliance with the dates
set forth in Section 2.1 above, Product Specifications, In-Process
Specifications, cGMP, and other legal, regulatory or contractual requirements.
2.4 CHANGE PROCEDURES
(a) ACSD will notify and consult with Cubist immediately concerning
any potential delay in completion or validation of the Facility.
ACSD acknowledges that time is of the essence for this Agreement,
and that significant delays in the completion of the Facility may
cause Cubist material harm. Cubist and ACSD will, from time to
time during the construction process, confer regarding the
quality standards for materials and layout of operations within
the Facility. [ * ]. Cubist may request amendments to the
building, equipment, or Process to:
(i) effect [ * ] in the Facility,
(ii) to [ * ], or
(iii) to accommodate [ * ].
(b) If Cubist wishes to make a change it shall notify ACSD of the
requested change in writing, specifying the change with
sufficient details to [ * ] (each, a CHANGE ORDER REQUEST).
Within [ * ] business days following the date of ACSD's receipt
of a Change Order Request, ACSD shall deliver a document that:
(i) assesses the impact of the change on the total cost of the
Timetable and Facility Construction Plan, and
(ii) incorporates a description of the requested change and its
proposed cost (a CHANGE ORDER).
If Cubist accepts the Change Order in writing, then the
provisions of this Agreement shall be deemed amended to
incorporate such Change Order. The cost stated in the Change
Order shall be deemed an adjustment to the charges specified in
this Agreement.
It is the expectation of both parties that the dates and
milestones set forth in this Agreement has been defined broadly
enough to accomplish both parties' goals and that no Change
Orders will be required.
2.5 ACSD CAPITAL INVESTMENT
Subject to Section 4 below, the [ * ]. Any increases in capital expenditures
required by Cubist will be specified in writing and will be [ * ].
* Confidential Treatment Requested. Omitted portions filed with the Commission.
Page 5 of 37
<Page>
3. PRODUCTION
3.1 MANUFACTURING QUALITY
ACSD shall manufacture Product for Cubist in accordance with Exhibit D of this
Agreement and under Current Good Manufacturing Practices (cGMPs) as required by
the FDA and set forth in Title 21 Code of Federal Regulations Parts 210 and 211
(section.section.210.1-211.204 et. seq.), with particular emphasis on 211.22,
211.25 and 211.28 or the equivalents thereto pertaining to the responsibilities
of a quality unit, personnel qualifications and personnel responsibilities
respectively.
According to the provisions of Exhibit D, ACSD will develop a cGMP-compliant
quality unit at the Facility. This quality unit will follow and implement
policies and procedures mutually authorized by ACSD and Cubist. Compliance with
this Agreement is dependent upon, among other factors, ACSD hiring or training a
full-time senior level quality manager reasonably acceptable to Cubist dedicated
to, and located at, the Facility, to establish and lead the cGMP-compliant
quality unit.
ACSD will develop a cGMP compliant quality control test laboratory for the
testing and release of Product.
3.2 PROCESS VALIDATION
ACSD will develop and complete a validation process at the Facility in
accordance with Exhibit D herein, and [ * ]. Validation parameters and limits
for the process must span the actual process parameters and limits developed and
documented during the manufacture of consistency batches at commercial scale.
All post-validation process changes [ * ]. Cubist will provide test method
validation reports and small-scale purification validation studies as such
reports become available. ACSD will provide Cubist with a master validation plan
for the Facility and Process.
3.3 PROCESS IMPROVEMENTS
Following Facility Approval, ACSD may continue operating [ * ] with the [ * ].
Development undertaken for the purpose of [ * ] will be [ * ]. ACSD will [ * ].
All modifications in raw materials, conditions or processing related to the
manufacture of Product will be implemented [ * ]. The [ * ] following a
successful and complete cGMP change control process outlined in the [ * ].
3.4 STABILITY PROGRAM BATCHES
ACSD will supply Cubist with samples from the first [ * ] validation batches of
Product to be placed on stability as defined by Cubist's approved stability
protocols. In addition, ACSD will supply Cubist with samples from a minimum of
[ * ] commercial batch per year. Cubist will be responsible for conducting all
stability testing. ACSD agrees to ship stability samples under defined storage
conditions to either Cubist or a site designated by Cubist.
4. CUBIST INVESTMENT
According to the provisions of this Section 4, Cubist will contribute to ACSD
[ * ] in equity, milestones, Product Price Premiums, resin investment, process
development, quality systems and facility qualification support as specified
below.
4.1 EQUITY CONTRIBUTION
Within [ * ] days of execution of this Agreement Cubist will transfer to ACSD
[ * ] with an aggregate value of [ * ]. This equity contribution will comply
with terms and conditions specified in Exhibit E.
* Confidential Treatment Requested. Omitted portions filed with the Commission.
Page 6 of 37
<Page>
4.2 MILESTONES
cubist will pay to ACSD:
- [ * ] upon [ * ] and [ * ]; and
- [ * ] upon [ * ].
4.3 PRODUCT PRICE PREMIUMS
Cubist will pay to ACSD [ * ] through a [ * ] specified in Section 6.2.
4.4 RESIN INVESTMENT
ACSD expects to spend [ * ]. In the event that Product is not approved for
commercial sale by [ * ].
4.5 PROCESS DEVELOPMENT, QUALITY SYSTEMS, FACILITY QUALIFICATION SUPPORT
Cubist will contribute such expertise, training, and support staff and services,
[ * ], as is reasonably necessary to assist ACSD in the [ * ].
5. PURCHASE OF PRODUCT
5.1 PURCHASE COMMITMENT
Contingent upon the receipt of the necessary Product and Facility Approvals,
Cubist will purchase [ * ] of Product during the term of this Agreement. During
the period prior to the receipt of Product Approvals, Cubist may, but is not
obligated to, purchase Product produced using commercial Process in accordance
with Exhibits B, C and D herein. Any such Product purchases [ * ] of Product
that Cubist is required to purchase. Subject to the conditions of this
Agreement, Cubist agrees to make the following yearly purchases:
YEAR PURCHASE [ * ](KG)
---- ------------------
[ * ] [ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ]
The above schedule will be extended for any delays caused by ACSD.
5.2 DELAY IN PURCHASES / PAYMENT OF PRODUCT PRICE PREMIUMS
In the event that Facility Approval is received, but Cubist does not choose to
purchase [ * ], Cubist may defer the purchase and the payment for Product until
the following year, [ * ].
* Confidential Treatment Requested. Omitted portions filed with the Commission.
Page 7 of 37
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Any delays caused by ACSD (including, but not limited to delays in construction,
validation, qualification, documentation, regulatory approvals and other ACSD
activities under this Agreement) will extend the Cubist purchase commitment
schedule, as described in Section 5.1 herein, on a day for day basis to account
for such ACSD delays.
5.3 PURCHASE FORECASTS
During the term of this Agreement, Cubist shall provide to ACSD, within the
first [ * ] business days of each quarter, on a quarterly basis, a rolling
forecast for orders of Product with respect to the following [ * ] quarters
(PURCHASE FORECAST). Cubist shall be [ * ] of the amount of Product forecast for
the [ * ] of any Purchase Forecast, and shall execute a binding purchase order
to that effect. The forecast for the remaining [ * ] of any Purchase Forecast
shall be non-binding.
5.4 PRODUCT ORDERS
Orders for Product shall be placed by written purchase order and submitted by
mail or facsimile, or by other means agreed upon by the parties. Due to the
expected variance in Product yield, an exact purchase amount may not be possible
and the Cubist purchase orders will accordingly include a [ * ]. Amounts in
excess of the stated [ * ]. No order shall be binding upon ACSD until it has
been accepted by ACSD in writing. ACSD shall accept or reject all orders within
[ * ] days following receipt of same and shall deliver all orders that are
accepted within [ * ] days of the projected delivery date.
5.5 CHANGED PURCHASE ORDERS
In the event that Cubist cancels, reschedules or otherwise reduces a purchase
order less than [ * ] days in advance of the scheduled batch initiation, Cubist
shall [ * ] of the price of the Product that [ * ]. Cubist may not [ * ] less
than [ * ] days in [ * ]. Cubist may [ * ] days in [ * ].
5.6 OBLIGATION TO SUPPLY
(a) ACSD shall use best efforts to accept and fill each order for
Product submitted by Cubist including orders that exceed the
Purchase Forecast by [ * ], provided that such request is
delivered to ACSD [ * ] days prior to [ * ]. ACSD shall not be in
breach of this Section 5.6 if ACSD's failure to supply Product is
due to a Force Majeure event or if ACSD's failure is limited to
[ * ]. Delivery dates will be set independently from Product
release and invoice dates as described in Section 5.7;
(b) If ACSD is unable to supply the Product ordered by Cubist in
accordance with the terms of this Agreement, then ACSD shall
[ * ], and any such [ * ]. If ACSD is unable to [ * ] days after
its initial failure to supply, then ACSD shall consult with
Cubist and the parties shall work together to remedy the problem.
In such an event, Cubist may, at its option, and upon notice to
ACSD:
(i) [ * ] and/or
* Confidential Treatment Requested. Omitted portions filed with the Commission.
Page 8 of 37
<Page>
(ii) in the event that the parties agree that Cubist will
[ * ];
(c) In order to minimize adverse consequences from any interruption
in ACSD's ability to supply Cubist with Product, ACSD shall
maintain a back-up supply of raw materials sufficient to support
Cubist's forecasted production needs for a period of [ * ] months
following any failure of ACSD to timely supply Cubist with
Product. The costs of purchasing and maintaining this back-up
supply of raw materials will be borne by [* ]. Upon removal of
any units of raw materials from the back-up supply, [ * ], in
accordance with cGMP First-To-Expire-First-Out rules, so that an
adequate back-up supply is maintained at all times. The parties
shall confer [ * ] to review their aggregate requirements for raw
material and will adjust the size of the back-up supply of raw
materials in order to maintain at least [ * ] month supply of raw
material [ * ] shall also increase the size of the back-up supply
from time to time as warranted by commercially prudent risk
management practices.
5.7 PRODUCT WAREHOUSING AND PAYMENT SCHEDULE
Storage of Product after release by ACSD will be the responsibility of [ * ] for
a quantity amounting to the greater of [ * ] supply or [ * ] of Product as
[ * ]. Delivery of Product to finish/fill organizations will be scheduled and
mutually agreed upon by Cubist and ACSD. Cubist will be invoiced at the time
[ * ]. The payment for released Product that is warehoused at ACSD or contract
freezer warehouse facilities will follow promptly behind the invoicing of
material that is ready for shipment provided that a Certificate of Analysis is
sent to Cubist, and such Certificate of Analysis is reviewed and accepted by
Cubist. In addition, a batch payment becomes due upon review and approval of the
Batch Record and batch Certificate of Analysis by Cubist.
5.8 THIRD PARTY SUPPLY
If Cubist notifies ACSD that Cubist will obtain the Product through a third
party [ * ] then Cubist may purchase Product from a [ * ]. Cubist may continue
to exercise [ * ] and substantiates such claim to Cubist's reasonable
satisfaction. [ * ], Cubist shall commence purchasing Product from ACSD,
provided that:
(a) Cubist shall [ * ] and
(b) ACSD shall [ * ].
6.0 TERMS OF SALE
6.1 PRODUCT PRICE
(a) Subject to the provisions of Sections 5, 6 and 7, Cubist will
purchase Product from ACSD at a price of [ * ].
(b) Subject to [ * ], Cubist and ACSD agree to re-evaluate the
cost structure of Product manufacturing [ * ] days after the
[ * ] anniversary of the Facility Approval, and to negotiate in
good faith an appropriate adjustment to the price of the
Product specified in Section 6.1 (a).
* Confidential Treatment Requested. Omitted portions filed with the Commission.
Page 9 of 37
<Page>
6.2 PRODUCT PRICE PREMIUMS
Cubist will pay ACSD a [ * ] on the price of Product (PRODUCT PRICE PREMIUM)
purchased over [ * ]. Once the [ * ] have accrued to [ * ], Cubist will
immediately stop paying the Product Price Premiums and will pay [ * ] of
Product, as provided in Section 6.1 herein.
YEAR PURCHASE [ * ] PRODUCT PRICE PREMIUM
---- ------------- ---------------------
[ * ] [ * ] $[ * ]
[ * ] [ * ] $[ * ]
[ * ] [ * ] $[ * ]
[ * ] [ * ] $[ * ]
[ * ] [ * ] $[ * ]
[ * ] [ * ] $[ * ]
$[ * ]
The above schedule [ * ]. In the event that Cubist [ * ]. Any delays caused by
ACSD (including, but not limited, to delays in construction, validation,
qualification, documentation and other ACSD activities under this Agreement)
will extend Cubist's obligation to pay the Product Price Premiums.
6.3 PAYMENT
(a) Cubist shall pay for Product within [ * ] days after the date of
receipt by Cubist of ACSD's invoice, Certificate of Analysis,
Batch Records, and Manufacturing Compliance Reports as required
by Exhibit D with respect to such Product. [ * ], all taxes and
charges that may be imposed by any government taxing authority on
the amounts paid by [ * ]. In the event and to the extent that
[ * ], Cubist may [ * ].
(b) Cubist shall make payments required under this Section 6.3 by
wire transfer to a bank identified by ACSD in writing. All
payments shall be calculated, invoiced, stated and paid in United
States Dollars (USD).
6.4 SHIPPING
ACSD shall arrange for shipment of the Product ordered by Cubist via common
carrier of Cubist's choice, [ * ] to the port of entry specified by Cubist.
[ * ] shall pay all shipping, insurance, customs, duties and other governmental
charges relating to the importation and sale of the Product, if any, and shall
have all responsibility for storing and clearing the Product through all customs
and importation requirements. ACSD acknowledges that validation of shipping
procedures by Cubist will require ACSD to prepare shipments that comply with
validation parameters, comply with cGMP regulations related to shipping and
conform to relevant SOPs.
* Confidential Treatment Requested. Omitted portions filed with the Commission.
Page 10 of 37
<Page>
6.5 QUALITY, DOCUMENTATION, FACILITY EXPECTATION AND ACCEPTANCE
(a) Each shipment of Product from ACSD shall contain Certificates of
Analysis for the Product being shipped as are necessary to show
that the Product is in conformity with the Product Specifications
and Product Approval. Cubist shall have reviewed and approved
Batch Records and quality control records for all Products to be
shipped prior to shipment. Cubist shall notify ACSD within [ * ]
days of the receipt of a shipment of the Product of any apparent
non-conformity of the Product to the Product Specifications;
provided that with respect to obvious nonconformities, Cubist
will promptly notify ACSD in order that ACSD may notify its
shipper and insurer. If Cubist fails to so notify ACSD, it will
be deemed to have accepted the Product; provided that ACSD's
obligations under Sections 10.2 and 11.1 herein shall survive
acceptance of the Product by Cubist. [ * ].
(b) Cubist shall not be required to pay ACSD for any Product which
has been properly rejected or for which unresolved Deviations
remain. [ * ]. Samples of all defective units of the Product
shall be returned to ACSD using the procedure specified in this
Section 6.5(b). Cubist shall notify ACSD in writing of its
rejection of Product under Section 6.5(a), and shall request a
Return Material Authorization (RMA) number, which ACSD shall
issue promptly. Within [ * ] days of receipt of such RMA number
Cubist shall return rejected Product to ACSD freight prepaid and
properly insured, along with a reasonably detailed statement of
the claimed defect and proof of date of purchase. In the event
ACSD determines that the returned Product is defective and
Product has been properly rejected by Cubist, ACSD shall replace
such defective Product free of charge. ACSD shall return to
Cubist, freight prepaid, all replaced Product, along with
reimbursement of the shipment charges for return of the
nonconforming Product if ACSD requires said nonconforming Product
to be returned. In the event, that ACSD determines that the
returned Product is not defective and the parties are unable to
resolve such dispute to their mutua