CUBIST PHARMACEUTICALS INC
S-1/A, 1996-07-31
PHARMACEUTICAL PREPARATIONS
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<PAGE>

 
     
  AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1996     
                                                    
                                                 REGISTRATION NO. 333-6795     
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
                                 
                              PRE-EFFECTIVE     
                                
                             AMENDMENT NO. 1     
                                       
                                    TO     
 
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
                               ----------------
 
                         CUBIST PHARMACEUTICALS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
        DELAWARE                     2834                    22-3192085
     (STATE OR OTHER           (PRIMARY STANDARD          (I.R.S. EMPLOYER
     JURISDICTION OF              INDUSTRIAL             IDENTIFICATION NO.)
    INCORPORATION OR          CLASSIFICATION CODE
      ORGANIZATION)                 NUMBER)
 
                                24 EMILY STREET
                              CAMBRIDGE, MA 02139
                                (617) 576-1999
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                               ----------------
 
                           SCOTT M. ROCKLAGE, PH.D.
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                         CUBIST PHARMACEUTICALS, INC.
                                24 EMILY STREET
                              CAMBRIDGE, MA 02139
                                (617) 576-1999
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
 
                               ----------------
 
                                WITH COPIES TO:
       JUSTIN P. MORREALE, ESQ.                STEVEN D. SINGER, ESQ.
          JULIO E. VEGA, ESQ.                VIRGINIA H. KINGSLEY, ESQ.
       BINGHAM, DANA & GOULD LLP                    HALE AND DORR
          150 FEDERAL STREET                       60 STATE STREET
           BOSTON, MA 02110                       BOSTON, MA 02109
            (617) 951-8000                         (617) 526-6000
       
       
                               ----------------
 
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
  CROSS REFERENCE SHEET BETWEEN ITEMS IN PART I OF FORM S-1 AND THE PROSPECTUS
 
<TABLE>
<CAPTION>
      REGISTRATION STATEMENT
      ITEM NUMBER AND CAPTION                  CAPTION IN PROSPECTUS
      -----------------------                  ---------------------
<S>                                 <C>
 1.Forepart of the Registration
     Statement and Outside Front
     Cover Page of Prospectus...... Outside Front Cover Page of Prospectus
 2.Inside Front and Outside Back
     Cover Pages of Prospectus..... Inside Front and Outside Back Cover Pages
                                     of Prospectus
 3.Summary Information and Risk
     Factors....................... Prospectus Summary; Risk Factors
 4.Use of Proceeds................. Prospectus Summary; Use of Proceeds
 5.Determination of Offering        Outside Front Cover Page of Prospectus;
     Price.........................  Risk Factors; Underwriting
 6.Dilution........................ Risk Factors; Dilution
 7.Selling Security Holders........ Not Applicable
 8.Plan of Distribution............ Outside Front and Inside Front Cover Page
                                     of Prospectus; Underwriting
 9.Description of Securities to be  
     Registered.................... Outside Front Cover Page of Prospectus;
                                     Prospectus Summary; Dividend Policy;
                                     Capitalization; Description of Capital
                                     Stock
10.Interests of Named Experts and
     Counsel....................... Legal Matters; Experts
11.Information with Respect to      
     Registrant....................  Outside Front and Inside Front Cover Pages;
                                     Prospectus Summary; Risk Factors; Dividend
                                     Policy; Capitalization; Selected Financial
                                     Data; Management's Discussion and Analysis
                                     of Financial Condition and Result of
                                     Operations; Business; Management; Certain
                                     Transactions; Principal Stockholders;
                                     Description of Capital Stock; Shares
                                     Eligible for Future Sale; Experts;
                                     Financial Statements
12.Disclosure of Commission
     Position on Indemnification
     for Securities Act
     Liabilities................... Not Applicable
</TABLE>
<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                   
                Subject to Completion, Dated July 31, 1996     
 
PROSPECTUS
 
                                2,500,000 SHARES
 
                                     [LOGO]
 
                          CUBIST PHARMACEUTICALS, INC.
 
                                  COMMON STOCK
 
                                 -------------
 
  All of the 2,500,000 shares of Common Stock offered hereby are being sold by
Cubist Pharmaceuticals, Inc. ("Cubist" or the "Company"). Prior to this
Offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be
between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
Application has been made to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "CBST."
 
  THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 6.
 
                                 -------------
 
 THESE SECURITIES HAVE NOT BEEN APPROVED  OR DISAPPROVED BY THE SECURITIES AND
   EXCHANGE COMMISSION OR ANY OTHER  STATE SECURITIES COMMISSION NOR HAS  THE
    SECURITIES AND  EXCHANGE COMMISSION OR ANY  STATE SECURITIES COMMISSION
      PASSED UPON  THE  ACCURACY  OR  ADEQUACY  OF  THIS  PROSPECTUS.  ANY
       REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   Price to   Underwriting Discounts Proceeds to
                                    Public      and Commissions(1)   Company(2)
- --------------------------------------------------------------------------------
<S>                               <C>         <C>                    <C>
Per Share.......................    $                $                 $
- --------------------------------------------------------------------------------
Total(3)........................  $                 $                $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) For information regarding indemnification of the Underwriters, see
    "Underwriting."
 
(2) Before deducting expenses of the Offering payable by the Company, estimated
    at $600,000.
 
(3) The Company has granted the Underwriters an option, exercisable within 30
    days from the date hereof, to purchase up to 375,000 additional shares of
    Common Stock on the same terms as set forth above, solely to cover over-
    allotments, if any. If such option is exercised in full, the total Price to
    Public will be $   , the Underwriting Discounts and Commissions will be
    $   , and the Proceeds to Company will be $   . See "Underwriting."
 
                                 -------------
 
  The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and to certain other
conditions. It is expected that delivery of the shares of Common Stock will be
made through the offices of UBS Securities LLC, 299 Park Avenue, New York, New
York on or about       , 1996.
 
                                 -------------
 
UBS SECURITIES
 
                  HAMBRECHT & QUIST
 
                                                   PACIFIC GROWTH EQUITIES, INC.
 
    , 1996
<PAGE>

Current antiinfective drugs are           Protein synthesis is a sequential  
categorized  according to the four        process essential to the life of the 
types of essential cell functions         cell whereby amino acids are   
they inhibit:  (i) protein synthesis,     incorporated into proteins.  Cubist 
(ii) cell metabolism, (iii) cell wall     focuses on discovering novel anti-
synthesis and (iv) nucleic acid           infective drugs that inhibit new
synthesis.                                targets essential to protein 
                                          synthesis.  These targets are shown
                       (i) Protein        in the boxes below.
                           Synthesis

                 (ii) Cell                     Ribonuclease P
                      Metabolism

       (iii) Cell Wall                    [PICTURE OF RIBONUCLEASE 
             Synthesis      Ribosomes      P AND tRNA APPEARS HERE] 
                           
(iv) Nucleic Acid       [PICTURE OF        
     Synthesis       CELL AND             Immature             Mature
                  CELL FUNCTION           tRNA                 tRNA
               APPEARS HERE]

           Enzyme
                                                Ribonuclease P (RNase P)
        DNA                                     binds to and cleaves immature
                                                tRNA molecules to produce
                                                mature tRNAs.


mRNA        Synthetase      Amino                    Amidotransferase
                            Acid                             Glutamine

    [PICTURE OF AMINOACYL tRNA                  [PICTURE OF AMIDOTRANSFERASE
    SYNTHETASE CHARGING APPEARS                 MODIFYING GLUTAMATE tRNA
    HERE]                                       APPEARS HERE]   
                        Charged                                        Glutamine
                        tRNA
                                                Certain bacteria lack glutamine
Aminoacyl tRNA synthetase binds to              tRNA synthetase and require
mature tRNA and charges it with a               amidotransferase (AdTase) to
specific amino acid.                            bind to an inappropriately
                                                charged tRNA and modify the 
         EF-Tu                                  amino acid glutamate to 
                                                glutamine.




[PICTURE OF ELONGATION FACTOR                                       Protein
Tu AND CHARGED tRNA APPEARS HERE]                                            
                                                 [PICTURE OF CHARGED tRNA,   
                                                 RIBOSONE,mRNA, AND PROTEIN
Elongation factor EF-Tu binds to                 CHAIN APPEARS HERE]         
charged tRNA and transports it to
the ribosome for protein synthesis.                                 mRNA
                                              Ribosome

                               ----------------
 
  IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.

<PAGE>
 
                               PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus, including the information under "Risk Factors." This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed under "Risk
Factors."
 
                                  THE COMPANY
 
  Cubist Pharmaceuticals, Inc. ("Cubist" or the "Company") is a
biopharmaceutical company engaged in the research, development and
commercialization of novel antiinfective drugs to treat infectious diseases
caused by bacteria and fungi, primarily those resistant to existing
antiinfective drugs. The increasing prevalence of drug-resistant bacterial and
fungal pathogens has led to significantly higher mortality rates from
infectious diseases and currently presents a serious crisis worldwide. Cubist's
strategy for combating antiinfective drug resistance is to identify novel
intracellular targets essential for cell function in bacteria and fungi, such
as proteins, RNA or DNA, which if inhibited by a drug would kill or attenuate
the growth of the pathogen. Cubist selects these targets based on a thorough
understanding of their function, thereby providing a foundation for assay
development and identification of leads for drug discovery.
 
  Cubist believes that its rational, target-based, drug discovery strategy
represents a distinct departure from and offers significant advantages over
traditional drug discovery strategies to counter drug resistance. These
traditional strategies have generally involved (i) whole-cell screening
methodologies which provide only limited knowledge of target function, (ii)
chemical modifications of existing antiinfective drugs, such as penicillin, or
(iii) the combination of existing antiinfective drugs with another agent (an
"antibiotic potentiator") to block drug resistance. For decades, antiinfective
drug discovery research has utilized only a fixed number of targets and
chemical structures, thereby limiting the ability of these approaches to
identify new classes of drugs effective against drug-resistant bacteria and
fungi. Cubist believes that the identification of new drug classes inhibiting
new targets will provide a compelling solution to drug resistance. The Company
has identified over 100 proprietary targets and related assays for the
discovery of new drugs. The Company expects that drugs inhibiting these new
targets will be immediately effective against drug-resistant bacteria and fungi
since these pathogens have not had an opportunity to evolve resistance specific
to these new drugs. Furthermore, Cubist's most advanced drug discovery program
could identify a drug which inhibits more than one essential target for a given
pathogen, which would significantly decrease the rate of emergence of drug
resistance.
 
  The increasing prevalence of and rise in mortality rates from infectious
diseases places additional stress on the already overburdened U.S. health care
system. According to estimates from the U.S. Centers for Disease Control and
Prevention (the "CDC"), infectious diseases ranked as the third leading cause
of death in 1992, with mortality rates increasing by 58% during the period from
1980 to 1992, in contrast to mortality rates due to all causes which decreased
by 3% during this period. Based on CDC estimates, approximately two million
hospital-acquired infections occur each year, causing more than eight million
days of extended hospital stay and resulting in more than $4.5 billion in
additional health care costs each year.
 
  According to 1995 sales data compiled by IMS International, an independent
pharmaceutical research firm, antiinfective drugs generated $26 billion in
sales and constituted the third largest pharmaceutical market worldwide, behind
only gastrointestinal and cardiovascular drugs. The growth of the worldwide
antiinfective drug market from 1994 to 1995 was 13%. Of the 100 best-selling
brand name drugs worldwide, 19 are antiinfective drugs addressing bacterial and
fungal infections. In the United States, sales of antiinfective drugs totaled
over $7 billion in 1995, and brand name antiinfective drugs accounted for 15 of
the leading 100 prescription drugs.
 
  Cubist's initial focus is on the identification and development of
antiinfective drugs to inhibit selected targets involved in the essential
process of protein synthesis. Cubist's programs are based on targets that are
responsible for the: (i) addition or charging of amino acids to tRNA molecules
by enzymes known as aminoacyl-tRNA synthetases (the "Synthetase Program"), (ii)
cleavage of immature tRNA to form mature tRNA prior to its charging with amino
acids by the enzyme ribonuclease P (the "Ribonuclease P Program"), (iii)
modification of the amino acid glutamate to
 
                                       3
<PAGE>
 
glutamine on incorrectly charged tRNAs by the enzyme amidotransferase (the
"Amidotransferase Program") and (iv) transport of amino acid-charged tRNA
molecules to the site of protein synthesis by elongation factors (the
"Elongation Factors Program"). The Company believes that its target-based
programs will enable the development of clinically effective drugs to treat
infectious diseases caused by pathogens such as staphylococci, enterococci,
streptococci and candida. To date, the Company has identified lead candidates
targeting certain aminoacyl-tRNA synthetases, which demonstrate potency and
selectivity and inhibit the growth of bacteria or fungi. Cubist expects to
complete optimization of these lead candidates and select its first drug
candidate for pre-clinical development by the end of 1996. Assuming successful
pre-clinical development, the Company expects to file an Investigational New
Drug ("IND") application by the end of 1997.
 
  A key element of the Company's strategy is to enhance certain of its drug
discovery and development programs and to fund its capital requirements, in
part, by entering into collaborative agreements with major pharmaceutical
companies. To date, the Company has entered into agreements based on certain
targets within the Synthetase Program with Bristol-Myers Squibb Company, Merck
& Co., Inc. and Pfizer Inc. Assuming that these collaborative agreements
continue until their scheduled expirations, and that a separate drug is
successfully developed and commercialized from each of the five research
programs to be conducted pursuant to these agreements, Cubist will be entitled
to receive a total of $98.5 million in research support payments, technology
licensing fees, milestone payments and equity investments. In addition, the
Company will be entitled to receive royalties on worldwide sales of any drug
developed and commercialized from the collaborations.
 
  Bristol-Myers Squibb. Cubist is collaborating with Bristol-Myers Squibb
Company ("Bristol-Myers Squibb") to discover antibacterial, antimycobacterial
and antifungal drug candidates from leads detected in the screening of Bristol-
Myers Squibb's compound library against six of Cubist's aminoacyl-tRNA
synthetase targets. If a separate drug is successfully developed and
commercialized through each of the bacterial, mycobacterial and fungal programs
within this collaboration, Cubist will be entitled to receive a total of $56.5
million in research support payments, technology licensing fees, milestone
payments and other payments from Bristol-Myers Squibb, including an equity
investment of $4.0 million made in June 1996. In addition, the Company will be
entitled to receive royalties on worldwide sales of any drug developed and
commercialized from this collaboration.
 
  Merck. Cubist is collaborating with Merck & Co., Inc. ("Merck") to discover
antibacterial drug candidates from leads detected in the screening of Merck's
compound library against three of Cubist's aminoacyl-tRNA synthetase targets.
If a drug is successfully developed and commercialized through this
collaboration, Cubist will be entitled to receive a total of $20.5 million in
research support payments, technology licensing fees, milestone payments and
other payments from Merck. In addition, the Company will be entitled to receive
royalties on worldwide sales of any drug developed and commercialized from this
collaboration.
 
  Pfizer. Cubist is collaborating with Pfizer Inc ("Pfizer") to discover
antibacterial drug candidates from leads detected in the screening of Pfizer's
compound library against six of Cubist's aminoacyl-tRNA synthetase targets. If
a drug is successfully developed and commercialized through this collaboration,
Cubist will be entitled to receive a total of $21.5 million in research support
payments, technology licensing fees, milestone payments and other payments from
Pfizer, including a $5.0 million equity investment. In addition, the Company
will be entitled to receive royalties on worldwide sales of any drug developed
and commercialized from this collaboration.
 
  Apart from these collaborations, Cubist has retained rights to internally
develop and commercialize certain proprietary products which will enable the
Company either to commercialize certain drug candidates independently, or to
enter into future drug development and commercialization alliances with third
parties at a later stage in the development process.
 
  The Company was incorporated under the laws of the State of Delaware on May
1, 1992. The Company's principal executive offices are located at 24 Emily
Street, Cambridge, Massachusetts 02139, and its telephone number is (617) 576-
1999.
 
                                --------------
 
  Cubist(TM), Cubist Pharmaceuticals(TM) and the Cubist logo are trademarks of
the Company. All other trademarks and trade names referenced in this Prospectus
are the property of their respective owners.
 
                                       4
<PAGE>
 
                                  THE OFFERING
 
<TABLE>   
<S>                                              <C>
Common Stock Offered............................ 2,500,000 shares
Common Stock Outstanding after this Offering.... 8,873,023 shares(1)
Use of Proceeds................................. To fund research and development and working
                                                 capital and for general corporate purposes.
Proposed Nasdaq National Market Symbol.......... CBST
Risk Factors.................................... The Common Stock offered hereby involves a high
                                                 degree of risk. See "Risk Factors."
</TABLE>    
 
                             SUMMARY FINANCIAL DATA
                     (in thousands, except per share data)
 
<TABLE>   
<CAPTION>
                                                                 SIX MONTHS
                                  YEARS ENDED DECEMBER 31,     ENDED JUNE 30,
                                 ----------------------------  ----------------
                                   1993      1994      1995     1995     1996
                                 --------  --------  --------  -------  -------
<S>                              <C>       <C>       <C>       <C>      <C>
STATEMENTS OF OPERATIONS DATA:
Sponsored research revenues....  $    --   $    --   $  1,271  $   100  $ 2,047
Total operating expenses.......     1,716     4,758     6,673    3,414    4,056
Net interest income (expense)..        28       (55)        6      (10)     (64)
                                 --------  --------  --------  -------  -------
Net loss.......................   $(1,688)  $(4,813)  $(5,396) $(3,324) $(2,073)
                                 ========  ========  ========  =======  =======
Pro forma net loss per
 share(2)......................                      $  (0.91)          $ (0.32)
                                                     ========           =======
Pro forma weighted average
 shares used in computing
 pro forma net loss per
 share(2)......................                         5,934             6,485
</TABLE>    
 
<TABLE>   
<CAPTION>
                                                           JUNE 30, 1996
                                                      ------------------------
                                                       ACTUAL   AS ADJUSTED(3)
                                                      --------  --------------
<S>                                                   <C>       <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments............... $  4,732     $ 32,032
Working capital......................................    5,023       32,323
Total assets.........................................   10,355       37,655
Long-term debt and capital lease obligations, less
 current portion.....................................    1,206        1,206
Accumulated deficit..................................  (14,005)     (14,005)
Total stockholders' equity...........................    6,790       34,090
</TABLE>    
- -------
   
(1) Based on the number of shares outstanding as of June 30, 1996. Excludes (i)
    an aggregate of 520,660 shares of Common Stock issuable pursuant to stock
    options outstanding as of June 30, 1996, at a weighted average exercise
    price per share of $1.37 and (ii) 86,619 shares of Common Stock issuable
    pursuant to warrants outstanding as of June 30, 1996, at a weighted average
    exercise price per share of $4.04.     
 
(2) Computed on the basis described in Note B of the Notes to Financial
    Statements.
          
(3) As adjusted to reflect the sale of 2,500,000 shares of Common Stock offered
    hereby and receipt by the Company of the estimated net proceeds therefrom,
    based upon an assumed initial public offering price of $12.00 per share and
    after deducting the underwriting discount and estimated offering expenses
    payable by the Company. See "Use of Proceeds" and "Capitalization."     
 
                                --------------
 
  Unless otherwise indicated, all information in this Prospectus (i) assumes
the Underwriters' over-allotment option is not exercised, (ii) reflects a one-
for-seven reverse stock split of the Common Stock to be effected prior to the
date of this Prospectus, (iii) reflects the conversion upon the closing of this
Offering of all outstanding shares of the Company's Preferred Stock into an
aggregate of 5,366,869 shares of Common Stock and of all outstanding warrants
to purchase shares of Preferred Stock into warrants to purchase 86,619 shares
of Common Stock, (iv) reflects the amendment and restatement of the Company's
Amended and Restated 1993 Stock Option Plan effective upon the closing of this
Offering, (v) reflects the amendment and restatement of the Company's Amended
and Restated By-Laws effective upon the closing of this Offering and (vi)
reflects the amendment of the Company's Restated Certificate of Incorporation
prior to the date of this Prospectus. See "Capitalization," "Description of
Capital Stock" and "Underwriting."
 
                                       5
<PAGE>
 
                                 RISK FACTORS
 
  Prospective investors in the shares offered hereby should carefully consider
the following risk factors, in addition to the other information appearing in
this Prospectus.
 
  Early Stage of Product Development; No Assurance of Successful
Commercialization. Since inception, the Company has generated no revenue from
product sales. The Company's research and development programs are at an early
stage, and the Company does not expect that any drugs resulting from its
research and development efforts, or from the joint efforts of the Company and
its collaborative partners, will be commercially available for a significant
number of years, if at all. The Company is currently in the process of
optimizing lead candidates to select drug candidates for pre-clinical
development; however, to date, the Company has not, independently or with its
collaborative partners, completed the optimization of any lead candidates or
selected any drug candidates. Any future drug candidates developed by the
Company will require significant additional research and development efforts,
including extensive pre-clinical (animal and in vitro data) and clinical
testing and regulatory approval, prior to commercial sale. None of the
Company's potential drug candidates have advanced to any phase of pre-clinical
or clinical trials. There can be no assurance that the Company's approach to
drug discovery, acting independently or with the efforts of any collaborative
partner of the Company, will be effective or will result in the development of
any drug. The Company's potential drug candidates will be subject to the risks
of failure inherent in the development of pharmaceutical products based on new
technologies. These risks include the possibilities that any or all of the
Company's drug candidates will be found to be unsafe, ineffective or toxic or
otherwise fail to meet applicable regulatory standards or receive necessary
regulatory clearances; that these drug candidates, if safe and effective, will
be difficult to develop into commercially viable drugs or to manufacture on a
large scale or will be uneconomical to market; that proprietary rights of
third parties will preclude the Company from marketing such drugs; or that
third parties will market superior or equivalent drugs. The failure to develop
safe, commercially viable drugs would have a material adverse effect on the
Company's business, operating results and financial condition.
 
  Uncertainty Due To Unproven Technology. The Company's drug discovery
approach faces technical issues which have not been resolved and requires the
development of multiple novel technologies to create a successful drug
candidate. While the Company has demonstrated that certain compounds have the
ability to inhibit the activity of certain aminoacyl-tRNA synthetases, the
Company has not proven that this activity can be utilized clinically as a
therapeutic. Furthermore, there can be no assurance that the inhibitory
activity already demonstrated in primary screening will continue to be
encouraging in further screening or drug discovery studies. The Company has
not tested any drug candidates in humans, and there can be no assurance that
there will be clinical benefits associated with any such drug candidates.
Furthermore, there can be no assurance that the Company will successfully
address these technological challenges or others that may arise in the course
of development. Any failure of the Company to anticipate or respond adequately
to technological developments will have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the study of antiinfectives will lead to the discovery and
development of any drug candidates in the future or that the Company will be
able to employ its drug discovery approach successfully.
 
  Dependence on Collaborative Partners and Others. A key element of the
Company's strategy is to enhance certain of its drug discovery and development
programs and to fund its capital requirements, in part, by entering into
collaborative agreements with major pharmaceutical companies. In December
1995, the Company entered into a Research Collaboration Agreement with Pfizer
(the "Pfizer Agreement"), and in June 1996, the Company entered into a
Collaborative Research and License Agreement with Bristol-Myers Squibb (the
"Bristol-Myers Squibb Agreement") and a Collaborative Research and License
Agreement with Merck (the "Merck Agreement" and, together with the Pfizer
Agreement and the Bristol-Myers Squibb Agreement, the "Collaborative
Agreements"). Under the Collaborative Agreements, each of Bristol-Myers
Squibb, Merck and Pfizer is responsible for (i) providing libraries of
compounds for screening against certain of the Company's aminoacyl-tRNA
synthetase targets, (ii) selecting, in collaboration with Cubist, compounds
determined to be leads in the screening for subsequent development, (iii)
conducting preclinical and clinical trials and obtaining required regulatory
approvals of drug candidates, and (iv) manufacturing and
 
                                       6
<PAGE>
 
commercializing resulting drugs. As a result, the Company's receipt of
revenues (whether in the form of continued research funding, drug development
milestones or royalties on sales) under the Collaborative Agreements is
dependent upon the decisions made by and the manufacturing and marketing
resources of its collaborative partners. The Company's collaborative partners
are not obligated to develop or commercialize any drug candidates resulting
from the Collaborative Agreements. The amount and timing of resources
dedicated by the Company's collaborative partners to their respective
collaborations with the Company is not within the Company's control. Moreover,
certain drug candidates discovered by the Company may be viewed by the
Company's collaborative partners as competitive with such partners' drugs or
drug candidates. Accordingly, there can be no assurance that the Company's
collaborative partners will elect to proceed with the development of drug
candidates which the Company believes to be promising or that they will not
pursue their existing or alternative technologies in preference to such drug
candidates. There can be no assurance that the interests of the Company will
continue to coincide with those of its collaborative partners, that some of
the Company's collaborative partners will not develop independently or with
third parties drugs that could compete with drugs of the types contemplated by
the Collaborative Agreements, or that disagreements over rights or technology
or other proprietary interests will not occur.
 
  If any of the Company's collaborative partners breaches or terminates its
agreement with the Company, 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 Agreement may be
delayed, the Company may be required to undertake unforeseen additional
responsibilities or to devote unforeseen additional resources to such
development or commercialization, or such development or commercialization
could be terminated. Any such event could materially adversely affect the
Company's financial condition, intellectual property position and operations.
In addition, there have been a significant number of recent consolidations
among pharmaceutical companies. Such consolidations among the companies with
which the Company is collaborating could result in the diminution or
termination of, or delays in, the development or commercialization of drug
candidates or research programs under one or more of the Collaborative
Agreements.
 
  Additional Financing Requirements; Uncertainty of Available Funding. The
Company will require substantial additional funds for its drug discovery and
development programs, for operating expenses, for pursuing regulatory
clearances, for the development of manufacturing, marketing and sales
capabilities and for prosecuting and defending its intellectual property
rights before it can expect to realize significant revenues from commercial
sales. The Company believes that the net proceeds of this Offering, together
with its existing capital resources, interest income and revenue from the
Collaborative Agreements, will be sufficient to fund its operating expenses
and capital requirements as currently planned through the end of 1998.
However, there can be no assurance that such funds will be sufficient to fund
its operating expenses and capital requirements during such period. The
Company's actual cash requirements may vary materially from those now planned
and will depend upon numerous factors, including the results of the Company's
research and development and collaboration programs, the timing and results of
pre-clinical and clinical trials, the timing and costs of obtaining regulatory
approvals, the level of resources that the Company commits to the development
of manufacturing, marketing and sales capabilities, the ability of the Company
to maintain existing and establish new collaborative agreements with other
companies to provide funding to the Company, the technological advances and
activities of competitors and other factors. Thereafter, the Company will need
to raise substantial additional capital to fund its operations. The Company
intends to seek such additional funding through public or private financing or
collaborative or other arrangements with corporate partners. If additional
funds are raised by issuing equity securities, further dilution to existing
stockholders may result and future investors may be granted rights superior to
those of existing stockholders. There can be no assurance, 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
funds are not available, the Company may be required to delay, reduce the
scope of or eliminate one or more of its research and development programs or
to obtain funds by entering into arrangements with collaborative partners or
others that require the Company to issue additional equity securities or to
relinquish rights to certain technologies or drug candidates that the Company
would not otherwise issue or relinquish in order to continue independent
operations. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
                                       7
<PAGE>
 
   
  History of Losses and Expectation of Future Losses; Uncertainty of Future
Profitability. The Company has incurred a cumulative operating loss of
approximately $14.0 million through June 30, 1996. Losses have resulted
principally from costs incurred in research and development activities related
to the Company's efforts to develop target candidates and from the associated
administrative costs. The Company expects to incur significant additional
operating losses over the next several years and expects cumulative losses to
increase substantially due to expanded research and development efforts, pre-
clinical and clinical trials and development of manufacturing, marketing and
sales capabilities. In the next few years, the Company's revenues may be
limited to research support payments under the Collaborative Agreements and
any amounts received under other research or drug development collaborations
that the Company has established or will establish. There can be no assurance,
however, that the Company will be able to establish any additional
collaborative relationships on terms acceptable to the Company or maintain in
effect the current Collaborative Agreements. The Company's ability to achieve
significant revenue or profitability is dependent on its or its collaborative
partners' ability to successfully complete the development of drug candidates,
to develop and obtain patent protection and regulatory approvals for the drug
candidates and to manufacture and commercialize the resulting drugs. The
Company will not receive revenues or royalties from commercial sales for a
significant number of years, if at all. Failure to receive significant
revenues or achieve profitable operations would impair the Company's ability
to sustain operations. There can be no assurance that the Company will ever
successfully identify, develop, commercialize, patent, manufacture and market
any products, obtain required regulatory approvals or achieve profitability.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."     
 
  Uncertainty of Patents and Proprietary Rights. The Company's success will
depend in part on its ability to obtain U.S. and foreign patent protection for
its drug candidates and processes, preserve its trade secrets and operate
without infringing the proprietary rights of third parties. Because of the
length of time and expense associated with bringing new drug candidates
through the development and regulatory approval process to the marketplace,
the pharmaceutical industry has traditionally placed considerable importance
on obtaining patent and trade secret protection for significant new
technologies, products and processes. There can be no assurance that any
additional patents will issue from any of the patent applications owned by, or
licensed to, the Company. Further, there can be no assurance that any rights
the Company may have under issued patents will provide the Company with
significant protection against competitive products or otherwise be
commercially viable. 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. There is no consistent
policy regarding the breadth of claims allowed in biotechnology patents. The
patent position of a biotechnology firm is highly uncertain and involves
complex legal and factual questions. There can be no assurance that any
existing or future patents issued to, or licensed by, the Company will not
subsequently be challenged, infringed upon, invalidated or circumvented by
others. In addition, patents may have been granted, or may be granted,
covering products or processes that are necessary or useful to the development
of the Company's drug candidates. If the Company's drug candidates or
processes are found to infringe upon the patents, or otherwise impermissibly
utilize the intellectual property of others, the Company's development,
manufacture and sale of such drug candidates could be severely restricted or
prohibited. In such event, the Company may be required to obtain licenses from
third parties to utilize the patents or proprietary rights of others. There
can be no assurance that the Company will be able to obtain such licenses on
acceptable terms, or at all. There has been significant litigation in the
industry regarding patents and other proprietary rights. If the Company
becomes involved in litigation regarding its intellectual property rights or
the intellectual property rights of others, the potential cost of such
litigation and the potential damages that the Company could be required to pay
could be substantial.
 
  In addition to patent protection, the Company relies on trade secrets,
proprietary know-how and technological advances which it seeks to protect, in
part, by confidentiality agreements with its collaborative partners, employees
and consultants. There can be no assurance that these confidentiality
agreements will not be breached, that the Company would have adequate remedies
for any such breach, or that the Company's trade secrets, proprietary know-how
and technological advances will not otherwise become known or be independently
discovered by others. See "Business--Patents and Proprietary Technology."
 
                                       8
<PAGE>
 
  Uncertainty Associated with Pre-clinical and Clinical Testing. Before
obtaining regulatory approvals for the commercial sale of any of the Company's
potential drugs, the drug candidates will be subject to extensive pre-clinical
and clinical trials to demonstrate their safety and efficacy in humans. The
Company is dependent on its collaborative partners to conduct clinical trials
for the drug candidates resulting from the Collaborative Agreements and may
become dependent on other third parties to conduct future clinical trials of
its internally developed drug candidates. The Company has no experience in
conducting pre-clinical or clinical trials, and no pre-clinical or clinical
trials have been commenced with respect to any of the Company's potential drug
candidates or any drug candidate being developed jointly by the Company and
its collaborative partners. Furthermore, there can be no assurance that pre-
clinical or clinical trials of any future drug candidates will demonstrate the
safety and efficacy of such 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 adequately
demonstrate the safety and efficacy of a drug candidate under development
could delay or prevent regulatory approval of the drug candidate and would
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--Government Regulation."
 
  No Assurance of Market Acceptance. There can be no assurance that any drugs
successfully developed by the Company, independently or with its collaborative
partners, if approved for marketing, will achieve market acceptance. The
antiinfective drugs which the Company is attempting to develop will compete
with a number of well-established antiinfective drugs manufactured and
marketed by major pharmaceutical companies. The degree of market acceptance of
any drugs developed by the Company will depend on a number of factors,
including the establishment and demonstration of the clinical efficacy and
safety of the Company's drug candidates, their potential advantage over
existing therapies and reimbursement policies of government and third-party
payors. There is no assurance that physicians, patients or the medical
community in general will accept and utilize any drugs that may be developed
by the Company independently or with its collaborative partners.
 
  Intense Competition. The biotechnology and pharmaceutical industries are
intensely competitive and subject to rapid and significant technological
change. Competitors of the Company in the United States and elsewhere are
numerous and include, among others, major, multinational pharmaceutical and
chemical companies, specialized biotechnology firms and universities and other
research institutions. Many of these competitors employ greater financial and
other resources, including larger research and development staffs and more
effective marketing and manufacturing organizations, than the Company or its
collaborative partners. Acquisitions of competing companies and potential
competitors by large pharmaceutical companies or others could enhance
financial, marketing and other resources available to such competitors. As a
result of academic and government institutions becoming increasingly aware of
the commercial value of their research findings, such institutions are more
likely to enter into exclusive licensing agreements with commercial
enterprises, including competitors of the Company, to market commercial
products. There can be no assurance that the Company's competitors will not
succeed in developing technologies and drugs that are more effective or less
costly than any which are being developed by the Company or which would render
the Company's technology and future drugs obsolete and noncompetitive.
 
  In addition, some of the Company's competitors have greater experience than
the Company in conducting pre-clinical and clinical trials and obtaining U.S.
Food and Drug Administration ("FDA") and other regulatory approvals.
Accordingly, the Company's competitors may succeed in obtaining FDA or other
regulatory approvals for drug candidates more rapidly than the Company.
Companies that complete clinical trials, obtain required regulatory agency
approvals and commence commercial sale of their drugs before their competitors
may achieve a significant competitive advantage, including certain patent and
FDA marketing exclusivity rights that would delay the Company's ability to
market certain products. There can be no assurance that drugs resulting from
the Company's research and development efforts, or from the joint efforts of
the Company and its collaborative partners, will be able to compete
successfully with competitors' existing products or products under development
or that they will obtain regulatory approval in the United States or
elsewhere.
 
                                       9
<PAGE>
 
  Impact of Extensive Government Regulation. The FDA and comparable agencies
in foreign countries impose substantial requirements upon the introduction of
pharmaceutical products through lengthy and detailed pre-clinical, laboratory
and clinical testing procedures, sampling activities and other costly and
time-consuming procedures to establish their safety and efficacy. All of the
Company's drug candidates will require governmental approvals for
commercialization, none of which have been obtained. Pre-clinical and clinical
trials and manufacturing of the Company's drug candidates will be subject to
the rigorous testing and approval processes of 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. There can be no assurance as to
when Cubist, independently or with its collaborative partners, might first
submit an IND for FDA or other regulatory review. Government regulation also
affects the manufacturing and marketing of pharmaceutical products. See
"Business--The Cubist Programs."
 
  The effect of government regulation may be to delay marketing of the
Company's potential drugs for a considerable or indefinite period of time,
impose costly procedural requirements upon the Company's 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 the Company's marketing as well as the
Company's ability to generate significant revenues from commercial sales.
There can be no assurance that FDA or other regulatory approvals for any drug
candidates developed by the Company will be granted on a timely basis or at
all. Moreover, if regulatory approval of a drug candidate is granted, such
approval may impose limitations on the indicated use for which such drug may
be marketed. Even if initial regulatory approvals for the Company's drug
candidates are obtained, the Company, its drugs and its manufacturing
facilities would be subject to continual review and periodic inspection, and
later discovery of previously unknown problems with a drug, manufacturer or
facility may result in restrictions on such drug or manufacturer, including
withdrawal of the drug from the market. The regulatory standards are applied
stringently by the FDA and other regulatory authorities and 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.
 
  The FDA has developed two "fast track" policies for certain new drugs
(including antibiotics), one policy for expedited development and review and
one policy for accelerated approval. The expedited development and review
policy applies to new drug therapies that are intended to treat persons with
life-threatening and severely-debilitating illnesses, especially where no
satisfactory alternative therapy exists. The accelerated approval policy
applies to certain new drugs that are intended to treat persons with serious
or life-threatening illnesses that provide a meaningful therapeutic benefit to
patients over existing treatments. See "Business--Government Regulation."
There can be no assurance that any drug candidate contemplated by the Company
will qualify for the FDA's various fast track or priority approval policies.
Nor can there be any assurance that such policies will remain as currently
implemented by the FDA.
 
  As with many biotechnology and pharmaceutical companies, the Company is
subject to numerous environmental and safety laws and regulations. Any
violation of, and the cost of compliance with, these regulations could
materially adversely affect the Company's business, operating results and
financial condition. The Company is subject to periodic inspections and has
not received notice of any material violations of any environmental or safety
law or regulation. See "Business--Government Regulation."
   
  Dependence on Key Personnel. The Company is highly dependent upon the
efforts of its senior management and scientific team, including its President
and Chief Executive Officer. Although Dr. Rocklage has entered into an
employment agreement with the Company, the terms of the employment agreement
provide that Dr. Rocklage may terminate his employment with the Company at any
time upon thirty days' written notice. None of the Company's other executive
officers or key employees has entered into an employment agreement with the
Company. The loss of the services of one or more of these individuals might
impede the achievement of the Company's development objectives. Because of the
specialized scientific     
 
                                      10
<PAGE>
 
nature of the Company's business, the Company is highly dependent upon its
ability to attract and retain qualified scientific and technical personnel.
There is intense competition among major pharmaceutical and chemical
companies, specialized biotechnology firms and universities and other research
institutions for qualified personnel in the areas of the Company's activities.
There can be no assurance that the Company will be able to continue to attract
and retain the qualified personnel necessary for the development of its
business. Loss of the services of, or failure to recruit, key scientific and
technical personnel could adversely affect the Company's business, operating
results and financial condition. See "Business--Employees" and "Management--
Executive Officers, Key Employees and Directors."
 
  Lack of Manufacturing, Marketing and Sales Capability and Experience. Cubist
has not yet invested in the development of manufacturing, marketing or sales
capabilities. The Company has no experience in, and currently lacks the
facilities and personnel to, manufacture products in accordance with Good
Manufacturing Practices ("GMP") as prescribed by the FDA or to produce an
adequate supply of compounds to meet future requirements for clinical trials.
If the Company is unable to develop or contract for manufacturing capabilities
on acceptable terms, the Company's ability to conduct pre-clinical and
clinical trials with the Company's drug candidates, if any, will be adversely
affected, resulting in delays in the submission of drug candidates for
regulatory approvals and in the initiation of new development programs, which
in turn could materially impair Cubist's competitive position and the
possibility of achieving profitability.
 
  The Company has no experience in marketing drugs. The Company has granted
marketing rights to its collaborative partners with respect to drugs developed
through the Collaborative Agreements. The Company may seek to collaborate with
a third party to market those drugs for which it has retained marketing rights
or may seek to market and sell such drugs directly. If the Company seeks to
collaborate with a third party, there can be no assurance that a collaborative
agreement can be reached on acceptable terms. If the Company seeks to market
and sell such drugs directly, the Company will need to hire additional
personnel skilled in marketing and sales as it develops drugs with commercial
potential. There can be no assurance that the Company will be able to acquire,
or establish third-party relationships to provide, any or all of these
capabilities.
 
  Reimbursement and Drug Pricing Uncertainty. The successful commercialization
of, and the interest of potential collaborative partners to invest in, the
development of the Company's drug candidates will depend substantially on
reimbursement of the costs of the resulting drugs and related treatments at
acceptable levels from government authorities, private health insurers and
other organizations, such as health maintenance organizations ("HMOs"). There
can be no assurance that reimbursement in the United States or elsewhere will
be available for any drugs the Company may develop or, if available, will not
be decreased in the future, or that reimbursement amounts will not reduce the
demand for, or the price of, the Company's drugs, thereby adversely affecting
the Company's business. If reimbursement is not available or is available only
to limited levels, there can be no assurance that the Company will be able to
obtain collaborative partners to manufacture and commercialize its drugs, or
would be able to obtain a sufficient financial return on its own manufacture
and commercialization of any future drugs.
 
  Third-party payors are increasingly challenging the 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,
which can control or significantly influence the purchase of health care
services and products, as well as legislative proposals to reform health care
or reduce government insurance programs, may result in lower prices for
pharmaceutical products. The cost containment measures that health care
providers are instituting, including practice protocols and guidelines and
clinical pathways, and the effect of any health care reform, could materially
adversely affect the Company's ability to sell any of its drugs if
successfully developed and approved. Moreover, the Company is 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 the
Company's business.
 
                                      11
<PAGE>
 
  Potential Product Liability and Availability of Insurance. The Company's
business exposes it to potential liability risks that are inherent in the
testing, manufacturing and marketing of pharmaceutical products. The use of
the Company's drug candidates in clinical trials may expose the Company to
product liability claims and possible adverse publicity. These risks will
expand with respect to the Company's drug candidates, if any, that receive
regulatory approval for commercial sale. Product liability insurance for the
biotechnology industry is generally expensive, if available at all. The
Company does not have product liability insurance but intends to obtain such
coverage if and when its drug candidates are tested in clinical trials.
However, such coverage is becoming increasingly expensive and there can be no
assurance that the Company will be able to obtain insurance coverage at
acceptable costs or in a sufficient amount, if at all, or that a product
liability claim would not adversely affect the Company's business, operating
results or financial condition.
 
  Control by Existing Stockholders. Upon completion of this Offering, the
Company's officers, directors and principal stockholders and their affiliates
will own or control approximately 67% of the Company's outstanding Common
Stock. As a result, these stockholders, acting together, will have the ability
to control most matters requiring approval by the stockholders of the Company,
including the election of the Company's Board of Directors.
 
  No Prior Public Market; Stock Price Volatility. Prior to this Offering there
has been no public market for any of the Company's securities. Accordingly,
there can be no assurance that an active trading market will develop after
this Offering or that the Common Stock offered hereby will not decline below
the initial public offering price. The initial public offering price will be
determined by negotiations between the Company and the Representatives. See
"Underwriting." The market price of the Company's securities is likely to be
highly volatile. Factors such as announcements of technological innovations,
new commercial products, preclinical and clinical trials by the Company or its
competitors, other evidence of the safety or efficacy of products of the
Company or its competitors, governmental regulations and developments, health
care legislation, developments relating to patents or proprietary rights of
the Company or its competitors, including litigation, fluctuations in the
Company's operating results, market conditions for biotechnology stocks in
general and other factors may have a significant effect on the market price of
the Company's Common Stock. There has also been a history of significant
volatility in the market price for shares of other companies in the
biotechnology field.
   
  Possible Adverse Impact of Shares Available for Future Sale.  Sales of
substantial amounts of Common Stock (including shares issued upon the exercise
of outstanding options and warrants) in the public market after this Offering
or the prospect of such sales could adversely affect the market price of the
Common Stock and may have a material adverse effect on the Company's ability
to raise any necessary capital to fund its future operations. Upon completion
of this Offering, the Company will have 8,873,023 shares of Common Stock
outstanding. The 2,500,000 shares offered hereby will be freely tradeable
without restriction or further registration under the Securities Act of 1933,
as amended (the "Securities Act"), except for any shares held by "affiliates"
of the Company within the meaning of the Securities Act which will be subject
to the resale limitations of Rule 144 promulgated under the Securities Act
("Rule 144"). The remaining 6,373,023 shares are "restricted" securities that
may be sold only if registered under the Securities Act, or sold in accordance
with an applicable exemption from registration, such as Rule 144. The
officers, directors, employees and other stockholders, who together hold
6,373,023 shares of Common Stock, and options to purchase an additional
520,660 shares of Common Stock, have agreed not to sell directly or
indirectly, any Common Stock without the prior written consent of UBS
Securities LLC for a period of 180 days from the date of this Prospectus (the
"Lock-up Agreements"). Commencing on the expiration of the Lock-up Agreements,
3,591,482 shares of Common Stock will be eligible for sale in the public
market, subject to compliance with Rule 144. In addition, holders of 5,453,488
shares of Common Stock will be entitled to certain registration rights with
respect to such shares. If such holders, by exercising their registration
rights, cause a large number of shares to be registered and sold in the public
market, such sales could have a material adverse effect on the market price of
the Common Stock. In addition, any demand of such holders to include such
shares in Company-initiated registration statements could have an adverse
effect on the Company's ability to raise needed capital. See "Description of
Capital Stock--Registration Rights" and "Shares Eligible for Future Sale."
    
                                      12
<PAGE>
 
  Potential Anti-Takeover Effect of Certain Charter and By-Law
Provisions. Pursuant to the Company's Restated Certificate of Incorporation,
to be effective upon the closing of this Offering (the "Restated Certificate
of Incorporation"), special meetings of stockholders may be called only by the
Chairman of the Board, the President or a majority of the Board of Directors
of the Company. In addition, the Restated Certificate of Incorporation
authorizes the Board of Directors to issue preferred stock and to determine
its rights and preferences in order to eliminate delays associated with a
stockholder vote on specific issuances. The Company has no present plans to
issue any shares of preferred stock. The Restated Certificate of Incorporation
also provides for staggered elections of the Company's Board of Directors and
specific procedures for director nominations by stockholders and submission of
other proposals for consideration at stockholder meetings. These provisions
may have the effect of deterring hostile takeovers or delaying or preventing
changes in control or management of the Company, including transactions in
which stockholders might otherwise receive a premium for their shares over
then-current market prices. Certain provisions of Delaware law applicable to
the Company could also delay or make more difficult a merger, tender offer or
proxy contest involving the Company, including Section 203 of the Delaware
General Corporation Law (the "DGCL"), which prohibits a Delaware corporation
from engaging in any business combination with any stockholder owning 15% or
more of Company's outstanding voting stock ("interested stockholder") for a
period of three years from the date a stockholder becomes an interested
stockholder unless certain conditions are met. These provisions could also
limit the price that investors might be willing to pay in the future for
shares of Common Stock. See "Description of Capital Stock--Delaware Law and
Certain Charter and By-Law Provisions."
   
  Dilution. The initial public offering price is substantially higher than the
net tangible book value per share of the currently outstanding Common Stock.
Investors purchasing shares of Common Stock in this Offering will therefore
suffer immediate dilution in net tangible book value of $8.16 per share. The
dilution will be increased to the extent that the holders of outstanding
options or warrants to purchase Common Stock at prices below the initial
public offering price exercise such options or warrants. See "Dilution."     
 
  Absence of Dividends. The Company has never declared or paid cash dividends
and does not intend to declare or pay any cash dividends in the foreseeable
future. See "Dividend Policy."
 
                                      13
<PAGE>
 
                                USE OF PROCEEDS
 
  The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby are estimated to be approximately $27,300,000
($31,485,000 if the Underwriters' over-allotment option is exercised in full),
based on an assumed initial public offering price of $12.00 per share and
after deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company.
 
  The Company intends to use the net proceeds for research and development,
working capital and general corporate purposes. The Company may also use a
portion of the net proceeds to acquire or license products or technologies
complementary to the Company's business, although the Company has no
agreements or commitments for any such acquisition or license. Pending such
use, the Company intends to invest the net proceeds in interest-bearing,
investment-grade securities.
 
  The Company believes that the net proceeds of this Offering, together with
its existing capital resources, interest income and revenue from the
Collaborative Agreements, will be sufficient to fund its operating expenses
and capital requirements as currently planned through the end of 1998.
However, there can be no assurance that such funds will be sufficient to fund
its operating expenses and capital requirements during such period. The
Company's actual cash requirements may vary materially from those now planned
and will depend upon numerous factors, including the results of the Company's
research and development and collaboration programs, the timing and results of
pre-clinical and clinical trials, the timing and costs of obtaining regulatory
approvals, the level of resources that the Company commits to the development
of manufacturing, marketing and sales capabilities, the ability of the Company
to maintain existing and establish new collaborative arrangements with other
companies to provide funding to the Company, the technological advances and
activities of competitors, and other factors. See "Risk Factors--Additional
Financing Requirements; Uncertainty of Available Funding."
 
 
                                DIVIDEND POLICY
 
  The Company has not declared or paid any cash dividends on its capital stock
since its inception and does not anticipate paying cash dividends in the
foreseeable future.
 
                                      14
<PAGE>
 
                                CAPITALIZATION
   
  The following table sets forth at June 30, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company, as described in Note 1 below, and (iii) the pro forma capitalization
of the Company as adjusted to reflect the receipt of the estimated proceeds
from the sale of 2,500,000 shares of Common Stock being offered by the Company
hereby after deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company. This table should be
read in conjunction with the Financial Statements of the Company and Notes
thereto included elsewhere in this Prospectus.     
 
<TABLE>   
<CAPTION>
                                                    JUNE 30, 1996
                                      ------------------------------------------
                                                                   PRO FORMA
                                       ACTUAL    PRO FORMA(1)  AS ADJUSTED(1)(2)
                                      --------  -------------- -----------------
                                                (in thousands)
<S>                                   <C>       <C>            <C>
Long-term debt and capital lease ob-
 ligations, less current portion....  $  1,206     $  1,206        $  1,206
Stockholders' equity:
  Preferred Stock, par value $.001
   per share; 43,000,000 shares
   authorized and 37,568,085 shares
   issued and outstanding, actual;
   5,000,000 shares authorized and
   no shares issued and outstanding,
   pro forma and pro forma as
   adjusted.........................        38          --              --
  Common Stock, par value $.001 per
   share; 52,000,000 shares
   authorized and 1,006,154 shares
   issued and outstanding, actual;
   25,000,000 shares authorized, pro
   forma and pro forma as adjusted;
   6,373,023 issued and outstanding,
   pro forma and 8,873,023 shares
   issued and outstanding, pro forma
   as adjusted(3)...................         1            6               9
  Additional paid-in capital........    20,756       20,789          48,086
  Accumulated deficit...............   (14,005)     (14,005)        (14,005)
                                      --------     --------        --------
   Total stockholders' equity.......     6,790        6,790          34,090
                                      --------     --------        --------
   Total capitalization.............  $  7,996     $  7,996        $ 35,296
                                      ========     ========        ========
</TABLE>    
- --------
   
(1) Presented on a pro forma basis to give effect to (i) the conversion upon
    the closing of this Offering of all outstanding shares of the Company's
    Preferred Stock into an aggregate of 5,366,869 shares of Common Stock and
    (ii) the amendment of the Company's Restated Certificate of Incorporation
    prior to the date of this Prospectus.     
 
(2) Adjusted to reflect the sale of 2,500,000 shares of Common Stock offered
    hereby and receipt by the Company of the estimated net proceeds therefrom,
    based upon an assumed initial public offering price of $12.00 per share
    and after deducting the underwriting discount and estimated offering
    expenses payable by the Company. See "Use of Proceeds."
   
(3) Excludes (i) an aggregate of 520,660 shares of Common Stock issuable
    pursuant to stock options outstanding as of June 30, 1996, at a weighted
    average exercise price per share of $1.37, and (ii) 86,619 shares of
    Common Stock issuable pursuant to warrants outstanding as of June 30,
    1996, at a weighted average exercise price per share of $4.04.     
 
                                      15
<PAGE>
 
                                   DILUTION
   
  As of June 30, 1996, the Company had a net tangible book value of
$6,790,000, or $1.07 per share. Net tangible book value per share is
determined by dividing the net tangible book value (tangible assets less
liabilities) of the Company by 6,373,023 shares of Common Stock outstanding at
such date, after giving effect to the conversion upon the closing of this
Offering of all outstanding shares of the Company's Preferred Stock into an
aggregate of 5,366,869 shares of Common Stock. Net tangible book value
dilution per share represents the difference between the amount per share paid
by purchasers of Common Stock in this Offering and the net tangible book value
per share of Common Stock immediately after the completion of this Offering.
Without taking into account any changes in net tangible book value after June
30, 1996 other than as described above and to give effect to the sale by the
Company of the 2,500,000 shares of Common Stock offered hereby and the receipt
by the Company of the estimated net proceeds therefrom, the pro forma net
tangible book value of the Company as of June 30, 1996 would have been $3.84
per share. This represents an immediate increase in the pro forma net tangible
book value of $2.77 per share to existing investors and an immediate dilution
in net tangible book value of $8.16 per share to new investors purchasing
shares of Common Stock in this Offering.     
 
  The following table illustrates this per share dilution:
 
<TABLE>     
   <S>                                                            <C>   <C>
     Assumed initial public offering price per share.............       $12.00
     Pro forma net tangible book value per share as of June 30,
      1996....................................................... $1.07
     Increase per share attributable to this Offering............  2.77
                                                                  -----
     Pro forma net tangible book value per share after this
      Offering...................................................         3.84
                                                                        ------
     Dilution per share to new investors.........................       $ 8.16
                                                                        ======
</TABLE>    
   
  The following table summarizes as of June 30, 1996, the total number of
shares of Common Stock purchased from the Company (adjusted to give effect to
the automatic conversion of all outstanding shares of Preferred Stock into
5,366,869 shares of Common Stock upon the closing of this Offering), the total
consideration paid, and the average price per share paid by existing
stockholders and by new investors:     
 
<TABLE>   
<CAPTION>
                                 SHARES PURCHASED  TOTAL CONSIDERATION  AVERAGE
                                 ----------------- -------------------   PRICE
                                  NUMBER   PERCENT   AMOUNT    PERCENT PER SHARE
                                 --------- ------- ----------- ------- ---------
<S>                              <C>       <C>     <C>         <C>     <C>
Existing stockholders........... 6,373,023   71.8% $21,083,536   41.3%  $ 3.31
New investors................... 2,500,000   28.2   30,000,000   58.7    12.00
                                 ---------  -----  -----------  -----
    Total....................... 8,873,023  100.0% $51,083,536  100.0%
                                 =========  =====  ===========  =====
</TABLE>    
   
  The foregoing table assumes no exercise of outstanding options or warrants
to purchase Common Stock after June 30, 1996. At June 30, 1996, there were
outstanding options granted under the Amended and Restated 1993 Stock Option
Plan (the "Plan"), exercisable for an aggregate of 520,660 shares of Common
Stock at a weighted average exercise price of $1.37 per share. In addition, at
June 30, 1996 there were outstanding warrants to purchase 86,619 shares of
Common Stock at a weighted average exercise price per share of $4.04. The
exercise of these options and warrants would result in further dilution to new
investors. See "Management--Amended and Restated 1993 Stock Option Plan,"
"Certain Transactions" and "Description of Capital Stock--Warrants."     
 
                                      16
<PAGE>
 
                            SELECTED FINANCIAL DATA
   
  The following Selected Financial Data should be read in conjunction with the
Company's Financial Statements and the Notes thereto, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and other
financial information included elsewhere in this Prospectus. The data set
forth below, as of December 31, 1994 and 1995 and for each of the three years
in the period ended December 31, 1995, are derived from the Company's
financial statements which have been audited by Coopers & Lybrand L.L.P.,
independent accountants, and which are included elsewhere in this Prospectus.
The selected financial data as of December 31, 1992 and 1993 and for the
period from inception (May 1, 1992) to December 31, 1992 are derived from and
are qualified by reference to, the Company's financial statements not included
in this Prospectus, all of which have been audited by Coopers & Lybrand
L.L.P., independent accountants. The selected financial data at June 30, 1996
and for the six months ended June 30, 1995 and 1996 are derived from the
Company's unaudited financial statements included elsewhere in this Prospectus
and include, in the opinion of the Company, all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
Company's financial position at that date and results of operations for those
periods. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results for any future period.     
 
<TABLE>   
<CAPTION>
                            PERIOD FROM
                             INCEPTION                                    SIX MONTHS
                           (MAY 1, 1992)   YEARS ENDED DECEMBER 31,     ENDED JUNE 30,
                          TO DECEMBER 31, ----------------------------  ----------------
                               1992         1993      1994      1995     1995     1996
                          --------------- --------  --------  --------  -------  -------
                                    (in thousands, except per share data)
<S>                       <C>             <C>       <C>       <C>       <C>      <C>
STATEMENTS OF OPERATIONS
 DATA:
Sponsored research
 revenues...............       $--        $    --   $    --   $  1,271  $   100  $ 2,047
Operating expenses......
 Research and
  development...........         32          1,169     3,309     4,965    2,595    3,183
 General and
  administrative........          6            547     1,449     1,708      819      873
                               ----       --------  --------  --------  -------  -------
 Total operating
  expenses..............         38          1,716     4,758     6,673    3,414    4,056
                               ----       --------  --------  --------  -------  -------
Interest income.........          3             45       113       239       90       43
Interest expense........        --             (17)     (168)     (233)    (100)    (107)
                               ----       --------  --------  --------  -------  -------
 Net loss...............       $(35)      $ (1,688) $ (4,813) $ (5,396) $(3,324) $(2,073)
                               ====       ========  ========  ========  =======  =======
Pro forma net loss per
 share(1)...............                                      $  (0.91)          $ (0.32)
                                                              ========           =======
Pro forma weighted
 average common and
 common equivalent
 shares outstanding(1)..                                         5,934             6,485
</TABLE>    
 
<TABLE>   
<CAPTION>
                                        DECEMBER 31,
                                  --------------------------  JUNE 30,
                                   1993     1994      1995      1996
                                  -------  -------  --------  --------
                                             (in thousands)
<S>                               <C>      <C>      <C>       <C>       
BALANCE SHEET DATA:
Cash, cash equivalents and
 investments....................  $ 4,457  $ 1,221  $  3,056  $  4,732
Working capital.................    3,937      (92)    3,215     5,023
Total assets....................    7,241    4,250     7,048    10,355
Long-term debt and capital lease
 obligations, less current
 portion........................    1,164    2,032     1,257     1,206
Accumulated deficit.............   (1,723)  (6,536)  (11,932)  (14,005)
Total stockholders' equity......    5,488      823     4,895     6,790
</TABLE>    
- --------
(1) Computed on the basis described in Note B of the Notes to the Financial
    Statements.
       
                                      17
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
 
  The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the related Notes thereto included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements which involve
risk and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in "Risk Factors."
 
OVERVIEW
   
  Since its incorporation on May 1, 1992 and commencement of operations in
February 1993, Cubist has been engaged in the research, development and
commercialization of novel antiinfective drugs to treat infectious diseases
caused by bacteria and fungi, primarily those resistant to existing
antiinfective drugs. To date, the Company has raised over $23.0 million in
funding primarily through the sale of preferred stock. Additionally, the
Company has received several SBIR grants from the National Institutes of
Health. The Company has a limited history of operations and has experienced
significant operating losses since inception. The Company expects to incur
significant additional operating losses over the next several years and
expects cumulative losses to increase substantially due to expanded research
and development efforts, pre-clinical and clinical trials and development of
manufacturing, marketing and sales capabilities.     
 
  A key element of the Company's strategy is to enhance certain of its drug
discovery and development programs and to fund its capital requirements, in
part, by entering into collaborative agreements with major pharmaceutical
companies. To date, the Company has entered into agreements based specifically
on the Synthetase Program with Bristol-Myers Squibb, Merck and Pfizer.
Assuming that the Collaborative Agreements continue until their scheduled
expirations, and that a separate drug is successfully developed and
commercialized from each of the five research programs to be conducted
pursuant to these agreements, Cubist will be entitled to receive a total of
$98.5 million in research support payments, technology licensing fees,
milestone payments and equity investments. In addition, the Company will be
entitled to receive royalties on worldwide sales of any drug developed and
commercialized from the collaborations.
 
RESULTS OF OPERATIONS
   
 Six Months Ended June 30, 1996 and 1995     
   
  Revenues. Total revenues in the six months ended June 30, 1996, were
$2,046,653 compared to $100,000 in the six months ended June 30, 1995. The
Company received $16,666 relating to Bristol-Myers Squibb research funding,
$1,915,000 relating to Merck license fees and research funding, $37,000
relating to Pfizer research funding, and $77,987 relating to revenues from
SBIR grants. In the six months ended June 30, 1995, the Company recognized
$100,000 relating to revenues from SBIR grants.     
          
  Research and Development Expenses. Total research and development expenses
were $3,182,609 in the six months ended June 30, 1996 compared to $2,594,884
in the six months ended June 30, 1995, an increase of $587,725 or 22.6%. The
increase was largely due to increased costs related to additional personnel,
laboratory research supplies and compound purchases to expand the Company's
compound collection.     
   
  General and Administrative Expenses. General and administrative expenses
were $873,586 in the six months ended June 30, 1996 compared to $818,977 in
the six months ended June 30, 1995, an increase of $54,609 or 6.7%. The
increase is primarily due to increased legal expenses related to the three
collaborations in the six months ended June 30, 1996 as compared to the six
months ended June 30, 1995.     
   
  Interest Income and Expense. Interest income was $43,232 in the six months
ended June 30, 1996, compared to $90,312 in the six months ended June 30,
1995, a decrease of $47,080 or 52.1%. The decrease is primarily due to a
decrease in the average cash balance in the six months ended June 30, 1996, as
compared to the six months ended June 30, 1995. Interest expense was $106,903
in the six months ended June 30, 1996 compared to $100,806 in the six months
ended June 30, 1995, an increase of $6,097 or 6.0%.     
       
                                      18
<PAGE>
 
   
  Net Loss. The net loss was $2,073,213 during the six months ended June 30,
1996 and $3,324,355 during the six months ended June 30, 1995, a decrease of
$1,251,142 or 37.6% primarily as a result of the revenues and other items
discussed above.     
 
 Years ended December 31, 1995 and 1994
 
  Revenues. Total revenues in 1995 were $1,271,333. No revenues were received
in 1994. The Company recognized $283,000 relating to three SBIR Phase I grants
awarded during 1995. In addition, sponsored research revenues were recognized
upon the signing of the Pfizer Agreement in December 1995. Revenues included
$500,000 in license fees and $488,000 in research funding.
 
  Research and Development Expenses. Total research and development expenses
were $4,964,876 in 1995 compared to $3,309,161 in 1994, an increase of
$1,655,715 or 50.0%. The increase was largely due to increased costs related
to additional personnel, increased facility-related expenses reflecting the
construction of 6,500 square feet of additional laboratory space and increased
license and collaboration expenses.
 
  General and Administrative Expenses. General and administrative expenses
were $1,708,513 in 1995 compared to $1,448,928 in 1994, an increase of
$259,585 or 17.9%. The increase is primarily due to increased compensation
expenses reflecting a full year of executive compensation and increased patent
application expenses offset by decreased relocation expenses.
 
  Interest Income and Expense. Interest income was $239,030 in 1995 compared
to $113,338 in 1994, an increase of $125,692 or 110.9%. This increase was due
to an increase in the average cash balance from two equity financings during
1995 raising approximately $9,000,000. Interest expense was $232,980 in 1995
compared to $168,284 in 1994, an increase of $64,696 or 38.4%. This increase
was due to additional capital lease obligations entered into during 1995.
 
  Net Loss. The net loss was $5,396,006 during 1995 and $4,813,035 during
1994, an increase of $582,971 or 12.1%. The increase was primarily due to
additional expenses incurred to support the advancement of the Company's
internal research programs. Offsetting these additional expenses were revenues
associated with the Pfizer Agreement and SBIR Phase I grants.
 
 Years ended December 31, 1994 and 1993
 
  Revenues. No revenues were received during these periods.
 
  Research and Development Expenses. Total research and development expenses
were $3,309,161 in 1994 compared to $1,169,168 in 1993, an increase of
$2,139,993 or 183.0%. The increase was largely due to increased costs related
to additional personnel, as well as increased laboratory research supplies
supporting the advancement of the Company's internal research programs.
 
  General and Administrative Expenses. General and administrative expenses
were $1,448,928 in 1994 compared to $546,843 in 1993, an increase of $902,085
or 165.0%. The increase is primarily due to increased compensation and
recruiting expenses and legal expenses associated with patent filings.
 
  Interest Income and Expense. Interest income was $113,338 in 1994 compared
to $45,028 in 1993, an increase of $68,310 or 151.7%. This increase was due to
an increase in the average cash balance due to an equity infusion during
August 1993 raising approximately $7,100,000. Interest expense was $168,284 in
1994 compared to $16,911 in 1993, an increase of $151,373 or 895.1%. This
increase was due to capital lease obligations entered into during 1994 and a
full year of interest expense incurred in 1994 for debt entered into by the
Company relating to the facility renovation in September 1993.
 
  Net Loss. The net loss was $4,813,035 during 1994 and $1,687,894 in 1993, an
increase of $3,125,141 or 185.2%. The increase was primarily due to additional
expenses incurred to support the advancement of the Company's internal
research programs.
 
                                      19
<PAGE>
 
       
LIQUIDITY AND CAPITAL RESOURCES
   
  Since inception, the Company has financed its operations through the sale of
equity securities, equipment financing, sponsored research revenues, license
revenues and interest earned on invested capital. The Company's total cash,
cash equivalent and investments balance at June 30, 1996 was $4,732,273
compared to $3,056,124 at December 31, 1995. The Company raised approximately
$8,468,000 in equity financings, $488,000 in sponsored research revenues,
$283,000 in SBIR grants and $500,000 in licensing revenues during 1995.     
 
  Net cash used in operating activities was $6,514,231 in 1995 compared to
$3,753,728 and $1,390,476 in 1994 and 1993, respectively. The cash used in
operations was primarily to fund research and development and for general and
administrative expenses.
   
  The Company has entered into Collaborative Agreements with Bristol-Myers
Squibb, Merck and Pfizer. Assuming that the Collaborative Agreements continue
until their scheduled expirations, and that a separate drug is successfully
developed and commercialized from each of the five research programs to be
conducted pursuant to these agreements, Cubist will be entitled to receive a
total of $98.5 million in research support payments, technology licensing
fees, milestone payments and equity investments. In addition, the Company will
be entitled to receive royalties on worldwide sales of drugs resulting from
these collaborations. Through July 1996, the Company's collaborative partners
have provided the Company with $3.8 million of research support payments and a
technology licensing fee and $4.0 million in equity investments. There can be
no assurance that the Company will receive any additional funding from the
Collaborative Agreements. See "Risk Factors--Dependence on Collaborative
Partners and Others" and "Business--Collaborative Agreements."     
   
  As of June 30, 1996, the Company had invested $4,171,086 in property and
equipment, primarily in facility renovations and laboratory equipment under
capital leases. The present value of obligations under capital leases at June
30, 1996 was $1,266,596. Minimum annual principal payments due under capital
leases total $520,060 in 1996 and 1997. Principal payments decline each year
thereafter until expiration in 1999. The Company made principal payments under
capital lease obligations in 1995 and 1994 of $318,272 and $212,428,
respectively. The Company expects its capital expenditures in 1996 to be
approximately $1,000,000, consisting of $300,000 in leasehold improvements and
$700,000 of laboratory and other equipment purchases.     
   
  The Company believes that the net proceeds of this Offering, together with
its existing capital resources, interest income and revenue from the
Collaborative Agreements, will be sufficient to fund its operating expenses
and capital requirements as currently planned through the end of 1998. These
funding requirements include continued expenditures for research and
development activities, as well as expenditures related to leasehold
improvements and the purchase of additional laboratory and other equipment.
The Company has not entered into any formal commitments to use the proceeds
from the Offering for increased personnel, capital expenditures or any other
purpose. The Company's actual cash requirements may vary materially from those
now planned and will depend upon numerous factors. There can be no assurance
that the net proceeds of this Offering, together with the Company's existing
capital resources, interest income and revenue from the Collaborative
Agreements, will be sufficient to fund the Company's operating expenses and
capital requirements during such period. Thereafter, the Company will need to
raise substantial additional capital to fund its operations. The Company
intends to seek such additional funding through public or private financing or
collaborative or other arrangements with corporate partners. See "Use of
Proceeds" and "Risk Factors--Additional Financing Requirements; Uncertainty of
Available Funding."     
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
  In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of." This standard is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company's
analysis of this new standard indicates that it will not have a material
effect on the Company's financial position or results of operations.
 
                                      20
<PAGE>
 
  In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which encourages companies to recognize compensation expense in
the income statement based on the fair value of the underlying common stock at
the date of the awards are granted. However, it will permit continued
accounting under APB Opinion 25, "Accounting for Stock Issued to Employees,"
accompanied by a disclosure of the pro forma effects on net income and
earnings per share had the new accounting rules been applied. The statement is
effective for fiscal year 1996. The Company has determined that it will elect
the disclosure-only alternative permitted under SFAS No. 123. The Company will
be required to disclose pro forma net income and pro forma earnings per share
in the footnotes using the fair value based method beginning in 1996 with
comparable disclosures for 1995. The Company has not determined the impact of
the pro forma adjustments to its net income or earnings per share.
 
                                      21
<PAGE>
 
                                   BUSINESS
 
THE COMPANY
 
  Cubist Pharmaceuticals, Inc. ("Cubist" or the "Company") is a
biopharmaceutical company engaged in the research, development and
commercialization of novel antiinfective drugs to treat infectious diseases
caused by bacteria and fungi, primarily those resistant to existing
antiinfective drugs. The increasing prevalence of drug-resistant bacterial and
fungal pathogens has led to significantly higher mortality rates from
infectious diseases and currently presents a serious crisis worldwide.
Cubist's strategy for combating antiinfective drug resistance is to identify
novel intracellular targets essential for cell function in bacteria and fungi,
such as proteins, RNA or DNA, which if inhibited by a drug would kill or
attenuate the growth of the pathogen. Cubist selects these targets based on a
thorough understanding of their function, thereby providing a foundation for
assay development and identification of leads for drug discovery.
 
  Cubist believes that its rational, target-based, drug discovery strategy
represents a distinct departure from and offers significant advantages over
traditional drug discovery strategies to counter drug resistance. These
traditional strategies have generally involved (i) whole-cell screening
methodologies which provide only limited knowledge of target function, (ii)
chemical modifications of existing antiinfective drugs, such as penicillin, or
(iii) the combination of existing antiinfective drugs with an antibiotic
potentiator to block drug resistance. For decades, antiinfective drug
discovery research has utilized only a fixed number of targets and chemical
structures thereby limiting the ability of these approaches to identify new
classes of drugs effective against drug-resistant bacteria and fungi. Cubist
believes that the identification of new drug classes inhibiting new targets
will provide a compelling solution to drug resistance. The Company has
identified over 100 proprietary targets and related assays for the discovery
of new drugs. The Company expects that drugs inhibiting these new targets will
be immediately effective against drug-resistant bacteria and fungi since these
pathogens have not had an opportunity to evolve resistance specific to these
new drugs. Furthermore, Cubist's most advanced drug discovery program could
identify a drug which inhibits more than one essential target for a given
pathogen, which would significantly decrease the rate of emergence of drug
resistance.
 
  Cubist's initial focus is on the identification and development of
antiinfective drugs to inhibit selected targets involved in the essential
process of protein synthesis. Cubist's programs are based on targets that are
responsible for the: (i) addition or charging of amino acids to tRNA molecules
by enzymes known as aminoacyl-tRNA synthetases, (ii) cleavage by the enzyme
ribonuclease P of immature tRNA to form mature tRNA prior to its charging with
amino acids by the enzyme ribonuclease P, (iii) modification of the amino acid
glutamate into glutamine on incorrectly charged tRNAs by the enzyme
amidotransferase and (iv) transport of amino acid-charged tRNA molecules to
the site of protein synthesis by elongation factors. The Company believes that
its target-based programs will enable the development of clinically effective
drugs to treat infectious diseases caused by pathogens such as staphylococci,
enterococci, streptococci and candida. To date, the Company has identified
lead candidates targeting certain aminoacyl-tRNA synthetases, which
demonstrate potency and selectivity and inhibit the growth of bacteria or
fungi. Cubist expects to complete optimization of these lead candidates and
select its first drug candidate for pre-clinical development by the end of
1996. Assuming successful pre-clinical development, the Company expects to
file an IND application by the end of 1997.
 
  A key element of the Company's strategy is to enter into collaborations with
major pharmaceutical companies to develop its initial products. These
collaborations are expected to provide the Company with funding, research and
development resources, and access to libraries of diverse compounds and
clinical development, manufacturing and commercialization capabilities. To
date, the Company has entered into collaborative agreements based on certain
targets within the Synthetase Program with Bristol-Myers Squibb, Merck and
Pfizer to screen the collaborators' respective compound libraries against
certain aminoacyl-tRNA synthetase targets. Assuming that the Collaborative
Agreements continue until their scheduled expirations, and that a separate
drug is successfully developed and commercialized from each of the five
research programs
 
                                      22
<PAGE>
 
   
to be conducted pursuant to these agreements, Cubist will be entitled to
receive a total of $98.5 million in research support payments, technology
licensing fees, milestone payments and equity investments. In addition, the
Company will be entitled to receive royalties on worldwide sales of drugs
resulting from these collaborations. Through July 1996, the Company's
collaborative partners have provided the Company with $3.8 million of research
support payments and a technology licensing fee and $4.0 million in equity
investments.     
 
  Apart from these collaborations, Cubist has retained rights to internally
develop and commercialize certain proprietary products which will enable the
Company either to commercialize certain drug candidates independently or to
enter into future drug development and commercialization alliances with third
parties at a later stage in the development process.
 
OVERVIEW OF INFECTIOUS DISEASE AND DRUG RESISTANCE
 
  Infectious diseases are caused by bacteria and fungi present in the
environment that enter the body through the skin or mucous membranes of the
lungs, nasal passages and gastrointestinal tract, and overwhelm the body's
immune system. These pathogens then 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, heart, lung,
liver and urinary tract.
 
  The increasing prevalence of and rise in mortality rates from infectious
diseases places additional stress on the already overburdened U.S. health care
system. According to estimates from the CDC, approximately two million
hospital-acquired infections occur each year, causing more than eight million
days of extended hospital stay and resulting in more than $4.5 billion in
additional health care costs each year. Based on CDC estimates, infectious
diseases ranked as the third leading cause of death in 1992, with mortality
rates increasing by 58% during the period from 1980 to 1992, in contrast to
mortality rates due to all causes which decreased by 3% during this period, as
shown in the following table:
 
           LEADING CAUSES OF MORTALITY BY INFECTIOUS DISEASE (U.S.)
 
<TABLE>
<CAPTION>
                                                NO. OF    MORTALITY
                                               DEATHS IN PER 100,000 % INCREASE
   INFECTIOUS DISEASE                            1992      IN 1992   1980-1992
   -------------------                         --------- ----------- ----------
   <S>                                         <C>       <C>         <C>
   Respiratory tract..........................    77,336     30.3         21 %
   HIV/AIDS(1)................................    33,581     13.2        N/A (2)
   Bloodstream................................    19,667      7.7         83
   Kidney/Urinary tract.......................    12,399      4.9         40
   Heart......................................     3,950      1.5         36
   Gall bladder...............................     2,494      1.0        100
   Fungal.....................................     2,298      0.9        200
   Other......................................    14,322      5.5        N/A (2)
                                               ---------    -----       ----
   All infectious diseases....................   166,047     65.0         58 %
   All deaths................................. 2,175,613    852.0         (3)%
</TABLE>
 
  --------
  (1) Although the HIV virus is known to be the underlying cause of AIDS, the
      majority of patients infected with AIDS die of opportunistic bacterial
      or fungal infections such as pneumonia.
  (2) N/A--data not available.
  Source: Journal of the American Medical Association estimates (1996).
 
                                      23
<PAGE>
 
  Antiinfective drugs have, in many cases, proven highly successful in
controlling the serious morbidity and mortality that accompany these
infections. These drugs work by chemically binding to specific targets in a
bacterial or fungal pathogen, thereby inhibiting a cell function essential to
its survival. Currently available antiinfective drugs can be divided into the
following four broad categories, according to the type of essential cell
function they inhibit: (i) protein synthesis (e.g., tetracyclines, macrolides
and aminoglycosides), (ii) cell wall and membrane synthesis (e.g., penicillins,
cephalosporins, carbapenems, glycopeptides and polyenes), (iii) nucleic acid
synthesis (e.g., fluoroquinolones) and (iv) cell metabolism (e.g.,
trimethoprim, sulfonamides, azoles and allylamines).
 
  Recently, there has been a rise in the incidence of infectious diseases
caused by bacteria and fungi that have developed resistance to existing
antiinfective drugs. This phenomenon has been well documented in medical
literature. A number of serious pathogens such as Staphylococcus aureus,
Streptococcus pneumoniae, Enterococcus faecalis, Enterococcus faecium,
Escherichia coli, Haemophilus influenzae, Pseudomonas aeruginosa, Mycobacterium
tuberculosis, Candida albicans, Aspergillus fumigatus and Aspergillus flavus
have shown significant evidence of drug resistance. The figure below shows the
increase in the incidence of hospital-acquired infections caused by drug-
resistant strains of Staphylococcus aureus and enterococci bacteria as
documented by the CDC, indicating significant and increasing levels of drug
resistance prevalent in these common, often lethal, pathogens.
 
 
 
       [LINE AND BAR CHARTS INDICATING INCIDENCE OF DRUG RESISTANCE IN  
                         HOSPITAL-ACQUIRED INFECTIONS]
 
 
  The increasing prevalence of drug-resistant pathogens has contributed to
higher mortality rates from infectious diseases, particularly those caused by
Staphylococcus aureus and Streptococcus pneumoniae. Staphylococcus aureus is
the most common pathogen to cause blood-borne infections and the most
frequently isolated pathogen in skin and soft tissue infections. Recent data
show that methicillin-resistant strains of Staphylococcus aureus have been
found in approximately 24% of the patient population in U.S. nursing homes.
During the years 1990 to 1993, the mortality rate for individuals with blood-
borne methicillin-resistant Staphylococcus aureus was 42%, as compared to 22%
for individuals infected with methicillin-susceptible strains. Streptoccocus
pneumoniae is the most frequently isolated pathogen in children with otitis
media (middle ear infections) and in adults with sinusitis. In the 1990's,
penicillin-resistant Streptococcus pneumoniae has accounted for 10% to 50%
(depending on geographic location) of all pediatric infections in day care
centers. During the years 1991 to 1994, the mortality rate in patients with
blood-borne strains of vancomycin-resistant enterococci was 57%, as compared to
approximately 35% for individuals infected with vancomycin--susceptible
strains.
 
                                       24
<PAGE>
 
  The increasing prevalence of antiinfective drug resistance is a natural
outcome of the use and overuse of antiinfective drugs. When bacteria or fungi
are exposed to an antiinfective drug, the drug kills or attenuates
the growth of the susceptible pathogen. However, any variant in the bacterial
population that has spontaneously undergone a genetic change that confers drug
resistance will have a selective growth advantage, which is known in
evolutionary terms as natural selection. Thus, the antiinfective drug does not
technically cause the resistance but creates a situation in which the
resistant pathogen can multiply in the presence of the drug, increasing the
population approximately a millionfold in a day and quickly becoming the
predominant microorganism. These resistant bacteria can then spread rapidly
from the infected patient to healthy individuals.
 
  Certain medical practices and sociological factors have facilitated and
accelerated the process of natural selection of drug-resistant bacteria and
fungi and help explain the increase in the rate at which pathogens are
becoming resistant to antiinfective drugs. These practices and factors
include: (i) the use of antibacterial drugs to treat non-bacterial infections,
(ii) the prophylactic use of antiinfective drugs to prevent potential but
unconfirmed infections, (iii) the use of antiinfective drugs active against
multiple pathogens (broad spectrum drugs) to treat an infection before the
specific disease-causing pathogen has been identified, (iv) the lack of
patient compliance with the prescribed course of antiinfective therapy and (v)
long-term antiinfective therapy for patients who are unable to clear
infections due to other conditions such as immunosuppression as a consequence
of organ transplants or cancer chemotherapy, or diseases such as AIDS.
 
  Bacteria and fungi have evolved multiple resistance mechanisms against
currently available categories of antiinfective drugs. These mechanisms
include: (i) utilization of an enzyme to alter the drug's structure by
creating or destroying chemical bonds, (ii) modification of the cell membrane
to block entry of the drug, (iii) utilization of a protein to pump the drug
out of their cells before the drug binds to the target and (iv) alteration of
the target to significantly limit the ability of the antiinfective drug to
bind to the target. Bacteria and fungi change the target by mutation of the
target's protein sequence, chemical modification of the target structure or
the acquisition of a new gene from another pathogen that substitutes for the
target function.
 
  Traditional drug discovery approaches have not met the challenge posed by
drug-resistant pathogens. To date, biology-based approaches have attempted to
identify compounds that kill or attenuate the growth of the pathogen using
whole-cell screening assays. This approach is limited because compounds that
could effectively inhibit a target function inside the cell, but are unable to
penetrate cell membranes, are not identified by whole-cell screening assays.
Thus, entire classes of effective inhibitors of intracellular targets, which
could be modified by medicinal chemistry to penetrate cell membranes, have
potentially been overlooked. Chemistry-based approaches have focused on
chemically modifying the molecular structure of existing antiinfective drugs
or combining existing antiinfective drugs with another agent (an antibiotic
potentiator) to circumvent established drug resistance mechanisms. Despite the
introduction of second and third generation antiinfective drugs, certain
pathogens, such as vancomycin-resistant strains of Enterococcus faecium, have
developed resistance to all currently available drugs. During the past 20
years, these traditional approaches have identified only one new chemical
class of antiinfective drugs to meet the challenge posed by drug-resistant
pathogens.
 
                                      25
<PAGE>
 
THE CUBIST SOLUTION
 
  Cubist is combating antiinfective drug resistance by identifying new targets
in bacteria or fungi which if inhibited by a drug would disrupt an essential
cell function and thereby kill or attenuate the growth of the pathogen,
allowing it to be cleared by the immune system. This rational, target-based
approach represents a distinct departure from traditional strategies to
develop drugs that only counter drug resistance. The Company has identified
over 100 proprietary targets and related assays for the discovery of new
drugs. The Company expects that drugs inhibiting these new targets would be
immediately effective against currently drug-resistant bacteria and fungi
since these pathogens have not had an opportunity to evolve resistance
specific to these new drugs. Furthermore, Cubist's most advanced drug
discovery program could identify a drug which inhibits more than one essential
target for a given pathogen, which would significantly decrease the rate of
emergence of drug resistance.
 
MARKET OPPORTUNITY
 
 Potential Market
 
  According to 1995 sales data compiled by IMS International, antiinfective
drugs generated $26 billion in sales and constituted the third largest
pharmaceutical market worldwide, behind only gastrointestinal and
cardiovascular drugs. The growth of the worldwide antiinfective drug market
from 1994 to 1995 was 13%. Of the 100 best-selling brand name drugs worldwide,
19 are antiinfective drugs addressing bacterial and fungal infections. In the
United States, sales of antiinfective drugs totaled over $7 billion in 1995,
and brand name antiinfective drugs accounted for 15 of the leading 100
prescription drugs.
 
  Antiinfective drugs are segmented into distinctive chemical classes, as
shown in the following table:
 
                         1995 ANTIINFECTIVE DRUG SALES
 
<TABLE>
<CAPTION>
     CHEMICAL CLASS      WORLDWIDE SALES    SELECTED EXAMPLES          INDICATED USE
- ------------------------ --------------- ------------------------ ------------------------
                          ($ millions)
<S>                      <C>             <C>                      <C>
ANTIBACTERIAL
 Beta Lactams
  Cephalosporins........     $8,540      Ceclor, Ceftriaxone,     Bronchitis, pneumonia,
                                         Cefuroxime               meningitis
  Penicillins...........      4,460      Ampicillin, Amoxicillin, Pneumonia, bronchitis,
                                         Amoxicillin/Clavulanate  otitis media, sinusitis
  Carbapenems...........        550      Imipenem                 Bacteremia, pneumonia,
                                                                  abdominal infections
 Fluoroquinolones.......      3,310      Ciprofloxacin, Ofloxacin Urinary tract
                                                                  infections,
                                                                  gastroenteritis,
                                                                  meningitis
 Macrolides.............      3,115      Clarithromycin,          Otitis media, sinusitis,
                                         Azithromycin,            skin and soft tissue
                                         Erythromycin             infections, meningitis
 Tetracyclines..........        743      Minocycline, Doxycycline Acne, pelvic
                                                                  inflammatory disease
 Aminoglycosides........        712      Gentamicin, Amikacin     Pneumonia, bacteremia,
                                                                  abdominal and urinary
                                                                  tract infections
 Glycopeptides..........        533      Vancomycin               Intestinal infections,
                                                                  Staphylococcus aureus
                                                                  infections
 Aminopyrimidines.......        380      Trimethoprim/Sulfonamide Bronchitis, urinary
                                                                  tract infections
ANTIFUNGAL
 Azoles.................      1,430      Fluconazole,             Vaginitis, skin and oral
                                         Itraconazole             infections, systemic
                                         Ketoconazole             infections
 Allylamines............        190      Terbinafine              Vaginitis, skin and oral
                                                                  infections, systemic
                                                                  infections
 Polyenes...............        190      Amphotericin B, Nystatin Meningitis, pneumonia,
                                                                  fungemia
</TABLE>
- --------
Source: IMS International (1996).
 
                                      26
<PAGE>
 
  Currently, several antiinfective drug classes generate over $1 billion in
annual worldwide sales. Within the cephalosporin class alone, there are six
drugs each with worldwide sales of between $300 million and $1.2 billion
annually. In addition, at least three drugs have individually reached
worldwide sales of over $1 billion annually: Augmentin
(amoxicillin/clavulanate) sold by SmithKline Beecham, Cipro (ciprofloxacin)
sold by Bayer Corp. and Rocephin (ceftriaxone) sold by Hoffmann-La Roche Inc.
Each of these drugs replaced previously prescribed drugs (such as penicillin,
tetracycline and erythromycin) whose effectiveness has greatly diminished as a
consequence of bacterial drug resistance. The clinical efficacy of these new
drugs, however, is similarly being threatened by emerging strains of drug-
resistant pathogens.
 
  Cubist is focusing its drug discovery programs on pathogens that have a high
annual incidence rate worldwide and that have become resistant to all but a
few available antiinfective drugs. The CDC has reported that 44% of the two
million hospital-acquired infections in the United States are caused by four
bacteria: staphylococci, enterococci, pneumococci and pseudomonas. The table
below lists the hospital and community-acquired pathogens that are the focus
of Cubist's drug discovery programs, the estimated annual incidence of
infectious disease caused by these pathogens, the types of infectious diseases
caused by these pathogens and the existing drugs to which these pathogens have
developed resistance.
 
                         CUBIST'S THERAPEUTIC TARGETS
 
<TABLE>   
<CAPTION>
                      ESTIMATED                                  EXAMPLES OF
                        ANNUAL                                 DRUGS SUBJECT TO
      PATHOGEN       INCIDENCE(1)    PRINCIPAL DISEASES           RESISTANCE
- -------------------- ------------ ------------------------ ------------------------
<S>                  <C>          <C>                      <C>
BACTERIAL
 Staphylococcus au-   9,000,000   Skin and soft tissue     Methicillin, Beta
  reus..............              infections, bacteremia   Lactams
 Streptococcus        8,000,000   Otitis media, sinusitis, Penicillin, Beta Lactams
  pneumoniae........              pneumonia
 Escherichia coli...  4,800,000   Abdominal infections,    Ampicillin,
                                  urinary tract            Cephalosporins
                                  infections, bacteremia
 Haemophilus          1,000,000   Otitis media,            Ampicillin
  influenzae........              bronchitis, pneumonia
 Enterococcus           850,000   Urinary tract            Vancomycin, Beta Lactams
  faecium/faecalis..              infections, bacteremia
 Helicobacter pylo-     500,000   Gastritis, duodenal      Nitroimidazoles,
  ri................              ulcer                    Macrolides
 Pseudomonas            220,000   Pneumonia                Carbapenems,
  aeruginosa........                                       Aminoglycosides
 Mycobacterium tu-       25,000                            Rifampicin, Isoniazid
  berculosis........              Pneumonia
FUNGAL
 Candida albicans...  7,000,000   Vaginitis, skin          Fluconazole, Azoles
                                  infections, bacteremia,
                                  hepatitis
 Pneumocystis            60,000                            None documented(2)
  carinii...........              Pneumonia
 Aspergillus              8,000                            Azoles
  fumigatis/flavus..              Pneumonia
</TABLE>    
- --------
(1) Cubist's estimate of the incidence in 1995 in the United States.
(2) Limited effective therapies available.
 
                                      27
<PAGE>
 
 Antiinfective Drug Development
 
  The pre-clinical and clinical development path for antiinfective drugs has
been well-established. A novel antiinfective drug has a high likelihood of
efficacy in humans if it has demonstrated (i) appropriate in vitro activity
against a broad spectrum of clinical pathogens, (ii) in vivo activity in
highly-predictive animal models of infection and (iii) effective
pharmacokinetics, such as half-life in the bloodstream.
 
  The FDA has indicated that antibiotic drugs may receive fast track approval
consideration if the antibiotics have been studied for their safety and
effectiveness in treating serious or life-threatening illnesses and the drugs
provide "meaningful therapeutic benefit" to patients over existing treatments
(for example, the ability to treat patients unresponsive to, or intolerant of,
available therapy, or improved patient response over available therapy). See
"Business--Government Regulation."
 
STRATEGY
 
  The Company's objective is to become the worldwide leader in the discovery
and development of novel antiinfective drugs to treat infectious diseases
caused by drug-resistant pathogens. To achieve this objective, the principal
elements of the Company's strategy are to:
 
  Pursue a Rational, Target-Based Approach to Drug Discovery. Cubist's
strategy for combating antiinfective drug resistance is to identify novel,
intracellular targets essential for cell function in bacteria or fungi which,
if inhibited by a drug, would kill or attenuate the growth of the pathogen.
The principal element of Cubist's drug discovery strategy is to rationally
select novel intracellular targets based on a thorough understanding of cell
function, thereby providing a foundation for assay development and lead
identification. Cubist believes that its rational, target-based strategy
represents a distinct departure from and offers significant advantages over
traditional drug discovery strategies to counter drug resistance.
 
  Establish a Pipeline of New Targets to Address Drug Resistance. Cubist
believes that bacterial and fungal pathogens will eventually develop
resistance against any drug by evolving resistance mechanisms that prevent the
drug from binding to and inhibiting the function of its intended target.
Therefore, Cubist's strategy for combating drug-resistant pathogens is to
identify new targets and develop novel drugs that act upon such targets. The
Company has identified over 100 proprietary targets and related assays for the
discovery of drugs. Furthermore, Cubist's most advanced drug discovery program
could identify a drug which inhibits more than one essential target for a
given pathogen, which would significantly decrease the rate of emergence of
drug resistance.
 
  Integrate Multiple Enabling Technologies. The Company's rational, target-
based approach to the discovery of novel drugs to combat drug-resistant
pathogens utilizes multiple enabling technologies, including genomics,
genetics, molecular biology, biochemistry, high-throughput screening,
medicinal and combinatorial chemistry, microbiology, pharmacology and
toxicology. The Company has assembled a team of scientists with expertise in
each of these disciplines and has successfully integrated these enabling
technologies into a drug discovery process involving the following stages:
target identification and validation, assay development, lead identification
and lead optimization. The Company believes that it has the internal
capability to advance a drug candidate through each of these stages.
 
  Establish Collaborative Relationships to Discover New Drugs and Broaden
Technology Base. The Company employs two collaborative strategies for the
discovery of new antiinfective drugs: (i) collaborations with major
pharmaceutical companies to provide the Company with funding, research and
development resources, access to libraries of diverse compounds and clinical
development, manufacturing and commercialization capabilities and
(ii) alliances with biopharmaceutical companies to access additional compound
libraries for the identification and optimization of lead candidates for the
Company's internal programs. The Company has entered into collaborative
agreements based upon the Synthetase Program with Bristol-Myers Squibb,
 
                                      28
<PAGE>
 
THE CUBIST PROGRAMS
 
  Cubist's initial focus is on the identification and development of targets
that are involved in the fundamental process of protein synthesis. This process
involves a sequential order of well-established, enzymatic events that leads to
the incorporation of amino acids into proteins. Antiinfective drugs, such as
tetracyclines and erythromycin, that work by inhibiting protein synthesis at
the ribosome (a cellular component which is the site of incorporation of amino
acids into proteins) have been successfully developed and commercialized. There
are, however, several classes of essential enzyme targets that function
independently of the ribosome during protein synthesis that have not yet been
exploited as effective drug targets. The Company's programs address targets in
the areas of: (i) Synthetases, (ii) Ribonuclease P, (iii) Amidotransferase and
(iv) Elongation Factors. These enzyme targets are essential for the survival of
both bacterial and fungal pathogens. The Company believes that these targets
will enable the development of clinically useful antiinfective drugs against
susceptible and drug-resistant pathogens.
 
  The following table describes the various stages of development of Cubist's
four target-based programs.
 
 
 
                    [GRAPH OF PROGRAM STATUS APPEARS HERE]
 
 The Synthetase Program
 
  Synthetases are enzymes that play a fundamental role in protein synthesis in
all living organisms. In most organisms, there are 20 essential aminoacyl-tRNA
synthetases, one for each amino acid, which charge its specific amino acid to a
transfer RNA molecule ("tRNA") forming an amino acid-charged tRNA. These
charged tRNAs then interact with messenger RNA ("mRNA") at the ribosome to
incorporate the amino acid into the protein being synthesized. Inhibition of
any one of the 20 aminoacyl-tRNA synthetases from any bacterial or fungal
pathogen, at the amino acid or tRNA binding sites, would disrupt protein
production, thereby killing or attenuating the growth of the pathogen. As a
result, large numbers of targets, each with multiple sites of inhibition, are
available to Cubist for drug discovery. Furthermore, Cubist has demonstrated
that the molecular structures of bacterial or fungal synthetases are
sufficiently different from human synthetases to permit a drug to selectively
recognize and inhibit pathogen synthetases.
 
 
                                       29
<PAGE>
 
THE CUBIST PROGRAMS
 
  Cubist's initial focus is on the identification and development of targets
that are involved in the fundamental process of protein synthesis. This
process involves a sequential order of well-established, enzymatic events that
leads to the incorporation of amino acids into proteins. Antiinfective drugs,
such as tetracyclines and erythromycin, that work by inhibiting protein
synthesis at the ribosome (a cellular component which is the site of
incorporation of amino acids into proteins) have been successfully developed
and commercialized. There are, however, several classes of essential enzyme
targets that function independently of the ribosome during protein synthesis
that have not yet been exploited as effective drug targets. The Company's
programs address targets in the areas of: (i) Synthetases, (ii) Ribonuclease
P, (iii) Amidotransferase and (iv) Elongation Factors. These enzyme targets
are essential for the survival of both bacterial and fungal pathogens. The
Company believes that these targets will enable the development of clinically
useful antiinfective drugs against susceptible and drug-resistant pathogens.
 
  The following table describes the various stages of development of Cubist's
four target-based programs.
 
 
 
                    [GRAPH OF PROGRAM STATUS APPEARS HERE]
 
 The Synthetase Program
 
  Synthetases are enzymes that play a fundamental role in protein synthesis in
all living organisms. In most organisms, there are 20 essential aminoacyl-tRNA
synthetases, one for each amino acid, which charge its specific amino acid to
a transfer RNA molecule ("tRNA") forming an amino acid-charged tRNA. These
charged tRNAs then interact with messenger RNA ("mRNA") at the ribosome to
incorporate the amino acid into the protein being synthesized. Inhibition of
any one of the 20 aminoacyl-tRNA synthetases from any bacterial or fungal
pathogen, at the amino acid or tRNA binding sites, would disrupt protein
production, thereby killing or attenuating the growth of the pathogen. As a
result, large numbers of targets, each with multiple sites of inhibition, are
available to Cubist for drug discovery. Furthermore, Cubist has demonstrated
that the molecular structures of bacterial or fungal synthetases are
sufficiently different from human synthetases to permit a drug to selectively
recognize and inhibit pathogen synthetases.
 
 
                                      30
<PAGE>
 
                   INHIBITION OF AMINOACYL - TRNA SYNTHETASE
 
     AMINO ACID                                              INHIBITOR
[PICTURE OF INHIBITOR                                    [PICTURE OF AMINO 
 APPEARS HERE.]       AMINOACYL - TRNA SYNTHETASE       ACID APPEARS HERE.]
 
 
                               CHARGED TRNA
                                  TRNA                         INHIBITED
                                                               SYNTHETASE
                                                      [PICTURE OF AMINO ACID, 
                                                     tRNA AND AMINOACYL-tRNA
                                                      SYNTHESIS APPEARS HERE]
                 
                PROTEIN                  
               SYNTHESIS                 INHIBITION OF PROTEIN
        [PICTURE OF INHIBITOR,                  SYNTHESIS
      tRNA, AND AMINOACYL-tRNA
       SYNTHESIS APPEARS HERE]

            Binding of an amino          Binding of an inhibitor
            acid to the                  to the aminoacyl - tRNA
            aminoacyl - tRNA             synthetase alters the
            synthetase leads to          synthetase structure,
            the formation of             blocks amino acid binding
            charged tRNA and             and prevents the
            protein synthesis            formation of charged
                                         tRNA, thereby inhibiting
                                         protein synthesis
 
  Aminoacyl-tRNA synthetases provide a significant opportunity to combat
bacterial and fungal drug resistance derived from the resistance mechanism of
target alteration, which involves a change to the target's protein sequence,
chemical modification of the target structure or acquisition of a new gene
from another pathogen, substituting for the target function. Because there are
structural and functional similarities among the 20 aminoacyl-tRNA
synthetases, it may be possible to identify a drug that can bind to and
inhibit two similar synthetases, thereby decreasing the rate of emergence of
drug resistance. Thus, a resistance mechanism involving target alteration
would necessitate simultaneous changes in two of the targets. From a
statistical standpoint, the probability of simultaneous alteration of two
targets would be extremely low. Therefore, a single drug active against more
than one aminoacyl-tRNA synthetase would be likely to have the advantage of an
extended therapeutic lifetime by significantly impeding the future emergence
of drug resistance.
 
  Clinical precedent exists for the development of a bacterial aminoacyl-tRNA
synthetase inhibitor. Pseudomonic acid A, commercially marketed as Bactroban,
is an antibacterial drug that is a specific inhibitor of isoleucyl-tRNA
synthetase in several pathogens, including Staphylococcus aureus. The drug can
be used only as a topical agent, however, because it is unstable in the
bloodstream and therefore is not therapeutically effective when administered
systemically. Cubist's goal is to develop systemically-available drugs that
target aminoacyl-tRNA synthetases in either bacteria or fungi.
 
  The Company has developed over 100 proprietary aminoacyl-tRNA synthetase
targets and related assays that are currently being utilized in the discovery
and characterization of leads in its Synthetase Program. These aminoacyl-tRNA
synthetase targets were cloned or purified from Streptococcus pneumoniae,
Staphylococcus aureus, Enterococcus faecalis, Escherichia coli, Haemophilus
influenzae, Mycobacterium tuberculosis and Helicobacter pylori
 
                                      31
<PAGE>
 
bacteria, Candida albicans and Pneumocystis carinii fungi and cultured human
cells. The Company is currently developing assays and pursuing targets in
additional pathogens, such as Pseudomonas aeruginosa and Aspergillus
fumigatus.
 
  In its search for leads, Cubist combines automated, high-throughput
screening of its compound libraries with a rational drug design approach.
Cubist has synthesized molecules that structurally mimic the biochemical
intermediates that are formed during the charging of tRNA by aminoacyl-tRNA
synthetase enzymes. These structural mimics bind to the active site of the
enzyme and preclude the amino acid and other substrates from binding, thereby
inhibiting enzyme function. Using this approach, Cubist has discovered several
proprietary leads that inhibit certain aminoacyl-tRNA synthetases. Leads from
Cubist's rational drug design program as well as those identified through
screening compound libraries are currently being optimized to improve
stability, potency, selectivity, whole cell activity and efficacy in animal
models in an effort to identify clinical development candidates.
 
  The Company has entered into agreements based on certain targets within the
Synthetase Program with Bristol-Myers Squibb, Merck and Pfizer. Under these
collaborations, the small molecule compound libraries of Cubist's
collaborative partners are screened for inhibitors of certain aminoacyl-tRNA
synthetases in enzyme assays developed by the Company. Inhibitors are then
characterized for their spectrum of inhibition against a variety of pathogens
as well as for selectivity and whole cell activity using an additional set of
Cubist's assays. Lead candidates which are selected by the collaborative
partners will then enter into a drug development program where medicinal
chemistry, microbiology and pharmacology studies will be conducted to optimize
the leads into drug candidates. The Company has also retained certain rights
to this technology for use in its internal programs. See "Collaborative
Agreements."
 
  Cubist expects to complete the optimization of a lead from its internal
Synthetase Program efforts to select a drug candidate for pre-clinical
development by the end of 1996. Assuming successful pre-clinical development,
Cubist expects to file an IND by the end of 1997. Assuming successful
development of a drug candidate under one or more of its Collaborative
Agreements, Cubist believes a collaborative partner could file an IND as early
as the end of 1998.
 
 The Ribonuclease P Program
 
  The Company's Ribonuclease P Program focuses on the discovery of
antiinfective drugs that inhibit ribonuclease P ("RNase P"), an essential
target in the process of protein synthesis. All tRNAs are initially
synthesized as immature tRNA molecules which are cleaved to the required
functional size and structure by an essential enzyme, RNase P. Inhibition of
RNase P will thus prevent the maturation of tRNA molecules, an essential step
in protein synthesis, thereby killing or attenuating the growth of the
pathogen.
 
              [PICTURE OF RIBONUCLEASE P AND tRNA APPEARS HERE]
 
 
   RIBONUCLEASE P (RNASE P) BINDS TO AND CLEAVES IMMATURE TRNA MOLECULES TO
                             PRODUCE MATURE TRNAS
 
                                      32
<PAGE>

 
  Because RNase P has both RNA and protein components, each can serve as a
target for inhibition. To date, research has shown that both the bacterial RNA
and protein components of RNase P differ from those found in certain mammals.
The Company believes that the differences between the human and bacterial
RNase P enzymes indicate that the bacterial RNase P can be selectively
inhibited.
 
  Cubist has cloned, sequenced and expressed the genes encoding both the
protein and the RNA components of RNase P from certain bacteria. Recombinant
RNase P enzymes that have demonstrated the ability to cleave immature tRNA
serve as the foundation for biological assays. The Company is currently
developing an automated in vitro enzyme assay feasible for high-throughput
screening to identify inhibitors of bacterial RNase P. The Company expects to
commence high-throughput screening for the identification of inhibitors of
RNase P activity in the first quarter of 1997.
 
 The Amidotransferase Program
 
  The Company's Amidotransferase Program focuses on the discovery of
antiinfective drugs that inhibit glutamine amidotransferase ("AdTase"), an
essential target in the process of protein synthesis. Certain bacteria have
only 19 of the 20 required aminoacyl-tRNA synthetases and lack glutamine-tRNA
synthetase. These bacteria still require all 20 amino acids for protein
synthesis and therefore have developed a two-step process to compensate for
the lack of glutamine aminoacyl-tRNA synthetase. In step one, glutamate-tRNA
synthetase attaches glutamate to both glutamate-tRNA and glutamine-tRNA. In
step two, AdTase modifies the glutamate that is charged to the glutamine-tRNA
into glutamine, the appropriate amino acid. The now correctly charged tRNA can
incorporate the amino acid glutamine into the growing protein chain.
Inhibiting AdTase activity would thus limit the synthesis of all proteins that
require glutamine, thereby killing or attenuating the growth of the pathogen.
Mammalian cells do not need AdTase because they have a glutamine-tRNA
synthetase. Therefore, an inhibitor of AdTase is expected to be inherently
selective for the bacterial enzyme.
 
                                              GLUTAMATE
 
                                                        GLUTAMINE
 
 
 CERTAIN BACTERIA LACK GLUTAMINE TRNA SYNTHETASE AND REQUIRE
 AMIDOTRANSFERASE (ADTASE) TO BINDTO AN INAPPROPRIATELY CHARGED TRNA AND
 MODIFY THE AMINO ACID GLUTAMATE TO GLUTAMINE.
 
  The Company has established that AdTase activity is present in certain
bacteria, including Staphylococcus aureus and Enterococcus faecalis. The
Company has developed an assay to monitor the function of this enzyme. Cubist
is currently adapting this assay for automated, high-throughput screening and
expects to commence such screening for the identification of inhibitors of
AdTase activity in the second half of 1997.
 
                                      33
<PAGE>
 
 The Elongation Factors Program
 
  The Company's Elongation Factors Program focuses on the discovery of
antiinfective drugs that inhibit elongation factors Tu (EF-Tu) and Ts (EF-Ts),
essential protein targets in the process of protein synthesis. EF-Tu
transports amino acid-charged tRNA to the ribosome and also plays a role in
the continuing synthesis of proteins. During this process EF-Tu becomes
inactivated and its reactivation requires a second elongation factor, EF-Ts. A
crystal structure of EF-Tu associated with some of its substrates including
EF-Ts, has been defined. Inhibition of either EF-Tu or EF-Ts activity will
inhibit protein synthesis and kill or attenuate the growth of the pathogen.
The Company believes that based upon identified structural differences between
the bacterial and humans elongation factors, the bacterial enzymes can be
selectively inhibited.
 
    EF-TU
                                                                        PROTEIN
 
                                                        MRNA
 
                                 RIBOSOME
               [PICTURE OF ELONGATION FACTOR TU, CHARGED tRNA,
               RIBOSOME, mRNA, AND PROTEIN CHAIN APPEARS HERE]

    ELONGATION FACTOR EF-TU BINDS TO CHARGED TRNA AND TRANSPORTS IT TO THE
                        RIBOSOME FOR PROTEIN SYNTHESIS.
 
  Cubist has cloned, sequenced and expressed the genes encoding the EF-Tu and
EF-Ts proteins. Cubist is currently developing an assay for automated, high-
throughput screening and expects to commence such screening for the
identification of inhibitors of EF-Tu and EF-Ts activity in the second half of
1997.
 
 Other Target Discovery Programs
 
  The Company is currently utilizing genomic information to develop additional
biological screening assays for drug discovery. Strategically, the Company
will continue to investigate targets involved in protein synthesis and will
broaden its focus to include additional targets outside of this area, for
example, protein-DNA interactions and cell metabolism.
 
 
                                      34
<PAGE>
 
DRUG DISCOVERY TECHNOLOGIES
 
  The Cubist drug discovery process consists of four primary steps as part of
an integrated platform: (i) target identification and validation, (ii) assay
development, (iii) lead identification and (iv) lead optimization.
 
 
            [GRAPH OF CUBIST'S DRUG DISCOVERY PROCESS APPEARS HERE]
 
  TARGET IDENTIFICATION AND VALIDATION--the use of microbial genomics and
functional genetics to identify multiple targets for drug discovery. The
Company uses a rational target selection approach which incorporates microbial
genomics and functional genetics to identify and characterize targets. To be
selected for entry into a drug discovery program, targets must be: (i)
essential for the life of the pathogen, so that inhibition of the target's
natural function will kill or attenuate the growth of the pathogen, (ii)
functionally characterized for assay development prior to high-throughput
screening and (iii) structurally divergent between bacteria or fungi and humans
so that the pathogen target can be selectively inhibited.
 
  Cubist utilizes functional genetics to determine whether a particular target
is essential to the survival of the cell. Pathogen death following the
disruption or deletion of a gene encoding the target conclusively establishes
the essential nature of the target. The prevalence of a particular target among
different species of bacteria and fungi defines its spectrum. Structural
divergence between pathogen and human genes suggests the potential for
identifying compounds with selectivity for the pathogen.
 
  ASSAY DEVELOPMENT--the use of molecular biology, biochemistry and enzymology
to characterize targets and validate high-throughput screening assays. Cubist
has built significant assay development capabilities which are an important
component of its proprietary drug discovery programs. Assay quality is the most
important determinant of any screening program's productivity. Established
molecular biology tools enable Cubist to rapidly clone, sequence, express and
purify multiple targets. Cubist then utilizes enzymology and biochemistry
techniques to functionally characterize targets. By characterizing these
targets, Cubist can develop robust, sensitive high-throughput screening assays.
The Company utilizes these assays to identify inhibitors. Cubist employs
proprietary screens to provide a quantitative description of potency, spectrum
and selectivity. In addition, the Company's enzymology studies identify
reaction mechanisms that provide the basis for rational drug design.
 
  LEAD IDENTIFICATION--the use of high-throughput screening of small molecule
libraries, combinatorial chemistry and rational drug design to identify
potential drug candidates. Cubist has implemented automation and robotics to
perform high-throughput screening to address a critical rate-limiting step in
drug discovery: the large number of assays required to empirically screen
synthetic and natural product compound libraries to identify novel inhibitors.
Cubist has achieved a screening throughput rate of 1.5 million compounds per
year through the implementation of robotics and other enhancement techniques,
such as the simultaneous assay of mixtures of compounds. Novel inhibitors are
further characterized using Cubist's secondary screens consisting of
increasingly stringent selection criteria (such as spectrum and selectivity) to
identify drug candidates with the greatest potential for successful
development.
 
                                       35
<PAGE>
 
  To date, Cubist has assembled a library of over 135,000 structurally-diverse
synthetic small molecules for screening against each of its 100 proprietary
targets. Molecules used in the Cubist screening program currently originate
from four sources: (i) Cubist's proprietary rational design chemistry
programs, (ii) Cubist's proprietary combinatorial chemistry programs, (iii)
academic and industrial collaborations and (iv) commercial sources. Based on
the current rate of growth of the compound collection, the Company estimates
that the number of compounds available for high-throughput screening in its
proprietary programs will more than double during the next year. In addition,
the Company believes that the Collaborative Agreements provide it with access
to additional libraries of over one million structurally diverse molecules for
lead identification.
 
  The Cubist combinatorial chemistry program generates two types of libraries,
general and lead-specific. The general libraries are designed to provide
Cubist with a diversity of molecular structures which can be used in
conjunction with high-throughput screening to identify novel lead compounds
which inhibit selected targets. Cubist constructs lead-specific libraries
based on principles of rational drug design using structural templates
demonstrated to interact with the aminoacyl-tRNA synthetases. Cubist's
proprietary general and lead-specific libraries are being used to identify new
lead inhibitors of the aminoacyl-tRNA synthetases and other enzyme targets.
 
  LEAD OPTIMIZATION--the use of medicinal chemistry, high speed analoging and
pre-clinical evaluation to enhance pharmaceutical properties. Cubist optimizes
lead compounds, which have been identified by its high-throughput screening
and rational drug design approaches, through the iterative use of medicinal
chemistry and in vitro biological assays to enhance pharmaceutical properties.
These lead compounds first enter a high-speed chemical analoging program which
generates large numbers of structurally-related compounds. These analogs are
then evaluated for their (i) spectrum of inhibitory potency against a given
enzyme from a variety of pathogens, (ii) selectivity of the pathogen against
the human enzyme, (iii) inhibitory potency against multiple targets from a
single pathogen to identify a compound that could inhibit more than one target
and (iv) spectrum of activity against whole cells, including drug-resistant
strains, to determine potential clinical indication. Cubist subsequently
evaluates, in animal models, drug candidates exhibiting suitable potency,
spectrum and selectivity to determine their pharmacological and toxicological
properties.
 
COLLABORATIVE AGREEMENTS
   
  A key element of the Company's strategy is to enter into collaborations with
major pharmaceutical companies to develop its initial products. These
collaborations are expected to provide the Company with funding, research and
development resources, and access to libraries of diverse compounds and
clinical development, manufacturing and commercialization capabilities. To
date, the Company has entered into agreements based on certain targets within
the Synthetase Program with Bristol-Myers Squibb, Merck and Pfizer to screen
the collaborators' respective compound libraries against certain aminoacyl-
tRNA synthetase targets. Assuming that the Collaborative Agreements continue
until their scheduled expirations, and that a separate drug is successfully
developed and commercialized from each of the five research programs to be
conducted pursuant to these agreements, Cubist will be entitled to receive a
total of $98.5 million in research support payments, technology licensing
fees, milestone payments and equity investments. In addition, the Company will
be entitled to receive royalties on worldwide sales of drugs resulting from
these collaborations. Through July 1996, the Company's collaborative partners
have provided the Company with $3.8 million of research support payments and a
technology licensing fee and $4.0 million in equity investments.     
 
                                      36
<PAGE>
 
 Bristol-Myers Squibb
 
  In June 1996, the Company and Bristol-Myers Squibb entered into the Bristol-
Myers Squibb Agreement pursuant to which they agreed to collaborate to
discover and develop novel antiinfective drugs from leads obtained by
screening six of Cubist's aminoacyl-tRNA synthetase targets against Bristol-
Myers Squibb's compound library. In connection with the signing of the
Bristol-Myers Squibb Agreement, Bristol-Myers Squibb made a $4.0 million
equity investment in the Company. See "Certain Transactions." If a separate
drug is successfully developed and commercialized through each of the
bacterial, mycobacterial and fungal programs within the collaboration, Cubist
will be entitled to receive a total of $56.5 million in research support
payments, technology licensing fees, milestone payments and other payments
from Bristol-Myers Squibb, including an equity investment of $4.0 million made
in June 1996. The development, manufacture and worldwide sale of drugs
resulting from the collaboration will be conducted by Bristol-Myers Squibb,
and the Company will be entitled to receive royalties on the worldwide sales
of any drug developed and commercialized from this collaboration. Cubist has
granted Bristol-Myers Squibb an exclusive worldwide license to conduct
research and drug development of drug candidates resulting from this
collaboration. There can be no assurance that any drug candidates will be
discovered through the collaboration or that if discovered, Bristol-Myers
Squibb will elect to proceed with the development of any drug candidates.
Under the terms of the Bristol-Myers Squibb Agreement, Bristol-Myers Squibb is
not obligated to develop or commercialize any drug candidates. As a result,
there can be no assurance that any of the milestone or royalty payments
contemplated by the Bristol-Myers Squibb Agreement will be made.
 
 Merck
 
  In June 1996, the Company and Merck entered into the Merck Agreement
pursuant to which they agreed to collaborate to discover and develop novel
antiinfective drugs from leads obtained by screening three of Cubist's
aminoacyl-tRNA synthetase targets against Merck's compound library. If a drug
is successfully developed and commercialized through this collaboration,
Cubist will be entitled to receive $20.5 million in research support payments,
technology licensing fees and milestone payments from Merck. The development,
manufacture and worldwide sale of drugs resulting from the collaboration will
be conducted by Merck, and the Company will be entitled to receive royalties
on the worldwide sales of any drug developed and commercialized from this
collaboration. Cubist has granted Merck an exclusive worldwide license to
commercialize drugs resulting from this collaboration. There can be no
assurance that any drug candidates will be discovered through the
collaboration or that, if discovered, Merck will elect to proceed with the
development of any drug candidates. Under the terms of the Merck Agreement,
Merck is not obligated to develop or commercialize any drug candidates. As a
result, there can be no assurance that any of the milestone or royalty
payments contemplated by the Merck Agreement will be made.
 
 Pfizer
 
  In December 1995, the Company and Pfizer entered into the Pfizer Agreement
pursuant to which they agreed to collaborate to discover and develop novel
antiinfective drugs from leads obtained by screening six of Cubist's
aminoacyl-tRNA synthetase targets against Pfizer's compound library. If a drug
is successfully developed and commercialized through this collaboration,
Cubist will be entitled to receive $21.5 million in research support payments,
technology licensing fees, milestone payments and other payments from Pfizer,
including a $5.0 million equity investment. The development, manufacture and
sale of drugs worldwide resulting from the collaboration will be conducted by
Pfizer, and the Company will be entitled to receive royalties on the worldwide
sales of any drug developed and commercialized from this collaboration. Cubist
has granted Pfizer an exclusive worldwide license to commercialize drugs
resulting from this collaboration. There can be no assurance that any drug
candidates will be discovered during the collaboration or that, if discovered,
Pfizer will elect to proceed with the development of any drug candidates.
Under the terms of the Pfizer Agreement, Pfizer is not obligated to develop or
commercialize any drug candidates. As a result, there can be no assurance that
any of the milestone or royalty payments contemplated by the Pfizer Agreement
will be made.
 
                                      37
<PAGE>
 
  The Company is dependent on its collaborative partners for drug development,
obtaining regulatory approvals and other resources for drug candidates
emerging from these collaborations. See "Risk Factors-- Dependence on
Collaborative Partners and Others" and "Risk Factors--Future Capital Needs;
Uncertainty of Additional Funding."
 
 Other Collaborations
 
  To obtain additional compound libraries for further expansion of the
Company's internal drug discovery programs, Cubist has entered into agreements
with Terrapin Technologies Inc., Pharm-Eco Laboratories, Inc. and ArQule, Inc.
If a drug is successfully developed and commercialized as a result of any of
these agreements, Cubist is granted a license to commercialize the drug and
will pay royalties to its partner on commercial sales. In addition, Cubist has
entered into an agreement with Ceregen, a division of Monsanto Company,
permitting coded access to the Company's combinatorial chemistry library for
screening against certain agricultural targets. If Ceregen successfully
develops and commercializes a product as a result of the agreement, Cubist
will be entitled to royalties on sales.
 
PATENTS AND PROPRIETARY TECHNOLOGY
   
  Proprietary protection for the Company's compounds, technology and processes
is important to its business. The Company's policy is to diligently protect
its cloned targets, assays, organic synthetic processes, lead compounds,
screening technology and certain other technology by, among other things,
filing, or causing to be filed on its behalf, patent applications for
technology relating to the development of its business in the United States
and elsewhere. To date, the Company has received a notice of allowance for one
of these applications covering an isolated recombinant nucleic acid encoding
mycobacterial seryl-tRNA synthetase and processes of making mycobacterial
seryl-tRNA synthetases. Cubist has 8 pending U.S. patent applications. In
addition, Cubist has licensed three U.S. patents and three U.S. patent
applications.     
 
  Patent law, as it relates to inventions in the pharmaceutical and
biotechnology fields, is still evolving and involves complex legal and factual
questions for which legal principles are not firmly established. Moreover,
because (i) patent applications in the United States are maintained in secrecy
until patents issue, (ii) patent applications in certain other countries
generally are not published until more than eighteen months after they are
filed, (iii) publication of technological developments in the scientific or
patent literature often lags behind the date of such developments and (iv)
searches of prior art may not reveal all relevant prior inventions, the
Company cannot be certain that it was the first to invent the subject matter
covered by its patent applications or that it was the first to file patent
applications for such inventions. Accordingly, there can be no assurance that
patents will be granted with respect to any of the Company's pending patent
applications or with respect to any patent applications filed by the Company
in the future.
 
  The commercial success of the Company will depend in part on not infringing
patents or proprietary rights of others. There can be no assurance that the
Company will be able to obtain a license to any third-party technology it may
require to conduct its business or that if obtainable, such technology can be
licensed at reasonable cost. Failure by the Company to obtain a license to
technology that it may require to utilize its technologies or commercialize
its products may have a material adverse effect on the Company's business,
operating results and financial condition. In some cases, litigation or other
proceedings may be necessary to defend against or assert claims of
infringement, to enforce patents issued to the Company, to protect trade
secrets, know-how or other intellectual property rights owned by the Company,
or to determine the scope and validity of the proprietary rights of third
parties. Any potential litigation could result in substantial costs to and
diversion of resources by the Company and could have a material adverse effect
on the Company's business, operating results and financial condition. There
can be no assurance that any of the Company's issued or licensed patents would
ultimately be held valid or that efforts to defend any of its patents, trade
secrets, know-how or other intellectual property rights would be successful.
An adverse outcome in any such litigation or proceeding could subject the
Company to significant liabilities, require the Company to cease
 
                                      38
<PAGE>
 
using the subject technology or require the Company to license the subject
technology from the third party, all of which could have a material adverse
effect on the Company's business, operating results and financial condition.
 
  Much of the know-how of importance to the Company's technology and many of
its processes are dependent upon the knowledge, experience and skills, which
are not patentable, of key scientific and technical personnel. To protect its
rights to and to maintain the confidentiality of trade secrets and proprietary
information, the Company requires employees, Scientific Advisory Board
members, consultants and collaborators to execute confidentiality and
invention assignment agreements upon commencement of a relationship with the
Company. These agreements prohibit the disclosure of confidential information
to anyone outside the Company and require disclosure and assignment to the
Company of ideas, developments, discoveries and inventions made by employees,
advisors, consultants and collaborators. There can be no assurance, however,
that these agreements will not be breached or that the Company's trade secrets
or proprietary information will not otherwise become known or developed
independently by others. See "Risk Factors--Uncertainty of Patents and
Proprietary Rights."
 
GOVERNMENT REGULATION
 
 Overview
 
  Regulations imposed by United States federal, state and local authorities,
as well as their counterparts in other countries, are a significant factor in
the conduct of the research, development, manufacturing and marketing
activities for the Company's potential drug candidates.
 
  The development, manufacture and marketing of drugs (including antibiotics)
developed by the Company or its collaborative partners are subject to
regulation by numerous governmental agencies in the United States, principally
the FDA, by state and local governments, and in some instances by foreign
governments. Pursuant to the Federal Food, Drug, and Cosmetic Act and the
regulations promulgated thereunder (the "FDC Act"), the FDA regulates the pre-
clinical and, clinical trials, safety, effectiveness, manufacture, labeling,
storage, distribution, and promotion of drugs. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, recall or
seizure of products, total or partial suspension of production, refusals to
permit products to be imported into or exported out of the United States,
failure of the government to grant approval for new drugs or antibiotic
products, withdrawal of marketing approvals, denial or suspension of
government contracts and criminal prosecution.
 
  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. Moreover, there is no assurance that the
current regulatory framework will not change or that additional regulatory
standards will not be promulgated at any stage of the Company's or its
collaborative partners' product development that may adversely affect
approval, delay the submission or review of an application or require
additional expenditures by the Company.
 
 U.S. Regulatory Process
 
  New drugs (as well as antibiotics not subject to certification) must be
found safe and effective by FDA through the approval of an NDA pursuant to
section 505 of the FDC Act prior to marketing in interstate commerce. Prior to
this, the pre-clinical data (animal and in vitro laboratory data) and clinical
data (human data) are regulated by FDA pursuant to regulations and the
issuance and continuing FDA oversight of an IND. Post-NDA approval, FDA
maintains continuing regulatory control over the marketing of approved drugs
regulating most closely manufacturing, promotional activities and the
appropriate submission of adverse reaction information. Any material changes
to the indication for use, other labeling or manufacturing, require FDA
approval of a Supplement to the NDA prior to any such change being made.
 
  Before testing in the United States of any compounds with potential
therapeutic value in human test subjects may begin, stringent government
requirements for preclinical data must be satisfied. Pre-clinical testing
includes both in vitro and in vivo laboratory evaluation and characterization
of the safety and efficacy
 
                                      39
<PAGE>
 
of a drug and its formulation. Laboratories involved in pre-clinical testing
must comply with FDA regulations regarding Good Laboratory Practices. 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 the 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 (Phase I) studies in human
volunteers. Unless the FDA objects to an IND, the IND becomes effective 30
days following its receipt by the FDA. There can be no assurance that
submission of an IND will result in the commencement of human clinical trials.
Moreover, 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. Such clinical holds either before the clinical
studies commence or after commencement may result in either a temporary halt
to the study or abandonment of any further work whatsoever.
 
  Clinical trials, which involve the administration of the investigational
drug to healthy volunteers or to patients under the supervision of a qualified
principal investigator, are typically conducted in three sequential phases,
although the phases may overlap with one another. Clinical trials must be
conducted in accordance with the FDA's Good Clinical Practices, 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. Further, each clinical study
must be conducted under the auspices of an independent Institutional Review
Board (the "IRB") at the institution where the study will be conducted. The
IRB will consider, among other things, ethical factors, the safety of human
subjects, informed consent requirements and the possible liability of the
institution. Compounds must be formulated according to GMP.
 
  Clinical testing involves 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.
 
  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 (adverse
effects), dose tolerance, absorption, 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 tolerance 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 dosage regimen. These studies may
include investigation of the effects in subpopulations of patients, such as
the elderly, children, etc. All of the phases of clinical studies must be
conducted in conformance with the FDA's bioresearch monitoring regulations
(such as IRB, informed consent and sponsor monitoring requirements).
 
  At the same time that the human clinical program is being performed,
additional non-clinical (animal) studies are also conducted. Expensive, long
duration toxicity and carcinogenicity studies are done to demonstrate the
safety of drug administration for the extended period of time required for
effective therapy. Also, a variety of laboratory, animal and initial human
studies are performed to establish manufacturing methods for delivering the
drug, as well as stable, effective dosage forms.
 
 
                                      40
<PAGE>
 
  Unless exempted by specific regulation, antibiotic products are subject to
additional FDA regulations that pertain to batch certification requirements.
In general, the regulations require testing and certification of each batch of
an antibiotic drug for compliance with the FDA's monograph regulations. If the
FDA determines that the batch conforms to the applicable standards of
identity, strength, quality and purity found in the specific monograph, the
FDA will issue a certificate attesting that the batch conforms to the
applicable monograph standards. Manufacturers also are required to comply with
certain recordkeeping requirements that pertain to certification. If a given
batch does not comply with the stated requirements, the FDA will refuse to
certify the batch and the manufacturer will be prohibited from marketing the
product.
 
  Antibiotic drugs for human use are exempt from batch certification if
certain conditions are satisfied. For example, in the case of an over-the-
counter ("OTC") antibiotic subject to an FDA OTC drug monograph, the drug will
be exempt from batch certification if the drug satisfies the conditions
specified in the applicable OTC drug monograph. For prescription antibiotics,
a drug may be exempt from batch certification if certain other conditions are
satisfied, including among others, that the antibiotic has been approved by
the FDA in an applicable antibiotic application for marketing, and that the
antibiotic product meets the standard of identity, strength, quality and
purity specified in an applicable monograph or in the applicable approved
antibiotic application. Once an antibiotic drug has been approved as safe and
effective, the FDA promulgates a regulation of general applicability,
describing in detail the required specifications of the drug. Thereafter,
anyone who meets the standards in that regulation may obtain FDA clearance for
his or her own product without submission of any data on safety and
effectiveness, other than data demonstrating bioequivalence to the original
product.
 
  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 application, 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. As a result of the
Prescription Drug User Fee Act, FDA has made commitments to speed the review
of NDAs and NDA Supplements. While implementation of this by the FDA has sped
up certain decision-making by the FDA, it has not, with regard to many drugs,
sped up the overall development and approval time. Any proposed product of the
Company likely would 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.
 
  The FDA has developed two "fast track" policies for certain new drugs, one
policy for expedited development and review, and one policy for accelerated
approval. The expedited review policy applies to new drug therapies, including
antibiotics, that are intended to treat persons with life-threatening and
severely-debilitating illnesses, especially where no satisfactory alternative
therapy exists. The FDA has defined "severely-debilitating" to mean diseases
or conditions that cause major irreversible morbidity. During the
developmental stage of drugs that qualify, the FDA expedites consultation and
review of these experimental therapies.
 
  The FDA's accelerated approval policy applies to certain new drug or
antibiotic products that have been studied for their safety and effectiveness
in treating serious or life-threatening illnesses and that provide "meaningful
therapeutic benefit to patients over existing treatments." This accelerated
approval, or fast track approach, is generally limited to new drugs or
antibiotics that treat patients that are unresponsive to, or
 
                                      41
<PAGE>
 
intolerant of, available therapy, or when there is improved patient response
over currently available therapy. The accelerated approval policy is further
limited to drugs for which the predictive value of the surrogate endpoint, in
terms of clinical outcome, has not been established. At the time of approval,
the FDA may grant approval on a surrogate endpoint or an effect on a clinical
endpoint other than survival or irreversible morbidity. The FDA may impose
certain restrictions on distribution, limiting its use to certain facilities
or specialty-trained physicians or making its use contingent on the
performance of certain specified medical procedures. Postmarketing studies
(Phase IV trials) are usually required to further affirm safety and/or
efficacy. However, if an acceptable clinical endpoint has been established,
the drug must be evaluated for approval under the traditional (non-fast track)
approach.
 
  The FDA determines when a specific new drug or antibiotic product qualifies
for accelerated review. There is no guarantee that an application submitted
for a new drug or antibiotic product will receive fast track consideration by
the FDA or that the FDA will approve an NDA for such drug or antibiotic
product once it has been reviewed. Moreover, the FDA may grant marketing
approval and simultaneously require postmarketing studies. And, the FDA may
subsequently withdraw approval of a new drug or antibiotic product if a
postmarketing study fails to verify the clinical benefit of the new drug or
antibiotic.
 
  Timetables for the various phases of clinical trials and NDA approval cannot
be predicted with any certainty. The Company, its collaborative partners or
the FDA may suspend clinical trials at any time if it is believed that
individuals participating in such trials are being exposed to unacceptable
health risks. Even assuming that clinical trials are completed and that an NDA
is submitted to the FDA, there can be no assurance that the NDA will be
reviewed by the FDA in a timely manner or that once reviewed, the NDA will be
approved. The approval process is affected by a number of factors, including
the severity of the targeted indications, the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials. The
Company's ability to market its products successfully is further dependent on
the patent and marketing exclusivity rights of a competitor's products. With
regard to marketing exclusivity, the FDC Act provides for 5 years of marketing
exclusivity for new chemical entities having received an NDA. In addition,
NDAs or NDA Supplements for other new drugs may receive 3 years of marketing
exclusivity if their approved application contains new clinical investigations
(other than bioavailability) that are essential to the approval and were
conducted by or for the applicant. If the FDA grants such exclusivity, the FDA
will not approve another company's 505(b)(2) application (paper NDA) or
abbreviated NDA ("ANDA" or generic drug application) during that period. The
FDA may deny an NDA if applicable regulatory criteria are not satisfied or may
require additional testing or information with respect to the investigational
drug. Even if initial FDA approval is obtained, further studies, including
post-market studies, may be required in order to provide additional data on
safety and will be required in order to gain approval for the use of a product
as a treatment for clinical indications other than those for which the product
was initially tested. The FDA will also require post-market reporting and may
require surveillance programs to monitor the side effects of the drug. Results
of post-marketing programs may limit or expand the further marketing of the
drug. Further, if there are any modifications to the drug, including changes
in indication, manufacturing process or labeling, an NDA supplement may be
required to be submitted to the FDA. Further new scientific data or analyses
developed after approval may form the basis for the FDA to withdraw the NDA.
 
  Among the other requirements for drug product approval is the requirement
that the prospective manufacturer conform to the FDA's current Good
Manufacturing Practice ("cGMP") regulations. Manufacturers also must continue
to expend time, money and effort in product, recordkeeping and quality control
to assure that the product meets applicable specifications and other
requirements. The manufacturer also has obligations to report postmarketing
adverse drug experiences to the FDA. The FDA periodically inspects
manufacturing facilities in the United States to assure compliance with
applicable cGMP and other regulatory requirements. Failure of the Company (or
prospective manufacturer) to comply with cGMP regulations or other FDA
regulatory requirements could have a material adverse effect on the Company
and result in one or more regulatory actions affecting either the product, the
Company and its officials, or both.
 
                                      42
<PAGE>
 
  The Company (or prospective manufacturer) also may be subject to certain
user fees that the FDA is authorized to collect under the Prescription Drug
User Fees Act of 1992 for certain drugs. User fees also pertain to the
establishments where the products are made and to the marketed prescription
drug products.
 
  Completing the multitude of steps necessary before marketing can begin
requires the expenditure of considerable resources and can consume a long
period of time. Delay or failure in obtaining the required approvals,
clearances, permits or inclusions by the Company, its collaborative partners
or its licensees would have an adverse effect on the ability of the Company to
generate sales or royalty revenue. In addition, the impact of new or changed
laws or regulations cannot be predicted.
 
  There can be no assurance that the regulatory framework described above will
not change or that additional regulations will not arise that may affect
approval of or delay an IND or an NDA. In addition, there can be no assurance
that there will not be a change in currently accepted scientific standards
that may affect the ultimate approval of such products. Moreover, because the
Company's present collaborative partners are, and it is expected that the
Company's future collaborative partners may be, primarily responsible for pre-
clinical and clinical trials, regulatory approvals, manufacturing and
commercialization of drugs, the ability to obtain and the timing of regulatory
approvals are not within the control of the Company. Should the collaborative
partners develop regulatory problems, for example, cGMP violations, such
problems may adversely impact upon the Company's resources.
 
  Prior to the commencement of marketing a product in other countries,
approval by the regulatory agencies in such countries is required, whether or
not FDA approval has been obtained for such product. The requirements
governing the conduct of clinical trials and product approvals vary widely
from country to country, and the time required for approval may be longer or
shorter than the time required for FDA approval. Although there are some
procedures for unified filings for certain European countries, in general,
each country has its own procedures and requirements.
 
  The Company is 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
the Company believes that its safety procedures for handling and disposing of
radioactive compounds and other hazardous materials used in its 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, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company.
 
COMPETITION
 
  The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Competitors of the
Company in the United States and elsewhere are numerous and include, among
others, major, multinational pharmaceutical and chemical companies,
specialized biotechnology firms and universities and other research
institutions. Many of these competitors employ greater financial and other
resources, including larger research and development staffs and more effective
marketing and manufacturing organizations, than the Company or its
collaborative partners. Acquisitions of competing companies and potential
competitors by large pharmaceutical companies or others could enhance
financial, marketing and other resources available to such competitors. As a
result of academic and government institutions becoming increasingly aware of
the commercial value of their research findings, such institutions are more
likely to enter into exclusive licensing agreements with commercial
enterprises, including competitors of the Company, to market commercial
products. There can be no assurance that the Company's competitors will not
succeed in developing technologies and drugs that are more effective or less
costly than any which are being developed by the Company or which would render
the Company's technology and future drugs obsolete and noncompetitive.
 
                                      43
<PAGE>
 
  In addition, some of the Company's competitors have greater experience than
the Company in conducting pre-clinical and clinical trials and obtaining FDA
and other regulatory approvals. Accordingly, the Company's competitors may
succeed in obtaining FDA or other regulatory approvals for drug candidates
more rapidly than the Company. Companies that complete clinical trials, obtain
required regulatory agency approvals and commence commercial sale of their
drugs before their competitors may achieve a significant competitive
advantage, including certain patent and FDA marketing exclusivity rights that
would delay the Company's ability to market certain products. There can be no
assurance that drugs resulting from the Company's research and development
efforts, or from the joint efforts of the Company and its collaborative
partners, will be able to compete successfully with competitors' existing
products or products under development or that they will obtain regulatory
approval in the United States or elsewhere.
 
EMPLOYEES
   
  As of June 30, 1996, the Company had 51 full-time employees, 44 of whom were
engaged in research and development and seven of whom were engaged in
management, administration and finance. Doctorates are held by 22 of the
Company's employees. Each of the Company's employees has signed an agreement
which prohibits the disclosure of confidential information to anyone outside
the Company and requires disclosure and assignment to the Company of ideas,
developments, discoveries and inventions made by the employee.     
 
  The Company's employees are not covered by a collective bargaining
agreement. The Company has never experienced an employment-related work
stoppage and considers its employee relations to be good.
 
PROPERTIES
 
  The Company's headquarters and research and development facilities are
located in a 24,000 square foot facility in Cambridge, Massachusetts at 24
Emily Street. The Company believes that this space will be adequate for its
research and drug development activities for at least the next two years.
 
SCIENTIFIC ADVISORY BOARD
 
  The Company has established a Scientific Advisory Board consisting of ten
members (including Dr. Schimmel and Dr. Rebek, two of the Company's founders
and directors) with experience in infectious disease, cell and molecular
biology, genetics, enzymology, bacterial pathogenesis, and medicinal and
combinatorial chemistry. The Scientific Advisory Board meets as a group once
per year and members are available individually on an ongoing basis. The
Scientific Advisory Board recommends and reviews with the Company novel
approaches to drug discovery and development. For biographical information
regarding Dr. Schimmel and Dr. Rebek, see "Management."
 
  All of the Company's Scientific Advisory Board members have signed
consulting agreements with the Company and have either purchased shares of
Common Stock or been granted options to purchase Common Stock.
 
  The members of Cubist's Scientific Advisory Board are:
 
  Lan Bo Chen, Ph.D. is a Professor of Pathology at Harvard Medical School and
the Dana-Farber Cancer Institute. He is an expert in cell biology, immunology
and cancer. He consults with the Company on high-throughput screening and cell
culture. Dr. Chen received his B.S. in Chemistry from National Taiwan
University and his Ph.D. in Cell Biology from the Massachusetts Institute of
Technology.
 
  R. Alan B. Ezekowitz, M.D., Ph.D. is Chief of Pediatrics at Massachusetts
General Hospital and Professor of Pediatrics at Harvard Medical School. He is
an expert in molecular biology and cell biology of macrophages and pattern
recognition of foreign molecules in host defenses. He consults with the
Company on opportunistic infections, particularly Pneumocystis carinii in
immunocompromised patients. Dr. Ezekowitz
 
                                      44
<PAGE>
 
received his M.B.Ch.B. (equivalent to an M.D.) from the University of Cape
Town, Republic of South Africa and received his Ph.D. in Immunology from the
University of Oxford.
 
  David C. Hooper, M.D. is an Associate Physician and Associate Chief of the
Infection Control Unit at Massachusetts General Hospital as well as an
Associate Professor of Medicine at Harvard Medical School. Dr. Hooper is an
expert in the mechanism of action and resistance in fluoroquinolones. He is a
clinical investigator in infectious disease and consults with the Company on
infectious disease clinical problems, antiinfective resistance and mechanisms
of action of antiinfective drugs. Dr. Hooper received his B.A. in Microbiology
from the University of Texas, Austin and his M.D. from Washington University
School of Medicine.
 
  K.C. Nicolaou, Ph.D. is Chairman of the Department of Chemistry and a
Professor of Chemistry at The Scripps Research Institute. Dr. Nicolaou is an
expert on the total synthesis of biologically active natural products such as
macrolides, ionophores, eiconsanoids, saccharides, glycoconjugates and other
plant, bacterial and marine products. He consults with the Company on organic
and natural product synthesis. Dr. Nicolaou received his B.Sc. and Ph.D. in
Chemistry from the University of London.
 
  Joanne Stubbe, Ph.D. is a Professor of Biology and Chemistry at the
Massachusetts Institute of Technology. Dr. Stubbe's expertise is in the
elucidation of enzyme mechanisms, the design of suicide inhibitors, the
mechanism of cleavage of DNA by antitumor agents, purine biosynthesis and the
mechanism of DNA repair enzymes. She consults with the Company on enzyme
kinetics and assay development. Dr. Stubbe received her B.A. in Chemistry from
the University of Pennsylvania and her Ph.D. in Organic Chemistry from the
University of California, Berkeley.
 
  Jack Szostak, Ph.D. is a Professor of Genetics at Harvard Medical School and
a Molecular Biologist at Massachusetts General Hospital. He is an expert in
molecular biology and is known for his work on ribozymes. He consults with the
Company on molecular biology and assay development. Dr. Szostak received his
B.Sc. in Cell Biology from McGill University and his Ph.D. in Biochemistry
from Cornell University.
 
  Andrew Wright, Ph.D. is a Professor of Molecular Biology and Microbiology at
Tufts University School of Medicine. Dr. Wright is an expert on the regulation
of transcription in bacteria and the study of pathogenic mechanisms in
Haemophilus influenzae and Helicobacter pylori. He consults with the Company
on molecular biology and assay development. Dr. Wright received his B.S. in
Chemistry and his Ph.D. in Biochemistry from the University of Edinburgh,
Scotland.
 
  Richard Young, Ph.D. is a Member of the Whitehead Institute for Biomedical
Research and a Professor of Biology at the Massachusetts Institute of
Technology. Dr. Young is a molecular geneticist with expertise in gene
expression, bacterial pathogenesis and vaccine development. He consults with
the Company on selection of pathogenic organisms, molecular biology and assay
development. Dr. Young received his B.S. in Biology from Indiana University
and his Ph.D. in Molecular Biophysics and Biochemistry from Yale University.
 
LEGAL PROCEEDINGS
 
  The Company is not a party to any material legal proceedings.
 
                                      45
<PAGE>
 
                                  MANAGEMENT
 
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
 
  The executive officers, key employees and directors of the Company are as
follows:
 
<TABLE>
<CAPTION>
 NAME                                        AGE   POSITION
 ----                                        ---   --------
 <C>                                         <S>   <C>
 Scott M. Rocklage, Ph.D.(5)................ 42    President, Chief Executive Officer and Director
 Francis P. Tally, M.D. .................... 56    Vice President of Research and Development
 Arthur F. Kluge, Ph.D. .................... 52    Vice President of Chemistry
 Neal M. Farber, Ph.D. ..................... 45    Vice President of Corporate Development
 Thomas A. Shea............................. 36    Director of Finance & Administration, Treasurer
 Philip A. Wendler, Ph.D. .................. 42    Director of Pharmacology
 Susan K. Whoriskey, Ph.D. ................. 37    Director of Molecular Biology
 John K. Clarke(2)(5)....................... 42    Chairman of the Board of Directors
 Paul R. Schimmel, Ph.D.(5)................. 55    Director
 Julius Rebek, Jr., Ph.D.(4)................ 52    Director
 Ellen M. Feeney(1)(2)(3)................... 36    Director
 Terrance G. McGuire(1)(3).................. 40    Director
 Barry Bloom, Ph.D.(1)(4)................... 67    Director
 George Conrades(2)(4)...................... 55    Director
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Class I Director--term expires in 1997.
(4) Class II Director--term expires in 1998.
(5) Class III Director--term expires in 1999.
 
  Dr. Rocklage has served as President and Chief Executive Officer and as a
member of the Board of Directors of the Company since July 1994. 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 Salutar, Inc., a diagnostic imaging company and was
responsible for designing and implementing research and development programs
that resulted in three drug products in human clinical trials, including the
approved drug Omniscan. 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.
 
  Dr. Tally has served as Vice President of Research and Development since
March 1995. From 1986 to 1995, he 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. Kluge has served as Vice President of Chemistry since October 1995. From
1973 to 1995, Dr. Kluge served in various positions at Syntex Corporation
(which later became Roche Bioscience following the acquisition of Syntex by
Hoffmann-La Roche Inc.), including Vice President and Director, Institute of
Organic Chemistry, where he invented two currently marketed pharmaceutical
products: laidlomycin propionate and ketorolac. Dr. Kluge received his B.A. in
Chemistry from Park College, his M.S. and Ph.D. in Chemistry from the
University of Massachusetts and his M.B.A. from the University of Santa Clara.
 
  Dr. Farber has served as Vice President of Corporate Development since April
1996. From 1993 to 1995, Dr. Farber served as Director of Business Development
at T Cell Sciences, Inc., a biotechnology company.
 
                                      46
<PAGE>
 
From 1982 to 1993, Dr. Farber served in various positions at Biogen, Inc., a
biotechnology company. Dr. Farber received his B.Sc. in Chemistry and
Biochemistry from the Hebrew University, Israel and his Ph.D. in Biochemistry
from Columbia University.
 
  Mr. Shea has served as Treasurer and Chief Accounting Officer since June
1996 and has served as Director of Finance and Administration since September
1993. 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.
 
  Dr. Wendler has served as Director of Pharmacology since August 1994. From
1988 to 1994, he served in various scientific positions at Sandoz Chemicals
Biotech Research Corporation. Dr. Wendler received his B.S. in Biochemistry
from Trinity College and his Ph.D. in Biological Science (Biochemistry) from
the University of Rhode Island.
 
  Dr. Whoriskey has served as Director of Molecular Biology since January
1996. From 1993 to 1995, she served as a Research Scientist and then Group
Leader of Molecular Biology at the Company. From 1989 to 1993, she was a
Research Fellow in the Department of Genetics at Harvard Medical School.
Dr. Whoriskey received her B.S. in Microbiology from the University of
Massachusetts, Amherst and her Ph.D. from the Molecular Biology Institute at
the University of California, Los Angeles.
 
  Mr. Clarke is a founder of the Company and has served as Chairman of the
Board of Directors since its incorporation. From May 1992 to June 1994, Mr.
Clarke served as acting President and Chief Executive Officer of the Company.
Since 1982, he has been a general partner of DSV Management in Princeton, New
Jersey, the general partner of DSV Partners IV ("DSV"). He is a founder and
director of Alkermes, Inc. and DNX, Inc., biotechnology companies. 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.
 
  Dr. Schimmel is a scientific founder of the Company and has served as a
director of the Company since its incorporation. Since 1967, he has served as
a Professor of Biochemistry and Biophysics at the Massachusetts Institute of
Technology and since 1992, he has been the John D. and Catherine T. MacArthur
Professor of Biochemistry and Biophysics. 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., biotechnology companies. 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. Rebek is a scientific founder of the Company and has served as a
director of the Company since its incorporation. Since July 1996, he has
served as the Director of the Institute for Chemical Biology at The Scripps
Research Institute. From 1989 to June 1996, Dr. Rebek served as Professor of
Chemistry at the Massachusetts Institute of Technology, and from 1991 to June
1996, he served as the Camille Dreyfus Professor of Chemistry. Dr. Rebek is an
expert in synthetic organic chemistry, molecular recognition and combinatorial
chemistry. He is a member of the National Academy of Sciences and the American
Academy of Arts and Sciences. Dr. Rebek serves on the Scientific Advisory
Board of Procept, Inc., a biotechnology company. He is also a Founding Member
of the Scientific Advisory Board of Darwin Molecular, Inc., a genomics
company. Dr. Rebek received his B.S. in Chemistry from the University of
Kansas and his Ph.D. in Chemistry from the Massachusetts Institute of
Technology.
 
  Ms. Feeney has served as a director of the Company since September 1993.
Since 1991, she has served as a principal of Weiss, Peck & Greer, L.L.C., and
since 1989, she has been a General Partner of WPG Venture Partners II, L.P.,
the general partner of WPG Enterprise Fund, L.P. ("WPG Enterprise"), Weiss,
Peck & Greer Venture Associates II, L.P. ("WPG Venture") and WPG Venture
Advisers, L.P., the adviser of Weiss, Peck & Greer Venture Associates II
(Overseas), L.P. ("WPG Overseas"). Ms. Feeney is a director of Heartstream,
Inc., a medical device company, and several private health care companies. Ms.
Feeney received her B.S. in Biology and Philosophy from Duke University and
her M.S. in Human Genetics from the University of California, Davis.
 
 
                                      47
<PAGE>
 
   
  Mr. McGuire has served as a director of the Company since September 1993.
Since 1995, he has been a Founding General Partner of Polaris Venture
Partners, and since 1989, has served as a general partner of Beta Partners
Limited Partnership, each of which is a venture capital firm. Since 1992, he
has served as a general partner of Alta V Management Partners L.P., which is
the general partner of Alta V Limited Partnership ("Alta"), a fund associated
with Burr, Egan, Deleage & Co. He is a director of Integ, Inc., a diagnostic
company, and several private health care companies. Mr. McGuire received his
B.S. in Physics and Economics from Hobart College, his M.S. in Engineering
from Dartmouth College and his M.B.A. from the Harvard Business School.     
 
  Dr. Bloom has served as a director of the Company 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. and Neurogen Corp., biotechnology companies, Southern
New England Telecommunications Corporation, Catalytica Fine Chemicals, Inc., a
chemical manufacturer and supplier, 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. Conrades has served as a director of the Company since June 1996. Since
1994, he has served as President and Chief Executive Officer of BBN
corporation, a corporation providing Internet services and research and
development and he has served as Chairman since 1995. From 1961 to 1992, Mr.
Conrades served in various positions at IBM, including Senior Vice President,
Corporate Marketing and Services. He is a member of the Board of Directors of
Westinghouse, Inc. and CRA Managed Care, Inc. Mr. Conrades received his B.A.
in Physics and Mathematics from Ohio Wesleyan University and his M.B.A. from
the University of Chicago.
 
BOARD OF DIRECTORS
 
  Effective upon the consummation of this Offering, the Company's Board of
Directors will be divided into three classes, with one class of directors
elected each year at the annual meeting of stockholders for a three-year term
of office. All directors of one class hold their positions until the annual
meeting of stockholders at which their respective successors are elected and
qualified. Ms. Feeney and Mr. McGuire serve in the class whose term expires in
1997; Dr. Bloom, Mr. Conrades and Dr. Rebek serve in the class whose term
expires in 1998; and Mr. Clarke, Dr. Rocklage and Dr. Schimmel serve in the
class whose term expires in 1999. Executive officers of the Company are
elected annually by the Board of Directors and serve at the discretion of the
Board of Directors or until their successors are duly elected and qualified.
 
  The Board of Directors has appointed an Audit Committee and a Compensation
Committee. The Audit Committee reviews the scope and results of the annual
audit of the Company's financial statements conducted by the Company's
independent accountants, the scope of other services provided by the Company's
independent accountants, proposed changes in the Company's financial and
accounting standards and principles, and the Company's policies and procedures
with respect to its internal accounting, auditing and financial controls, and
makes recommendations to the Board of Directors on the engagement of the
independent accountants, as well as other matters which may come before it or
as directed by the Board of Directors. The Compensation Committee administers
the Company's compensation programs, including the Plan, and performs such
other duties as may from time to time be determined by the Board of Directors.
 
DIRECTOR COMPENSATION
   
  In 1995, the Company paid $6,000 to Dr. Bloom in connection with attendance
at meetings of the Board of Directors. No other director has received
compensation for his or her service on the Board of Directors or any committee
thereof, except that in May and June of 1996, the Company has granted to each
non-employee director a nonstatutory stock option exercisable for 7,142 shares
at an exercise price of $1.96 and $5.95, respectively. See "Certain
Transactions."     
   
  Following this Offering, Dr. Bloom and Mr. Conrades will receive a fee of
$1,000 for each Board meeting attended and will be reimbursed for expenses
incurred in connection with their attendance. In addition, upon first joining
the Board each director who is not an officer or employee of the Company will
be granted     
 
                                      48
<PAGE>
 
   
automatically a stock option exercisable for 7,000 shares of Common Stock at
fair market value, and each time that he or she is serving as a director on
the business day immediately following an annual meeting of stockholders, such
director will be automatically granted on such business day a stock option
exercisable for 700 shares of Common Stock at fair market value. See "Amended
and Restated 1993 Stock Option Plan."     
 
EXECUTIVE COMPENSATION
 
  The following table sets forth certain information with respect to the
annual and long-term compensation paid by the Company during the fiscal year
ended December 31, 1995 to the Chief Executive Officer and the other executive
officers of the Company (the "Named Executive Officers") whose 1995
compensation exceeded $100,000:
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                    LONG-TERM COMPENSATION
                                   ANNUAL COMPENSATION                      AWARDS
                         ---------------------------------------- --------------------------
                                                                  SECURITIES
NAME AND                                          OTHER ANNUAL    UNDERLYING    ALL OTHER
PRINCIPAL POSITION       SALARY($)(1) BONUS($) COMPENSATION($)(2) OPTIONS(#) COMPENSATION($)
- ------------------       ------------ -------- ------------------ ---------- ---------------
<S>                      <C>          <C>      <C>                <C>        <C>
Scott M. Rocklage.......   $180,434   $50,000        $6,072         14,285       $23,587(3)
 President, Chief
  Executive Officer and
 Director
Francis P. Tally........    165,280       --          8,258            --            --
 Vice President of
  Research and
 Development
Nancy Gray(4)...........    113,228    11,440           --           5,714           --
 Vice President of
  Corporate Development
</TABLE>
- -------
(1) Salary includes amounts, if any, deferred pursuant to the Company's 401(k)
    Plan.
(2) Other Annual Compensation consists of long-term disability insurance
    premiums paid by the Company on behalf of the Named Executive Officer.
(3) The Company forgave $23,587 of principal and accrued interest owed by Dr.
    Rocklage under certain promissory notes. See "Certain Transactions."
(4) Dr. Gray resigned from the Company in February 1996, at which time options
    for 4,285 shares were terminated and restricted stock totaling 17,857
    shares were repurchased by the Company.
 
  The following table sets forth certain information with respect to grants of
stock options under the Plan to the Named Executive Officers during the year
ended December 31, 1995.
 
               OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
                                                                            POTENTIAL REALIZABLE
                                                                              VALUE AT ASSUMED
                                                                              ANNUAL RATES OF
                                                                                STOCK PRICE
                                                                              APPRECIATION FOR
                                         INDIVIDUAL GRANTS                   OPTION TERM($)(2)
                         -------------------------------------------------- --------------------
                                         PERCENT OF
                            NUMBER          TOTAL
                         OF SECURITIES OPTIONS GRANTED EXERCISE
                          UNDERLYING   TO EMPLOYEES IN PRICE PER EXPIRATION
NAME                     OPTIONS(#)(1) FISCAL YEAR(%)  SHARE($)     DATE       5%        10%
- ----                     ------------- --------------- --------- ---------- --------- ----------
<S>                      <C>           <C>             <C>       <C>        <C>       <C>
Scott M. Rocklage.......    14,285          6.05%        $0.42    10/18/05  $   9,773 $   15,562
Francis P. Tally........       --            --            --        --           --         --
Nancy Gray(3)...........     5,714          2.42          0.35       --         4,561      7,262
</TABLE>
- -------
(1) Represents incentive stock options granted under the Plan to Dr. Rocklage
    on October 18, 1995 and to Dr. Gray on January 1, 1995. Each option is
    exercisable in 16 equal quarterly installments, and has a maximum term of
    10 years from the date of grant, subject to earlier termination in the
    event of the optionee's cessation of service with the Company. The options
    are exercisable during the holder's lifetime only by the holder and they
    are exercisable by the holder only while the holder is an employee of the
    Company and for certain limited periods of time thereafter in the event of
    termination of employment.
(2) Amounts represent hypothetical gains that could be achieved for the
    respective options if exercised at the end of the option term. These gains
    are based upon assumed appreciation rates of 5% and 10% in the fair market
    value of shares of Common Stock from the fair market value on the date of
    grant, which rates are set by the Securities and Exchange Commission and
    compounded annually from the date the respective options were granted to
    their expiration date. The gains shown are net of option exercise prices,
    but do not include deductions for taxes or other expenses associated with
    the exercises. Actual gains, if any, are dependent on the performance of
    the Common Stock and the date on which the option is exercised. There can
    be no assurance that the amounts reflected will be achieved or will
    otherwise be indicative of the actual amounts received, if any.
(3) Dr. Gray resigned from the Company in February 1996, at which time options
    for 4,285 shares were terminated.
 
                                      49
<PAGE>
 
  The following table sets forth information with respect to (i) the number of
unexercised options held by the Named Executive Officers as of December 31,
1995 and (ii) the value of unexercised in-the-money options (options for which
the fair market value of the Common Stock exceeds the exercise price) as of
December 31, 1995. In fiscal 1995, there were no option exercises by the Named
Executive Officers.
 
         AGGREGATED OPTION VALUES IN THE YEAR ENDED DECEMBER 31, 1995
 
<TABLE>
<CAPTION>
                              NUMBER OF SECURITIES                  VALUE OF UNEXERCISED
                             UNDERLYING UNEXERCISED                 IN-THE-MONEY OPTIONS
                         OPTIONS AT DECEMBER 31, 1995(#)         AT DECEMBER 31, 1995 ($)(1)
                         -------------------------------         ---------------------------
NAME                      EXERCISABLE        UNEXERCISABLE       EXERCISABLE      UNEXERCISABLE
- ----                     ---------------    ----------------     ------------     --------------
<S>                             <C>               <C>                  <C>            <C>
Scott M. Rocklage.......             0              14,285               0             $6,000
Francis P. Tally........            --                  --              --                 --
Nancy Gray (2)..........         1,429               4,285              700             2,100
</TABLE>
- --------
(1) Based on the fair market value of the Common Stock as of December 15, 1995
    of $0.84 per share, as determined by the Company's Board of Directors,
    less the aggregate exercise price.
(2) Dr. Gray resigned from the Company in February 1996, at which time options
    for 4,285 shares were terminated.
 
AMENDED AND RESTATED 1993 STOCK OPTION PLAN
 
  The Plan provides for grants of stock options intended to qualify for
preferential tax treatment (the "Incentive Stock Options") under Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), and
nonstatutory stock options that do not qualify for such treatment. All
employees of the Company are eligible for stock options under the Plan in
amounts and at prices determined by the Compensation Committee, provided that,
in the case of Incentive Stock Options, the price will not be less than 100%
of the fair market value of the Common Stock on the date of grant, or not less
than 110% of the fair market value of the Stock on the grant date if the
optionee owns, directly or indirectly, more than 10% of the total combined
voting power of all classes of stock.
   
  Each director who is not an officer or employee of the Company (a "Non-
Employee Director") who is first elected to the Board of Directors during the
term of the Plan will receive, on the director's election date, an option to
purchase 7,000 shares of Common Stock. In addition, each time that a Non-
Employee Director is serving as a director on the business day immediately
following an annual meeting of stockholders, he or she will be automatically
granted on such business day a stock option exercisable for 700 shares of
Common Stock at fair market value, which will become exercisable in four equal
installments on the last day of each subsequent fiscal quarter if the optionee
remains a director on that date.     
 
  The Plan will be administered by the Compensation Committee. The
Compensation Committee will select participants (other than for automatic
grants to Non-Employee Directors as set forth in the Plan) and, in a manner
consistent with the terms of the Plan, determine the number and duration of
the options to be granted and the terms and conditions of the option
agreements. The Compensation Committee has the right to alter, amend or revoke
the Plan.
 
  The Plan provides that each outstanding option will immediately become fully
exercisable upon a "Change in Corporate Control" of the Company, as defined in
the Plan. A "Change in Corporate Control" includes the acquisition by any
third party (as hereinafter defined), directly or indirectly, of more than 80%
of the Common Stock outstanding at the time, without the prior approval of the
Company's Board of Directors. A "third party" for purposes of the foregoing
means any person other than the Company or a subsidiary or employee benefit
plan or trust maintained by the Company or any of its subsidiaries together
with any of such person's "affiliates" and "associates" as defined in Rule
12b-2 under the Securities Exchange Act of 1934, as amended.
 
  A total of 1,500,000 shares of Common Stock of the Company is reserved for
issuance under the Plan. The maximum number of shares will increase, effective
as of January 1, 1998 and each January 1 thereafter during the term of the
Plan, by an additional number of shares of Common Stock equal to 15% of the
excess, if any, of (i) the total number of shares of Common Stock and Common
Stock equivalents issued and
 
                                      50
<PAGE>
 
outstanding as of the close of business on December 31 of the preceding year
over (ii) the total number of shares of Common Stock and Common Stock
equivalents issued and outstanding as of the close of business
   
on December 31 of the year prior to such preceding year. The maximum number of
shares that may be subject to incentive stock options granted under the Plan
is 3,000,000 shares, and the maximum number of shares that may be subject to
stock options granted to any person (including Non-Employee Directors) under
the Plan in a given year is 500,000 shares.     
   
  Incentive Stock Options granted under the Plan are not transferable except
by will or the laws of descent and distribution, and may be exercised during
the life of the optionee only by the optionee. Nonstatutory stock options
granted under the Plan are not transferable except by will or the laws of
descent and distribution and except that nonstatutory stock options may be
transferred if and to the extent authorized by the Compensation Committee.
    
401(K) PLAN
 
  The Company has implemented a retirement savings plan (the "401(k) Plan"),
which covers all full-time employees. Pursuant to the 401(k) Plan, an employee
may elect to reduce his or her current compensation by up to 15% (subject to
certain overall dollar limits) and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan allows employees with six
months continuous service to make certain tax-deferred voluntary
contributions, which the Company generally intends to match with a 1.5%
contribution, but in any event not to exceed $500. The 401(k) Plan is intended
to qualify under Section 401 of the Code, so that contributions by employees,
and earned income thereon, are not taxable to employees until withdrawn from
the 401(k) Plan. The administrator of the 401(k) Plan will invest each
employee's account at the direction of each such employee, who can choose
among certain investment alternatives provided.
 
EMPLOYMENT AGREEMENT
 
  Dr. Rocklage, the Company's President and Chief Executive Officer, is
employed pursuant to an employment agreement with the Company, dated June 20,
1994 (the "Employment Agreement"). Under the terms of the Employment
Agreement, Dr. Rocklage will receive an annual base salary in 1996 of $185,000
and is entitled to a performance bonus of up to $50,000, subject to review by
the Company's Board of Directors, upon the Company's achievement of certain
milestones for such year that have been mutually agreed upon by Dr. Rocklage
and the Board of Directors prior to the commencement of such fiscal year.
Pursuant to the terms of the Employment Agreement, on July 21, 1994 the
Company granted to Dr. Rocklage a stock option exercisable for 188,121 shares
of the Company's Common Stock at an exercise price of $0.35 per share, and
sold to Dr. Rocklage 263,370 shares of Series B Convertible Preferred Stock
(convertible into 37,624 shares of Common Stock) at a purchase price of $0.50
per share ($3.50 per share on an as-converted basis). To purchase the shares
of Series B Convertible Preferred Stock and to exercise his option, Dr.
Rocklage issued two promissory notes to the Company. See "Certain
Transactions." The Employment Agreement also provides Dr. Rocklage with
medical insurance and other fringe benefits. Dr. Rocklage's employment with
the Company may be terminated by the Company at any time by giving written
notice of termination and may be terminated by Dr. Rocklage at any time upon
thirty days' written notice of termination. Upon any termination by the
Company of Dr. Rocklage's employment without cause, Dr. Rocklage is entitled
to severance pay in an amount equal to three months of his then current annual
base salary.
 
  None of the Company's other executive officers has entered into an
employment agreement with the Company. See "Risk Factors--Dependence on Key
Personnel."
 
COMPENSATION COMMITTEE INTERLOCKS
   
  In 1995, the members of the Compensation Committee of the Board of Directors
were Mr. Clarke, Dr. Schimmel and Dr. Rebek, none of whom is an employee of
the Company. As of July, 1996, the members of the Compensation Committee are
Mr. Clarke, Mr. Conrades and Ms. Feeney, none of whom is an employee of the
Company.     
 
 
                                      51
<PAGE>
 
                             CERTAIN TRANSACTIONS
 
  In August 1993, the Company sold an aggregate of 14,270,000 shares of its
Series B Convertible Preferred Stock (convertible into 2,038,571 shares of
Common Stock), at a purchase price of $0.50 per share ($3.50 per share on an
as-converted basis) to a group of stockholders, including DSV, Alta, WPG
Enterprise, WPG Venture, and Interwest Partners V, L.P. ("Interwest"), Dr.
Schimmel, Dr. Rebek, and the Julius Rebek, Jr. Retirement Plan. Mr. Clarke, a
director of the Company, is a general partner of DSV Management, the general
partner of DSV. Ms. Feeney, a director of the Company, is a general partner of
WPG Venture Partners II, L.P., the general partner of WPG Enterprise and WPG
Venture. Mr. McGuire, a director of the Company, is a general partner of Alta
V Management Partners, L.P., the general partner of Alta. Dr. Schimmel and Dr.
Rebek are directors of the Company. The Julius Rebek, Jr. Retirement Plan is
an affiliate of Dr. Rebek.
 
  In August 1993, Dr. Schimmel executed a promissory note to the Company in
the amount of $250,000 with a 4% annual interest rate in connection with his
purchase of Series B Convertible Preferred Stock. This note has been paid in
full.
 
  In June 1994, the Company entered into an Employment Agreement with Dr.
Rocklage, President, Chief Executive Officer and a director of the Company.
See "Management--Employment Agreement." In consideration for the performance
of services by Dr. Rocklage under the Employment Agreement, the Company
granted to Dr. Rocklage an incentive stock option to purchase 188,121 shares
of Common Stock, at a purchase price of $0.35, the fair market value of the
Common Stock on the date of grant. Dr. Rocklage purchased 263,370 shares of
Series B Convertible Preferred Stock (convertible into 37,624 shares of Common
Stock), at a purchase price of $0.50 per share ($3.50 per share on an as-
converted basis). In July 1994, Dr. Rocklage executed a promissory note to the
Company in the amount of $131,685 with a 4% annual interest rate to purchase
his shares of Series B Convertible Preferred Stock. This note is secured by
263,370 shares of Series B Convertible Preferred Stock (convertible into
37,624 shares of Common Stock). In November 1994, Dr. Rocklage executed a
promissory note to the Company in the amount of $65,842 with a 4% annual
interest rate in connection with the exercise of his stock option agreement.
One-third of the principal and interest on the promissory note has been
forgiven and the remainder will be forgiven in equal installments on November
28, 1996 and November 28, 1997.
 
  In December 1994, the Company consummated a financing in which it issued
Convertible Demand Promissory Notes in the aggregate principal amount of
$1,000,000 (the "Notes") to a group of existing investors including DSV, Alta,
WPG Enterprise, WPG Venture and Interwest.
 
  In February 1995, the Company sold an aggregate of 9,428,644 shares of its
Series C Convertible Preferred Stock (convertible into 1,346,949 shares of
Common Stock), at a purchase price of $0.60 per share ($4.20 per share on an
as-converted basis) to a group of existing investors, including DSV, Alta, WPG
Enterprise, WPG Venture and Interwest. The purchase price of the Series C
Convertible Preferred Stock was paid in part by the conversion and
cancellation of the Notes (plus accrued interest) previously issued by the
Company to certain investors.
 
  In May 1995, the Company issued a warrant to each of Dr. Schimmel and Dr.
Rebek to purchase 120,000 shares of Series C Convertible Preferred Stock
(convertible into 17,142 shares of Common Stock), at an exercise price of
$0.60 per share ($4.20 per share on an as-converted basis).
 
  In May 1995, the Company sold an aggregate of 5,589,169 shares of its Series
C Convertible Preferred Stock (convertible into 798,452 shares of Common
Stock), at a purchase price of $0.60 per share ($4.20 per share on an as-
converted basis) to a group of new investors, including H&Q Healthcare
Investors, H&Q Life Sciences Investors, and Rovent II Limited Partnership.
   
  In May 1996, the Company granted to certain of its officers stock options
under the Plan exercisable for an aggregate of 126,507 shares of Common Stock
at an exercise price of $1.96 per share, and the Company granted to certain of
its directors stock options exercisable for an aggregate of 42,857 shares of
Common Stock at an exercise price of $1.96 per share.     
 
                                      52
<PAGE>
 
  In June 1996, the Company sold a total of 2,816,902 shares of Series D
Convertible Preferred Stock (convertible into 402,414 shares of Common Stock),
at a purchase price of $1.42 per share ($9.94 per share on an as-converted
basis), to Bristol-Myers Squibb.
   
  In June 1996, the Company granted George Conrades, a director of the
Company, a stock option exercisable for 7,142 shares of Common Stock at an
exercise price of $5.95 per share.     
 
  For a description of certain transactions and certain employment and other
arrangements between the Company and certain of its directors and executive
officers, see "Management--Director Compensation" and "--Employment
Agreements."
 
  The Company believes that the securities issued in the transactions
involving the Company described above were sold by the Company at their then
fair market value and that the terms of the transactions described above were
no less favorable than the Company could have obtained from unaffiliated third
parties.
   
  The Company has adopted a policy, effective following the consummation of
this Offering, that all future transactions between the Company and its
officers, directors and affiliates must (i) be approved by a majority of those
members of the Company's Board of Directors that are not parties, directly or
indirectly through affiliates, to such transactions and (ii) be on terms no
less favorable to the Company than could be obtained from unrelated third
parties.     
 
                                      53
<PAGE>
 
                             PRINCIPAL STOCKHOLDERS
   
  The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1996, giving effect to
the sale of 2,816,902 shares of Series D Convertible Preferred Stock
(convertible into 404,414 shares of Common Stock) to Bristol-Myers Squibb on
June 1996 and the conversion of all outstanding shares of the Company's
Preferred Stock into an aggregate of 5,366,869 shares of Common Stock by (i)
each person known to the Company to be the beneficial owner of more than 5% of
the shares of Common Stock, (ii) each director of the Company, (iii) each of
the Named Executive Officers and (iv) all current directors and executive
officers as a group.     
<TABLE>   
<CAPTION>
                                                       SHARES    PERCENT  PERCENT
                                                    BENEFICIALLY  BEFORE   AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER                  OWNED(1)   OFFERING OFFERING
- ------------------------------------                ------------ -------- --------
<S>                                                 <C>          <C>      <C>
DSV Partners IV(2).................................  1,643,499    25.77%   18.51%
 221 Nassau Street
 Princeton, NJ 08542
Entities affiliated with
Interwest Management Partners(3)...................    789,213    12.37     8.89
 300 Sandhill Road
 Building 3, Suite 255
 Menlo Park, CA 94025-7112
Entities affiliated with
Burr, Egan, Deleage & Co.(4).......................    786,356    12.33     8.86
 One Post Office Square, Suite 3800
 Boston, MA 02109
Entities affiliated with
Weiss, Peck & Greer, L.L.C.(5).....................    667,308    10.46     7.52
 555 California Street, Suite 4760
 San Francisco, CA 94104
Entities affiliated with
H&Q Capital Management(6)..........................    428,571     6.72     4.83
 50 Rowes Wharf
 Boston, MA 02110
Bristol-Myers Squibb Company(7)....................    402,414     6.31     4.53
 P.O. Box 4000
 Princeton, NJ 08543
Entities affiliated with
Advent International Corporation(8)................    357,142     5.60     4.02
 101 Federal Street
 Boston, MA 02110
Scott M. Rocklage(9)...............................    240,302     3.77     2.71
Francis P. Tally...................................     92,857     1.46     1.05
Nancy Gray(10).....................................     12,142      *        *
John K. Clarke(11).................................  1,643,499    25.77    18.51
Paul R. Schimmel(12)...............................    302,856     4.74     3.40
Julius Rebek, Jr.(13)..............................    241,000     3.77     2.71
Ellen M. Feeney(14)................................    667,308    10.46     7.52
Terrance G. McGuire(15)............................    778,178    12.20     8.76
Barry Bloom(16)....................................      8,928      *        *
George Conrades....................................      *          *        *
All current executive officers and directors as a
 group (12 persons)(17)..............................3,988,944.   62.54    44.93
</TABLE>    
 
                                       54
<PAGE>
 
- --------
  * Less than 1% of the outstanding shares of Common Stock.
 
 (1) Beneficial ownership is determined in accordance with Rule 13d-3(d)
     promulgated by the Commission under the Securities and Exchange Act of
     1934, as amended. Shares of Common Stock issuable pursuant to options,
     warrants and convertible securities, to the extent such securities are
     currently exercisable or convertible within 60 days of May 31, 1996, are
     treated as outstanding for computing the percentage of the person holding
     such securities but are not treated as outstanding for computing the
     percentage of any other person. Unless otherwise noted, each person or
     group identified possesses sole voting and investment power with respect
     to shares, subject to community property laws where applicable. Shares
     not outstanding but deemed beneficially owned by virtue of the right of a
     person or group to acquire them within 60 days are treated as outstanding
     only for purposes of determining the number of and percent owned by such
     person or group.
   
 (2) DSV Management is the general partner of DSV and as such shares voting
     and investment power with respect to the shares owned by DSV. DSV
     Management may be deemed to beneficially own all of the shares owned by
     DSV although DSV Management disclaims beneficial ownership except to the
     extent of its proportionate partnership interest in DSV. Mr. Clarke is a
     general partner of DSV Management.     
   
 (3) Consists of 783,986 shares held by Interwest and 5,227 shares held by
     Interwest Investors V. Interwest Management Partners V is the general
     partner of Interwest and as such Interwest Management Partners V shares
     voting and investment power with respect to the shares owned by
     Interwest. Interwest Management Partners V may be deemed to beneficially
     own all of the shares owned by Interwest although it disclaims beneficial
     ownership except to the extent of its proportionate direct partnership
     interests in Interwest. Mr. Arnold Oronsky, a consultant to the Company,
     is a general partner of Interwest Management Partners V. Mr. Oronsky is
     also a general partner of Interwest Investors V and as such shares voting
     and investment power with respect to the shares owned by Interwest
     Investors V. Mr. Oronsky may be deemed to beneficially own all of the
     shares owned by Interwest Investors V although he disclaims beneficial
     ownership except to the extent of his proportionate partnership interest
     in Interwest Investors V.     
   
 (4) Consists of 778,178 shares held by Alta and 8,178 shares held by Customs
     House Partners. Alta V Management Partners, L.P. is the general partner
     of Alta and as such shares voting and investment power with respect to
     the shares owned by Alta. Alta V Management Partners, L.P. may be deemed
     to beneficially own all of the shares owned by Alta although Alta V
     Management Partners, L.P. disclaims beneficial ownership except to the
     extent of its proportionate partnership interest in Alta. Mr. McGuire is
     a general partner of Alta V Management Partners, L.P. Eileen McCarthy is
     a general partner of Customs House Partners and as such shares voting and
     investment power with respect to the shares owned by Customs House
     Partners. Ms. McCarthy may be deemed to beneficially own all of the
     shares owned by Customs House Partners although Ms. McCarthy disclaims
     beneficial ownership except to the extent of her proportionate
     partnership interest in Customs House Partners.     
   
 (5) Consists of 354,741 shares held by WPG Enterprise, 256,380 shares held by
     WPG Venture and 56,187 shares held by WPG Overseas (the "WPG Group"). WPG
     Venture Partners II, L.P. is the general partner of WPG Enterprise and
     WPG Venture and is the investment adviser of WPG Overseas. In such
     capacities, WPG Venture Partners II, L.P. shares voting and investment
     control with respect to the shares owned by the WPG Group. WPG Venture
     Partners II, L.P. may be deemed to beneficially own all of the shares
     owned by the WPG Group although WPG Venture Partners II, L.P. disclaims
     beneficial ownership except to the extent of its proportionate
     partnership interest in each of the partnerships in the WPG Group. Ms.
     Feeney is a general partner of WPG Venture Partners II, L.P.     
   
 (6) Consists of 238,095 shares held by H&Q Healthcare Investors and 190,476
     shares held by H&Q Life Sciences Investors. H&Q Capital Management, Inc.
     is the general partner of H&Q Healthcare Investors and H&Q Life Sciences
     Investors and as such H&Q Capital Management, Inc. shares voting and
     investment power with respect to the shares owned by H&Q Healthcare
     Investors and H&Q Life Sciences Investors. H&Q Capital Management, Inc.
     may be deemed to beneficially own all of the shares owned by H&Q
     Healthcare Investors and H&Q Life Sciences Investors although H&Q Capital
     Management, Inc. disclaims beneficial ownership except to the extent of
     its proportionate partnership interest in each of H&Q Healthcare
     Investors and H&Q Life Sciences Investors.     
   
 (7) Consists of the purchase in June 1996 of 2,816,902 shares of Series D
     Convertible Preferred Stock.     
   
 (8) Consists of 295,238 shares held by Rovent II Limited Partnership, 59,523
     shares held by Advent Performance Materials Limited Partnership and 2,381
     shares held by Advent International Investors II Limited Partnership.
     Advent International Corporation is the indirect general partner of each
     of Rovent II Limited Partnership, Advent Performance Materials Limited
     Partnership and Advent International Investors II Limited Partnership and
     as such shares voting and investment power with respect to all of such
     shares. Advent International Corporation may be deemed to beneficially
     own all of such shares although it disclaims beneficial ownership except
     to the extent of its indirect proportionate partnership interest in
     Rovent II Limited Partnership, Advent Performance Materials Limited
     Partnership and Advent International Investors II Limited Partnership.
            
 (9) Includes 2,678 shares of Common Stock which Dr. Rocklage has the right to
     acquire within 60 days of May 31, 1996 upon exercise of stock options.
            
(10) Dr. Gray resigned from the Company in February 1996.     
   
(11) Consists of shares held by DSV. Mr. Clarke, Chairman of the Board of
     Directors of the Company, is a general partner of DSV     
 
                                      55
<PAGE>
 
       
    Management, the general partner of DSV. Mr. Clarke shares voting and
    investment power with respect to the shares owned by DSV. Mr. Clarke may
    be deemed to beneficially own the shares held by DSV although he disclaims
    beneficial ownership except to the extent of his proportionate partnership
    interest therein.     
   
(12) Includes 17,142 shares of Common Stock which Dr. Schimmel has the right
     to acquire within 60 days of May 31, 1996 upon the exercise of his stock
     options and warrants.     
   
(13) Includes 17,142 shares of Common Stock which Dr. Rebek has the right to
     acquire within 60 days of May 31, 1996 upon the exercise of his stock
     options and warrants and 3,857 shares held by the Julius Rebek, Jr.
     Retirement Plan, over which Dr. Rebek has sole voting power and
     beneficial ownership. Includes shares owned by Dr. Rebek's wife. Dr.
     Rebek disclaims beneficial ownership of all shares owned by his wife.
            
(14) Consists of shares held by the WPG Group. Ms. Feeney, a director of the
     Company, is a general partner of WPG Venture Partners II, L.P., the
     general partner of WPG Enterprise and WPG Venture and the adviser to WPG
     Overseas. Ms. Feeney shares voting and investment control with respect to
     the shares owned by the WPG Group. Ms. Feeney may been deemed to
     beneficially own the shares held by the WPG Group although she disclaims
     beneficial ownership except to the extent of her proportionate
     partnership interest therein.     
   
(15) Consists of shares held by Alta. Mr. McGuire, a director of the Company,
     is a general partner of Alta V Management Partners, L.P., the general
     partner of Alta. Mr. McGuire shares voting and investment control with
     respect to the shares owned by Alta. Mr. McGuire may been deemed to
     beneficially own the shares held by Alta although he disclaims beneficial
     ownership except to the extent of his proportionate partnership interest
     therein.     
   
(16) Includes 1,785 shares of Common Stock which Dr. Bloom has the right to
     acquire within 60 days of May 31, 1996 upon the exercise of his stock
     options.     
   
(17) Includes 38,747 shares of Common Stock which all directors and executive
     officers have the right to acquire within 60 days of May 31, 1996 upon
     the exercise of their stock options.     
 
                                      56
<PAGE>
 
                         DESCRIPTION OF CAPITAL STOCK
   
  Upon the closing of this Offering, the Company will be authorized to issue
25,000,000 shares of Common Stock, $0.001 par value per share, of which
8,873,023 shares will be issued and outstanding, and 5,000,000 shares of
undesignated Preferred Stock, $0.001 par value per share, of which no shares
will be issued and outstanding.     
 
COMMON STOCK
 
  Upon the closing of this Offering, the Company's Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") will authorize the
issuance of up to 25,000,000 shares of Common Stock, $0.001 par value per
share. Holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of Common
Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor and subject to any
preferential dividend rights of any then outstanding Preferred Stock. Upon the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive ratably the net assets of the Company available
after the payment of all debts and other liabilities and subject to any
liquidation preference of any then outstanding Preferred Stock. Holders of
Common Stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares of Common Stock are, and the shares offered by
the Company in this Offering will be, when issued and paid for, fully paid and
nonassessable.
   
  As of June 30, 1996, there were 6,373,023 shares of Common Stock outstanding
held by 84 stockholders (after giving effect to the automatic conversion of
all outstanding shares of Preferred Stock into an aggregate of 5,366,869
shares of Common Stock effective upon the closing of this Offering).     
 
PREFERRED STOCK
 
  Upon the closing of this Offering, the Restated Certificate will have an
authorized class of undesignated preferred stock consisting of 5,000,000
shares, $0.001 par value per share. The Board of Directors will be authorized,
subject to any limitations prescribed by law, without further stockholder
approval, to issue from time to time shares of preferred stock in one or more
series. Each such series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or
relative rights or privileges as shall be determined by the Board of
Directors, which may include, among others, dividend rights, voting rights,
redemption and sinking fund provisions, liquidation preferences, conversion
rights and preemptive rights.
 
  The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of holders of any preferred stock that may
be issued in the future. Such rights may include voting and conversion rights
which could adversely affect the holders of Common Stock. Satisfaction of any
dividend preferences of outstanding preferred stock would reduce the amount of
funds available, if any, for the payment of dividends on Common Stock. See
"Dividend Policy." Holders of preferred stock would typically be entitled to
receive a preference payment in the event of a liquidation, dissolution or
winding up of the Company before any payment is made to the holders of Common
Stock. Additionally, the issuance of preferred stock could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue any shares of
preferred stock.
 
WARRANTS
   
  As of June 30, 1996, there were outstanding warrants exercisable for up to
86,619 shares of Common Stock (after giving effect to the conversion of all
outstanding warrants to purchase shares of the Company's     
 
                                      57
<PAGE>
 
Preferred Stock into warrants for shares of Common Stock which will occur upon
the closing of this Offering). Such warrants have expiration dates ranging
from 2003 to 2006 and have a weighted average exercise price equal to $4.04
per share. The holders of the warrants are entitled to certain registration
rights in respect of the shares of Common Stock issuable upon exercise of
their respective warrants. See "Registration Rights."
 
REGISTRATION RIGHTS
 
  Certain persons and entities have rights with respect to the registration of
Common Stock under the Securities Act. Immediately after the closing of this
Offering, those rights will cover approximately 5,960,631 shares of Common
Stock (the "Registrable Shares"), which will include 86,619 shares of Common
Stock issuable upon exercise of warrants. In general, in the event that the
Company proposes to register any shares of Common Stock under the Securities
Act for its own account or the account of other stockholders at any time or
times, subject to certain exceptions, the Company must, upon the written
request of a holder of Registrable Shares, use its best efforts to cause to be
registered under the Securities Act all of the Registrable Shares requested to
be registered, provided, however, that the Company is not required to register
Registrable Securities in excess of the amount, if any, of Common Stock which
the principal underwriter of an underwritten offering shall agree to include
in such offering. The holders of 5,960,631 of the Registrable Shares will also
have the right to require the Company to prepare and file from time to time a
registration statement under the Securities Act with respect to their
Registrable Shares, provided that such holders may not exercise such right
more than once with respect to a registration statement on Form S-1 or more
than three times in any calendar year with respect to a registration statement
on Form S-3. Upon receipt of any such request from such holders, the Company
will be required to use its best efforts to effect such registration, subject
to certain conditions and limitations. If such holders are unable to include
in such registration statement on Form S-1 at least 90% of the Registrable
Shares that such holders have requested for inclusion, then such holders will
have the right to require that the Company prepare and file a second
registration statement on Form S-1 and the Company will be required to use its
best efforts to effect such registration, subject to certain conditions and
limitations.
 
 
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
 
  The Company is subject to the provisions of Section 203 of the DGCL. Subject
to certain exceptions, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained such status with the approval of the Board of Directors
or unless the business combination is approved in a prescribed manner. A
"business combination" includes certain mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who,
together with his or her affiliates and associates, owns, or within three
years prior did own, 15% or more of the corporation's voting stock.
 
  The Restated Certificate of Incorporation and Amended and Restated By-Laws
(the "By-Laws") provide that, effective upon the consummation of this
Offering, any action required or permitted to be taken by the stockholders of
the Company may be taken only at duly called annual or special meetings of the
stockholders, and that special meetings may be called only by the Chairman of
the Board of Directors, the President or a majority of the Board of Directors
of the Company. These provisions could have the effect of delaying until the
next annual stockholders' meeting stockholder actions that are favored by the
holders of a majority of the outstanding voting securities of the Company,
including actions to remove directors. These provisions may also discourage
another person or entity from making a tender offer for the Company's Common
Stock, because such person or entity, even if it acquired all or a majority of
the outstanding voting securities of the Company, would be able to take action
as a stockholder (such as electing new directors or approving a merger) only
at a duly called stockholders meeting, and not by written consent.
 
 
                                      58
<PAGE>
 
  The Company's Restated Certificate of Incorporation and By-Laws provide
that, effective upon the consummation of this Offering, for nominations for
the Board of Directors or for other business to be properly brought by a
stockholder before a meeting of stockholders, the stockholder must first have
given timely notice thereof in writing to the Secretary of the Company. To be
timely, a notice of nominations or other business to be brought before an
annual meeting must be delivered not less than 120 days nor more than 150 days
prior to the first anniversary of the date of the proxy statement delivered to
stockholders in connection with the preceding year's annual meeting or, if the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary, or if no proxy statement was delivered to stockholders
in connection with the preceding year's annual meeting, such notice must be
delivered not earlier than 90 days prior to such annual meeting and not later
than the later of (i) 60 days prior to the annual meeting or (ii) 10 days
following the date on which public announcement of the date of such annual
meeting is first made by the Company. With respect to special meetings, notice
must generally be delivered not more than 90 days prior to such meeting and
not later than the later of 60 days prior to such meeting or 10 days following
the day on which public announcement of such meeting is first made by the
Company. The notice must contain, among other things, certain information
about the stockholder delivering the notice and, as applicable, background
information about each nominee or a description of the proposed business to be
brought before the meeting.
 
  The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless the corporation's certificate
of incorporation or by-laws, as the case may be, requires a greater
percentage. The Company's Restated Certificate of Incorporation requires the
affirmative vote of the holders of at least 75% of the outstanding voting
stock of the Company to amend or repeal any of the foregoing provisions, or to
reduce the number of authorized shares of Common Stock and preferred stock. A
75% vote is also required to amend or repeal any of the foregoing By-Law
provisions. Such 75% stockholder vote would in either case be in addition to
any separate class vote that might in the future be required pursuant to the
terms of any preferred stock that might be outstanding at the time any such
amendments are submitted to stockholders. The By-Laws may also be amended or
repealed by a majority vote of the Board of Directors.
 
  The Company's Restated Certificate of Incorporation and By-Laws provide for
the division of the Board of Directors into three classes, as nearly equal in
size as possible, with staggered three-year terms. See "Management--Executive
Officers, Key Employees and Directors." Any director may be removed only for
cause and then only by the vote of a majority of the shares entitled to vote
for the election of directors.
 
  The Company's Restated Certificate of Incorporation empowers the Board of
Directors, when considering a tender offer or merger or acquisition proposal,
to take into account factors in addition to potential economic benefits to
stockholders. Such factors may include (i) comparison of the proposed
consideration to be received by stockholders in relation to the then current
market price of the Company's capital stock, the estimated current value of
the Company in a freely negotiated transaction and the estimated future value
of the Company as an independent entity, and (ii) the impact of such a
transaction on the employees, suppliers and customers of the Company and its
effect on the communities in which the Company operates.
 
  The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, control of the Company.
 
  The Company's Restated Certificate of Incorporation contains certain
provisions permitted under the DGCL relating to the liability of directors.
These provisions eliminate a director's personal liability for monetary
damages resulting from a breach of fiduciary duty, except in certain
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions that involve intentional
misconduct or a knowing violation of law. These provisions do not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a
director's fiduciary duty. There provisions will not alter a director's
liability under federal
 
                                      59
<PAGE>
 
securities laws. The Company's Restated Certificate of Incorporation and By-
Laws also contain provisions indemnifying the directors and officers of the
Company to the fullest extent permitted by the DGCL. The Company believes that
these provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
 
TRANSFER AGENT AND REGISTRAR
 
  The transfer agent and registrar for the Company's Common Stock is The First
National Bank of Boston.
 
                        SHARES ELIGIBLE FOR FUTURE SALE
   
  Upon completion of this Offering, the Company will have outstanding
8,873,023 shares of Common Stock. Of these shares, the 2,500,000 shares sold
in this Offering will be freely tradeable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. The
remaining 6,373,023 shares outstanding upon completion of this Offering will
be "restricted securities" as that term is defined under Rule 144 (the
"Restricted Shares"). Sales of Restricted Shares in the public market, or the
availability of such shares for sale, could adversely affect the market price
of the Common Stock. The executive officers, directors, employees and other
stockholders of the Company who beneficially own an aggregate of 6,373,023
shares of Common Stock outstanding prior to this Offering have agreed that
they will not, without the prior written consent of UBS Securities LLC, offer,
sell or otherwise dispose of any shares of Common Stock, options or warrants
to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock owned by them for a period of 180 days
after the effective date of this Offering (the "Lock-Up Period"). See
"Underwriting."     
   
  Upon expiration of the Lock-Up Period, approximately 177,139 Restricted
Shares held by non-affiliates will be eligible for sale in the public market
without restriction pursuant to Rule 144(k) and approximately 3,346,275
Restricted Shares held by affiliates and approximately 68,068 Restricted
Shares held by non-affiliates will be so eligible subject to compliance with
the volume limitations of Rule 144 described below. The remaining 2,547,809
Restricted Shares may be sold pursuant to Rule 144 only after they have been
fully paid for and held for at least two years from the later of the date of
issuance by the Company or acquisition from an affiliate (which dates do not
occur until after the expiration of the Lock-Up Period).     
   
  Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon exercise of options granted by the Company prior to the date
of this Prospectus will also be eligible for sale in the public market
pursuant to Rule 701 under the Securities Act. In general, Rule 701 permits
resales of shares issued pursuant to certain compensatory benefit plans and
contracts commencing 90 days after the issuer becomes subject to the reporting
requirements of the Securities and Exchange Act of 1934, as amended, in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirements, contained in Rule 144. If all the
requirements of Rule 701 are met, upon expiration of the Lock-Up Period an
aggregate of 233,732 shares of Common Stock currently outstanding, and an
aggregate of 520,660 shares of Common Stock issuable upon exercise of
currently outstanding options will be eligible for sale pursuant to such rule
commencing on the 181st day after this Prospectus.     
 
  In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owned Restricted Shares for at
least two years, including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the number of shares
of Common Stock then outstanding or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the filing of a Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. In addition, a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding
 
                                      60
<PAGE>
 
the sale, and who has beneficially owned for at least three years the shares
proposed to be sold, would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above.
 
  The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule
changes will be enacted. If enacted, such modifications will have a material
effect on the times when shares of the Company's Common Stock become eligible
for resale.
 
  The Company is unable to estimate accurately the number of Restricted Shares
that will be sold under Rule 144 since this will depend in part on the market
price for the Common Stock, the personal circumstances of the sellers and
other factors.
 
  Rule 144A under the Securities Act would permit, subject to certain
conditions, the sale by the current holders of Restricted Shares of all or a
portion of their shares to certain "qualified institutional buyers," as
defined in Rule 144A.
 
  The Company intends to file a Form S-8 registration statement under the
Securities Act to register all shares of Common Stock issuable under the Plan.
That registration statement is expected to be filed within 180 days after the
date of this Prospectus and is expected to become effective immediately upon
filing. Shares covered by such registration statement will be eligible for
resale in the public market after the effective date of such registration
statements, subject to Rule 144 limitations applicable to affiliates and to
the Lockup Period, if applicable.
 
  In addition, upon completion of this Offering, the holders of 5,453,488
shares of Common Stock (including holders of warrants to purchase 86,619
shares of Common Stock) will be entitled to certain rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by affiliates of the Company) immediately upon the effectiveness of
such registration. See "Description of Capital Stock--Registration Rights."
 
                                      61
<PAGE>
 
                                 UNDERWRITING
 
  Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC,
Hambrecht & Quist LLC and Pacific Growth Equities, Inc. are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company the following respective number of shares of Common Stock:
 
<TABLE>
<CAPTION>
                                                                       NUMBER OF
   UNDERWRITERS                                                         SHARES
   ------------                                                        ---------
   <S>                                                                 <C>
   UBS Securities LLC.................................................
   Hambrecht & Quist LLC..............................................
   Pacific Growth Equities, Inc.......................................
</TABLE>
 
<TABLE>
   <S>                                                                 <C>
                                                                       ---------
       Total.......................................................... 2,500,000
                                                                       =========
</TABLE>
 
  The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased. The Underwriting Agreement contains certain provisions whereby if
any Underwriter defaults in its obligation to purchase shares, and the
aggregate obligations of the Underwriters so defaulting do not exceed 10% of
the shares offered hereby, the remaining Underwriters, or some of them, must
assume such obligations.
 
  The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering
price set forth on the cover of this Prospectus, and to certain dealers at
such price less a concession not in excess of $    per share. The Underwriters
may allow and such dealers may reallow a concession not in excess of $    per
share to certain other dealers. After the public offering of the shares of
Common Stock, the offering price and other selling terms may be changed by the
Underwriters.
 
  The Company has granted the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. To the extent that the Underwriters
exercise this option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of shares
of Common Stock to be purchased by it shown in the above table bears to the
total number of shares of Common Stock offered hereby. The Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters to
the extent the option is exercised.
 
  The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
   
  The executive officers, directors, employees and other stockholders of the
Company who beneficially own an aggregate of 6,373,023 shares of Common Stock
outstanding prior to this Offering have agreed that they will not, without the
prior written consent of UBS Securities LLC, offer, sell or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common
Stock owned by them for a period of 180 days after the effective date of this
Offering. The Company has agreed that it will not, without the prior written
consent of UBS Securities LLC, offer, sell or otherwise dispose of any shares
of Common Stock, options or warrants to acquire     
 
                                      62
<PAGE>
 
shares of Common Stock for a period of 180 days after the date of this
Prospectus, except that the Company may grant additional options under its
stock option plans, or issue shares upon the exercise of outstanding stock
options.
 
  The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
 
  Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated among the Company
and the Representatives. Among the factors to be considered in determining the
initial public offering price of the Common Stock, in addition to prevailing
market and economic conditions, are certain financial information of the
Company, the history of, and the prospects for, the Company and the industry
in which it competes, an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present stage of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. The initial public offering
price set forth on the cover page of this Prospectus should not, however, be
considered an indication of the actual value of the Common Stock. Such price
is subject to change as a result of market conditions and other factors. There
can be no assurance that an active trading market will develop for the Common
Stock or that the Common Stock will trade in the public market subsequent to
this Offering at or above the initial offering price.
 
  The Company has applied for listing of the Common Stock on the Nasdaq
National Market under the symbol "CBST."
 
                                 LEGAL MATTERS
 
  Bingham, Dana & Gould LLP, Boston, Massachusetts will pass on the validity
of the shares offered hereby for the Company. Justin P. Morreale, Esq., a
partner at Bingham, Dana & Gould LLP, is the Secretary of the Company and owns
42,857 shares of Common Stock. David L. Engel, Esq., a partner at Bingham,
Dana & Gould LLP, owns 5,952 shares of Common Stock. Certain legal matters
will be passed upon for the Underwriters by Hale and Dorr, Boston,
Massachusetts.
 
                                    EXPERTS
 
  The balance sheets of the Company as of December 31, 1994 and 1995 and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995 included in this
Prospectus and in the Registration Statement have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given upon the authority of that firm as experts in accounting and auditing.
 
  The statement in this Prospectus under the captions "Risk Factors--
Uncertainty of Patents and Proprietary Rights" and "Business--Patents and
Proprietary Rights" have been reviewed and approved by Hamilton, Brook, Smith
& Reynolds, P.C. patent counsel to the Company, as experts on such matters,
and are included herein in reliance upon that review and approval. David E.
Brook, Esq., a shareholder at Hamilton, Brook, Smith & Reynolds, P.C. owns
14,285 shares of Common Stock. Dr. Helen Wendler, an attorney at Hamilton,
Brook, Smith & Reynolds, P.C., is the spouse of Dr. Philip Wendler. Dr. Philip
Wendler owns 10,285 shares of Common Stock and has stock options exercisable
for 26,142 shares of Common Stock.
 
                            ADDITIONAL INFORMATION
 
  The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act
of 1933, as amended (the "Securities Act") with respect to shares of Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract or other document filed as an exhibit to the Registration Statement
are qualified in all respects by such reference. For further information with
respect to the Company
 
                                      63
<PAGE>
 
   
and the Common Stock, reference is hereby made to the Registration Statement
and to the exhibits and schedules thereto, which may be inspected without
charge at the principal office of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the
Commission: the New York Regional Office located at 7 World Trade Center,
Suite 1300, New York, New York 10048 and the Chicago Regional Office located
at the Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of this material also may be obtained from the
Commission's Public Reference Section at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.     
 
  The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information.
 
                                      64
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Report of Independent Accountants.........................................   F-2
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996
 (unaudited) and June 30, 1996 Pro forma Stockholders' Equity
 (unaudited)..............................................................   F-3
Statements of Operations for the years ended December 31, 1993, 1994 and
 1995 and for the (unaudited) six month periods ended June 30, 1995 and
 1996.....................................................................   F-4
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
 1995 and for the (unaudited) six month periods ended June 30, 1995 and
 1996.....................................................................   F-5
Statements of Changes in Stockholders' Equity for the years ended December
 31, 1993, 1994 and 1995 and for the (unaudited) six month period ended
 June 30, 1996............................................................   F-6
Notes to Financial Statements.............................................  F-10
</TABLE>    
 
                                      F-1
<PAGE>
 
This is the form of the opinion which will be issued upon effectiveness of the
stock split described in Note M to the financial statements.
 
                                          /s/ Coopers & Lybrand L.L.P.
                                          Coopers & Lybrand L.L.P.
 
Boston, Massachusetts
   
July 31, 1996     
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of Cubist Pharmaceuticals, Inc.:
 
  We have audited the accompanying balance sheets of Cubist Pharmaceuticals,
Inc. as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1995. 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 conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cubist Pharmaceuticals,
Inc. as of December 31, 1995 and 1994, and the results of its operations and
cash flows for each of the three years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
       
Boston, Massachusetts
January 12, 1996, except as to the information in Notes L and M, for which the
date is      , 1996
 
                                      F-2
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
                                 BALANCE SHEETS
 
 
<TABLE>   
<CAPTION>
                                DECEMBER 31,
                          -------------------------
                                                                     PRO FORMA
                                                                   STOCKHOLDERS'
                                                       JUNE 30,       EQUITY
                             1994          1995          1996      JUNE 30, 1996
                          -----------  ------------  ------------  -------------
                                                            (unaudited)
<S>                       <C>          <C>           <C>           <C>
         ASSETS
Current Assets:
  Cash and cash
   equivalents..........  $ 1,220,983  $  2,049,555  $  4,732,273
  Short-term investments
   .....................          --      1,006,569           --
  Accounts receivable...          --        988,000     1,915,000
  Prepaid expenses and
   other current
   assets...............       82,709        66,996       734,086
                          -----------  ------------  ------------
  Total current assets..    1,303,692     4,111,120     7,381,359
Property and equipment..    3,282,436     3,834,953     4,171,086
  Less: Accumulated
   depreciation and
   amortization.........     (486,246)   (1,056,802)   (1,368,476)
                          -----------  ------------  ------------
  Property and
   equipment, net.......    2,796,190     2,778,151     2,802,610
Other assets............      150,181       158,571       171,260
                          -----------  ------------  ------------
    Total assets........  $ 4,250,063  $  7,047,842  $ 10,355,229
                          ===========  ============  ============
    LIABILITIES AND
  STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable......  $   375,270  $    124,856  $    413,266
  Accrued expenses......      647,353       189,663       768,614
  Deferred revenue......          --            --        550,000
  Current portion of
   long-term debt.......       96,997       168,565       177,164
  Current portion of
   capital lease
   obligations..........      276,062       413,223       449,646
                          -----------  ------------  ------------
    Total current
     liabilities........    1,395,682       896,307     2,358,690
Long-term debt, net of
 current portion........      346,943       479,745       389,378
Long-term capital lease
 obligation, net of
 current portion........      684,587       777,017       816,950
Venture capital bridge
 loan payable...........    1,000,000           --            --
                          -----------  ------------  ------------
    Total liabilities...    3,427,212     2,153,069     3,565,018
                          -----------  ------------  ------------
Commitments (Note I)
Stockholders' Equity:
Preferred Stock non-
 cumulative;
 convertible--$.001 par
 value; authorized
 43,000,000 shares;
 issued 1994 19,733,370
 shares; issued 1995
 34,751,183 shares;
 issued June 1996
 37,568,085 shares; and
 no shares issued pro
 forma..................       19,733        34,751        37,568  $        --
Common Stock--$.001 par
 value; authorized
 52,000,000 shares;
 issued 1994 910,027
 shares; issued 1995
 1,016,662 shares;
 issued June 30, 1996
 1,006,154 shares and
 6,373,023 shares pro
 forma..................          910         1,017         1,006         6,373
Additional paid-in
 capital................    7,338,075    16,790,878    20,756,723    20,788,924
Accumulated deficit.....   (6,535,867)  (11,931,873)  (14,005,086)  (14,005,086)
                          -----------  ------------  ------------  ------------
    Total stockholders'
     equity.............      822,851     4,894,773     6,790,211  $  6,790,211
                          -----------  ------------  ------------  ============
    Total liabilities
     and stockholders'
     equity.............  $ 4,250,063  $  7,047,842  $ 10,355,229
                          ===========  ============  ============
</TABLE>    
 
    The accompanying notes are an integral part of the financial statements.
 
                                      F-3
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
                            STATEMENTS OF OPERATIONS
 
 
<TABLE>   
<CAPTION>
                                                                   SIX MONTHS ENDED
                          FOR THE YEARS ENDED DECEMBER 31,             JUNE 30,
                         -------------------------------------  ------------------------
                            1993         1994         1995         1995         1996
                         -----------  -----------  -----------  -----------  -----------
                                                                      (unaudited)
<S>                      <C>          <C>          <C>          <C>          <C>
Sponsored research
 revenues............... $       --   $       --   $ 1,271,333  $   100,000  $ 2,046,653
Operating expenses:
  Research and
   development..........   1,169,168    3,309,161    4,964,876    2,594,884    3,182,609
  General and
   administrative.......     546,843    1,448,928    1,708,513      818,977      873,586
                         -----------  -----------  -----------  -----------  -----------
    Total operating
     expenses...........   1,716,011    4,758,089    6,673,389    3,413,861    4,056,195
Interest income.........      45,028      113,338      239,030       90,312       43,232
Interest expense........     (16,911)    (168,284)    (232,980)    (100,806)    (106,903)
                         -----------  -----------  -----------  -----------  -----------
  Net loss.............. $(1,687,894) $(4,813,035) $(5,396,006) $(3,324,355) $(2,073,213)
                         ===========  ===========  ===========  ===========  ===========
Pro forma net loss per
 share (Note B).........                           $     (0.91)              $     (0.32)
                                                   ===========               ===========
Pro forma weighted
 average shares used in
 computing pro forma net
 loss per share 
 (Note B)...............                             5,933,507                 6,485,149
                                                   ===========               ===========
</TABLE>    
 
 
    The accompanying notes are an integral part of the financial statements.
 
                                      F-4
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>   
<CAPTION>
                                                                    SIX MONTHS ENDED
                           FOR THE YEARS ENDED DECEMBER 31,             JUNE 30,
                          -------------------------------------  ------------------------
                             1993         1994         1995         1995         1996
                          -----------  -----------  -----------  -----------  -----------
                                                                       (UNAUDITED)
<S>                       <C>          <C>          <C>          <C>          <C>
Cash flows from
 operating activities:
 Net loss...............  $(1,687,894) $(4,813,035) $(5,396,006) $(3,324,355) $(2,073,213)
 Adjustments to
  reconcile net loss to
  net cash used in
  operating activities:
  Depreciation and
   amortization.........      130,269      355,977      570,556      265,914      311,674
  Changes in assets and
   liabilities:
   Accounts receivable..          --           --      (988,000)         --      (927,000)
   Prepaid expenses and
    other current
    assets..............      (69,669)     (12,688)      15,713      (32,279)    (667,090)
   Other assets.........      (58,112)         --        (8,390)         --           --
   Accounts payable and
    accrued expenses....      294,930      716,018     (708,104)    (655,757)     867,360
   Deferred revenue.....          --           --           --           --       550,000
                          -----------  -----------  -----------  -----------  -----------
    Total adjustments...      297,418    1,059,307   (1,118,225)    (422,122)     134,944
                          -----------  -----------  -----------  -----------  -----------
Net cash used in
 operating activities...   (1,390,476)  (3,753,728)  (6,514,231)  (3,746,477)  (1,938,269)
Cash flows from
 investing activities:
 Purchase of equipment..      (86,612)    (150,726)         --      (193,875)    (276,742)
 Leasehold
  improvements..........   (1,183,692)    (688,329)     (99,325)     (88,335)      (4,361)
 Purchase of short-term
  investments...........   (2,612,158)         --    (3,942,610)  (3,379,296)         --
 Redemption of short-
  term investments......          --     2,612,158    2,936,041      443,254    1,006,569
 Redemption of long-term
  investments...........     (511,934)     511,934          --           --           --
                          -----------  -----------  -----------  -----------  -----------
Net cash provided
 by/(used in) investing
 activities.............   (4,394,396)   2,285,037   (1,105,894)  (3,218,252)     725,466
Cash flows from
 financing activities:
 Issuance of stock......    6,709,690      148,314    8,467,928    8,008,850    3,968,651
 Proceeds from venture
  capital bridge loan...          --     1,000,000          --           --           --
 Proceeds from long-term
  debt..................      543,393          --       345,500      345,500          --
 Repayments of long-term
  debt..................      (13,373)     (86,080)    (141,130)     (64,229)     (81,767)
 Proceeds from capital
  lease financing.......          --           --        94,671      286,522      229,216
 Principal payments of
  capital lease
  obligations...........          --      (212,428)    (318,272)    (178,754)    (207,889)
 Deposits relating to
  capital lease
  obligations...........      (42,760)      (5,001)         --       (10,090)     (12,690)
                          -----------  -----------  -----------  -----------  -----------
Net cash provided by
 financing activities...    7,196,950      844,805    8,448,697    8,387,799    3,895,521
                          -----------  -----------  -----------  -----------  -----------
Net increase (decrease)
 in cash and cash
 equivalents............    1,412,078     (623,886)     828,572    1,423,070    2,682,718
Cash and cash
 equivalents at
 beginning of year......      432,791    1,844,869    1,220,983    1,220,983    2,049,555
                          -----------  -----------  -----------  -----------  -----------
Cash and cash
 equivalents at end of
 year...................  $ 1,844,869  $ 1,220,983  $ 2,049,555  $ 2,644,053  $ 4,732,273
                          ===========  ===========  ===========  ===========  ===========
Supplemental disclosures
 of cash flow
 information:
 Cash paid during the
  year for interest.....  $    16,911  $   168,284  $   232,980  $   100,806  $   106,903
 Capital lease
  obligations entered
  into..................  $   916,926  $   256,151  $   547,862  $   336,712  $   284,245
</TABLE>    
   
Supplemental disclosure of non-cash transaction: Settlement of venture capital
bridge loan--Note G.     
 
    The accompanying notes are an integral part of the financial statements.
 
                                      F-5
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
                 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
     
  FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
                            ENDED JUNE 30, 1996     
 
<TABLE>   
<CAPTION>
                  # OF SHARES # OF SHARES # OF SHARES # OF SHARES # OF SHARES     $       $
                  PREFERRED A PREFERRED B PREFERRED C PREFERRED D   COMMON    PREFERRED COMMON
                  ----------- ----------- ----------- ----------- ----------- --------- ------
<S>               <C>         <C>         <C>         <C>         <C>         <C>       <C>
12/31/92
Balance.........   5,000,000          --          --        --      444,898    $ 5,000  $  445
                   ---------  ----------  ----------     -----      -------    -------  ------
Common Stock
Issued to
Consultants.....                                                     78,571                 79
Series B
Preferred Stock
par $.001 at
$.50 share......              14,270,000                                        14,270
Notes Receivable
Preferred
Stock...........
MIT Agreement
2% outstanding..                                                     23,170                 23
Exercise of
Common Stock
Options.........                                                        223
Net Loss........
                   ---------  ----------  ----------     -----      -------    -------  ------
12/31/93
Balance.........   5,000,000  14,270,000          --        --      546,862    $19,270  $  547
                   =========  ==========  ==========     =====      =======    =======  ======
Series B
Preferred Stock
par $.001 at
$.50 share......                 463,370                                           463
Common Stock par
$.007 at $.07
and $.35 share..                                                     60,714                 61
Exercise of
Common Stock
Options.........                                                    302,451                302
Notes Receivable
Preferred Series
B...............
Notes Receivable
Common Stock....
Issuance of
Stock Options...
Amortization of
Deferred
Compensation....
Net Loss........
                   ---------  ----------  ----------     -----      -------    -------  ------
12/31/94
Balance.........   5,000,000  14,733,370          --        --      910,027    $19,733  $  910
                   =========  ==========  ==========     =====      =======    =======  ======
<CAPTION>
                                   $
                      ADDITIONAL PAID-IN CAPITAL
                  ------------------------------------
                                                            $             $
                  ISSUANCE OF   NOTES       DEFERRED   ACCUMULATED  STOCKHOLDERS'
                    SHARES    RECEIVABLE  COMPENSATION   DEFICIT       EQUITY
                  ----------- ----------- ------------ ------------ -------------
<S>               <C>         <C>         <C>          <C>          <C>           <C>
12/31/92
Balance.........  $  495,269         --           --   $   (34,938)  $  465,776
                  ----------- ----------- ------------ ------------ -------------
Common Stock
Issued to
Consultants.....         471                                                550
Series B
Preferred Stock
par $.001 at
$.50 share......   7,120,730                                          7,135,000
Notes Receivable
Preferred
Stock...........              $(435,000)                               (435,000)
MIT Agreement
2% outstanding..       9,115                                              9,138
Exercise of
Common Stock
Options.........           2                                                  2
Net Loss........                                        (1,687,894)  (1,687,894)
                  ----------- ----------- ------------ ------------ -------------
12/31/93
Balance.........  $7,625,587  $(435,000)          --   ($1,722,832)  $5,487,572
                  =========== =========== ============ ============ =============
Series B
Preferred Stock
par $.001 at
$.50 share......     231,221                                            231,684
Common Stock par
$.007 at $.07
and $.35 share..      21,189                                             21,250
Exercise of
Common Stock
Options.........      86,485                                             86,787
Notes Receivable
Preferred Series
B...............               (131,685)                               (131,685)
Notes Receivable
Common Stock....                (65,842)                                (65,842)
Issuance of
Stock Options...      17,150                $(17,150)
Amortization of
Deferred
Compensation....                               6,120                      6,120
Net Loss........                                        (4,813,035)  (4,813,035)
                  ----------- ----------- ------------ ------------ ------------- ---
12/31/94
Balance.........  $7,981,632  $(632,527)    $(11,030)  $(6,535,867)  $  822,851
                  =========== =========== ============ ============ =============
</TABLE>    
 
    The accompanying notes are an integral part of the financial statements.
       
                                      F-6
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
           STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
     
  FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
                            ENDED JUNE 30, 1996     
 
<TABLE>   
<CAPTION>
                  # OF SHARES # OF SHARES # OF SHARES # OF SHARES # OF SHARES     $       $
                  PREFERRED A PREFERRED B PREFERRED C PREFERRED D   COMMON    PREFERRED COMMON
                  ----------- ----------- ----------- ----------- ----------- --------- ------
<S>               <C>         <C>         <C>         <C>         <C>         <C>       <C>
Series C
 Preferred Stock
 par $.001 at
 $.60 share.....                          15,017,813                           $15,018
Series C
 Preferred Stock
 Offering
 Expenses.......
Common Stock par
 $.007 at $.35
 and $.42
 share..........                                                     114,082               114
Exercise of
 Common Stock
 Options........                                                         785                 1
Repurchase of
 Common Stock...                                                      (8,232)               (8)
Repayment of
 Notes
 Receivable
 Preferred
 Series B Notes
 Receivable
 Preferred
 Series B.......
Notes Receivable
 Common Stock...
Forgiveness of
 Promissory
 Notes..........
Issuance of
 Stock Options..
Amortization of
 Deferred
 Compensation...
Net Loss
                   ---------  ----------  ----------   ---------   ---------   -------  ------
12/31/95
 Balance........   5,000,000  14,733,370  15,017,813          --   1,016,662   $34,751  $1,017
                   =========  ==========  ==========   =========   =========   =======  ======
Series D
 Preferred Stock
 par .001 at
 $1.42 share....                                       2,816,902               $ 2,817
Series D
 Preferred Stock
 Offering
 Expenses.......
Exercise of
 Common Stock
 Options........                                                      19,042                19
Repurchase of
 Common Stock...                                                     (29,550)              (30)
Amortization of
 Deferred
 Compensation...
Net Loss........
                   ---------  ----------  ----------   ---------   ---------   -------  ------
6/30/96 Balance
 (unaudited)....   5,000,000  14,733,370  15,017,813   2,816,902   1,006,154   $37,568  $1,006
                   =========  ==========  ==========   =========   =========   =======  ======
<CAPTION>
                                   $
                      ADDITIONAL PAID-IN CAPITAL
                  -------------------------------------
                                                             $              $
                  ISSUANCE OF    NOTES       DEFERRED   ACCUMULATED   STOCKHOLDERS'
                    SHARES     RECEIVABLE  COMPENSATION   DEFICIT        EQUITY
                  ------------ ----------- ------------ ------------- ------------- ---
<S>               <C>          <C>         <C>          <C>           <C>           <C>
Series C
 Preferred Stock
 par $.001 at
 $.60 share.....    8,995,670                                           9,010,688
Series C
 Preferred Stock
 Offering
 Expenses.......      (45,787)                                            (45,787)
Common Stock par
 $.007 at $.35
 and $.42
 share..........       47,274                                              47,388
Exercise of
 Common Stock
 Options........          274                                                 275
Repurchase of
 Common Stock...       (2,873)                                             (2,881)
Repayment of
 Notes
 Receivable
 Preferred
 Series B Notes
 Receivable
 Preferred
 Series B.......                 435,000                                  435,000
Notes Receivable
 Common Stock...                  (4,989)                                  (4,989)
Forgiveness of
 Promissory
 Notes..........                  23,615                                   23,615
Issuance of
 Stock Options..       28,020                 (28,020)
Amortization of
 Deferred
 Compensation...                                4,619                       4,619
Net Loss                                                  (5,396,006)  (5,396,006)
                  ------------ ----------- ------------ ------------- ------------- ---
12/31/95
 Balance........  $17,004,210  $(178,901)    $(34,431)  $(11,931,873)  $4,894,773
                  ============ =========== ============ ============= ============= ===
Series D
 Preferred Stock
 par .001 at
 $1.42 share....    3,997,183                                           4,000,000
Series D
 Preferred Stock
 Offering
 Expenses.......     (38,410)                                            (38,410)
Exercise of
 Common Stock
 Options........        7,580                                               7,599
Repurchase of
 Common Stock...       (9.798)                                             (9,828)
Amortization of
 Deferred
 Compensation...                                9,290                       9,290
Net Loss........                                          (2,073,213)  (2,073,213)
                  ------------ ----------- ------------ ------------- ------------- ---
6/30/96 Balance
 (unaudited)....  $20,960,765  $(178,901)    $(25,141)  $(14,005,086)  $6,790,211
                  ============ =========== ============ ============= ============= ===
</TABLE>    
 
    The accompanying notes are an integral part of the financial statements.
 
                                      F-7
<PAGE>
 
                         CUBIST PHARMACEUTICALS, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
     
  (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
                                UNAUDITED)     
 
A. NATURE OF BUSINESS
 
  Cubist Pharmaceuticals, Inc. ("Cubist" or the "Company") is a
biopharmaceutical company founded in May 1992 and is engaged in the research,
development and commercialization of novel classes of antiinfective drugs to
treat infectious diseases caused by bacteria and fungi, primarily those
resistant to existing antiinfective drugs. Cubist has established multiple
technology licenses and collaborations, has established a network of advisors
and collaborators and is located in Cambridge, Massachusetts. Prior to 1995,
the Company operated as a development stage enterprise, devoting substantially
all of its efforts to establishing the new business and carrying on research
and development activities.
 
B. ACCOUNTING POLICIES
 
 Basis of Presentation
   
  The accompanying financial statements are stated on an accrual basis.     
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities, of
disclosure of contingent assets and liabilities at the date of the financial
statements, and of the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
 
 
 Cash Equivalents
 
  Cash equivalents consist of short-term interest-bearing instruments (U.S.
Government treasuries and money market accounts) with original maturities of
three months or less. These investments are carried at cost which approximates
market value.
 
 Short-term Investments
 
  Short-term investments, with an original maturity of more than three months
and less than one year when purchased, consisted entirely of U.S. Government
agency securities at December 31, 1995. Short-term investments, all of which
are held to maturity, are stated at amortized cost, which approximates market
value.
   
 Pro Forma Stockholders' Equity (Unaudited)     
   
  Upon the closing of the Company's initial public offering, all of the
outstanding shares of Series A, B, C, and D Convertible preferred stock (the
"Preferred Stock") will automatically convert into 5,366,869 shares of common
stock. The unaudited pro forma presentation of stockholders' equity has been
prepared assuming the conversion of all the Preferred Stock into Common Stock
on June 30, 1996.     
 
 Pro Forma Net Loss Per Common Share (Unaudited)
 
  The pro forma net loss per common share is computed based upon the weighted
average number of common shares and common equivalent shares (using the
treasury stock method) outstanding after certain adjustments described below.
Common equivalent shares are not included in the per share calculations where
the effect of their inclusion would be anti-dilutive, except that, in
accordance with Securities and Exchange Commission Staff Accounting Bulletin
No. 83, all common and common equivalent shares issued during the
 
                                      F-8
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
     
  (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
                                UNAUDITED)     
twelve-month period prior to the filing of the initial public offering, even
when anti-dilutive, have been included in the calculation as if they were
outstanding for all periods, using the treasury stock method and the expected
initial public offering price of $12.00 per share. The pro forma net loss per
common share gives effect to the mandatory conversion of all outstanding shares
of Preferred Stock into 5,366,869 shares of Common Stock upon the closing of
this offering.
 
 Historical Net Loss Per Common Share
 
  Net loss per common share on a historical basis is computed in the same
manner as pro forma net loss per common share, except that Series A, B, C and D
Preferred Stock are not assumed to be converted. Net loss per common share on a
historical basis is as follows:
 
<TABLE>   
<CAPTION>
                                                                      SIX MONTHS
                               YEAR ENDED DECEMBER 31,              ENDED JUNE 30,
                         -------------------------------------  ------------------------
                            1993         1994         1995         1995         1996
                         -----------  -----------  -----------  -----------  -----------
<S>                      <C>          <C>          <C>          <C>          <C>
Net loss to common
 stockholders........... $(1,687,894) $(4,813,035) $(5,396,006) $(3,324,355) $(2,073,213)
Net loss per common
 share..................       (1.73)       (4.26)       (3.64)       (3.46)       (1.38)
Weighted average number
 of common and common
 equivalent shares
 outstanding............     978,173    1,129,048    1,482,781      960,267    1,507,429
</TABLE>    
 
  Fully diluted net loss per common share is the same as primary net loss per
common share.
 
 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,
generally three years for computer equipment and five years for laboratory
equipment, furniture and fixtures. Leasehold improvements are stated at cost
and are amortized over the lesser of the life of the lease or their estimated
useful lives. The leasehold improvements are also utilized as collateral up to
a value of $648,310, which relates to the balance of long-term debt.
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.
 
 Research and Development
 
  All research and development costs are expensed as incurred.
 
 Income Taxes
 
  Research and experimentation and other tax credits, when utilized, will be
recorded using the flow-through method of accounting as a reduction of the
current provision for federal and state income taxes.
 
 Reclassification
 
  Certain amounts in the 1994 financial statements have been reclassified to
conform to the current year presentation.
 
 
                                      F-9
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
     
  (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
                                UNAUDITED)     
 Interim Financial Statements
   
  The balance sheet as of June 30, 1996, the statement of operations and cash
flows for the six months ended June 30, 1996 and 1995 and the statement of
changes in stockholder's equity for the six months ended June 30, 1996 are
unaudited, have been prepared on a basis substantially consistent with the
audited financial statements and, in the opinion of management, include all
adjustments (consisting of normal, recurring adjustments) necessary for a fair
presentation of results for these interim periods. The results for the six
months ended June 30, 1996 are not necessarily indicative of results to be
expected for the entire year, although the Company expects to incur a
significant loss for the year ending December 31, 1996.     
 
 Recent Accounting Pronouncements
 
  In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." This standard is effective for financial statements for
fiscal years beginning after December 15, 1995. The Company's analysis of this
new standard indicates that it will not have a material effect on the Company's
financial position or results of operations.
 
  In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which encourages companies to
recognize compensation expense in the statement of operations based on the fair
value of the underlying common stock at the date the awards are granted.
However, it will permit continued accounting under APB Opinion 25, "Accounting
for Stock Issued to Employees," accompanied by a disclosure of the pro forma
effects on net income/(loss) and earnings per share had the new accounting
rules been applied. The statement is effective for fiscal year 1996. The
Company has determined that it will elect the disclosure-only alternative
permitted under SFAS No. 123. The Company will be required to disclose pro
forma net income and pro forma earnings per share in the footnotes using the
fair value based method beginning in 1996 with comparable disclosures for 1995.
The Company has not determined the impact of the pro forma adjustments to its
net income or earnings per share.
 
C. PROPERTY AND EQUIPMENT
 
  At December 31, property and equipment consisted of:
 
<TABLE>
<CAPTION>
                                                            1994        1995
                                                         ----------  ----------
   <S>                                                   <C>         <C>
   Leasehold improvements............................... $1,967,156  $2,066,480
   Laboratory equipment.................................    930,254   1,319,606
   Furniture and fixtures...............................    216,921     226,891
   Computer equipment...................................    168,105     221,976
                                                         ----------  ----------
                                                          3,282,436   3,834,953
   Less accumulated depreciation and amortization.......   (486,246) (1,056,802)
                                                         ----------  ----------
   Property and equipment, net.......................... $2,796,190  $2,778,151
                                                         ==========  ==========
</TABLE>
 
                                      F-10
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
     
  (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
                                UNAUDITED)     
 
D. ACCRUED EXPENSES
 
  At December 31, accrued expenses consisted of:
 
<TABLE>
<CAPTION>
                                                                1994     1995
                                                              -------- --------
   <S>                                                        <C>      <C>
   Payroll and benefits...................................... $ 53,824 $ 57,723
   Vacation..................................................   41,863   40,255
   Construction..............................................  488,000      --
   Legal, audit and patent...................................   63,666   80,185
   Utilities.................................................      --    11,500
                                                              -------- --------
   Total accrued expenses.................................... $647,353 $189,663
                                                              ======== ========
</TABLE>
 
E. LICENSE AGREEMENT
 
  The Company has entered into two agreements with the Massachusetts Institute
of Technology ("MIT"), pursuant to which MIT has granted the Company exclusive
worldwide licenses to certain patent rights owned by MIT. The Company has the
right to sell or license worldwide any product or process derived from these
patent rights. In return for these licenses, the Company has paid to MIT
license issue fees of $50,000 and $75,000, respectively. The Company also has
paid license maintenance fees of $25,000 in total each year commencing January
1, 1994. In addition, the Company issued shares of common stock equal to 2% of
the outstanding common and preferred shares at the completion of the Series B
round of financing and will pay royalties from future sales. License fees are
expensed as incurred.
 
F. COLLABORATIVE RESEARCH AGREEMENT
   
  On December 15, 1995, the Company entered into a collaborative research
agreement with Pfizer. Under the terms of the agreement, Pfizer is required to
pay the Company a technology licensing fee upon execution and research support
payments. These payments are recognized as income earned under the terms of the
agreement. In addition, Pfizer will reimburse the Company for expenses related
to the screening of Pfizer compounds against the Company's targets and certain
milestone payments. These payments are recognized as revenue when the related
expenses are incurred. During 1995, the Company included in sponsored research
revenues $500,000 for the technology licensing fee and $488,000 for certain
research and development revenues in accordance with the agreement. Pfizer also
has an option to initiate a drug discovery program using compounds from the
drug screening program. Upon initiation of a drug discovery program, Pfizer is
obligated to purchase $5,000,000 of the Company's Preferred Stock.     
 
G. STOCKHOLDERS' EQUITY
 
 Preferred Stock
   
  In February 1995, the Company sold an aggregate of 9,428,644 shares of its
Series C Convertible Preferred Stock at a purchase price of $0.60 per share to
a group of existing investors. The purchase price of the Series C Convertible
Preferred Stock was paid in part by the conversion and cancellation of
$1,000,000 of Convertible Demand Promissory Notes which had been issued in
December 1994 to certain existing investors.     
   
  Upon consummation of the reverse stock split of Common Stock described in
footnote M, the Company's Convertible Preferred Stock will be convertible to
Common Stock at a rate of 1 common share to 7 preferred shares (refer to
footnote M) at the option of the shareholder. The Company's Preferred Stock
will automatically convert into Common Stock at a rate of 1 common share to 7
preferred shares upon the     
 
                                      F-11
<PAGE>
 
                         CUBIST PHARMACEUTICALS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
     
  (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
                                UNAUDITED)     
   
first public offering where proceeds exceed $15,000,000 and the per share
price exceeds $10.92. The Company has also granted warrants to purchase
240,500 shares of Series B Convertible Preferred Stock at a purchase price of
$0.50, 92,500 shares of Series C Convertible Preferred Stock at a purchase
price of $0.60 and 33,333 shares of Series C Convertible Preferred Stock at a
purchase price of $0.90 per share. These warrants expire on either the fifth
anniversary of the closing of an initial public offering of the Company's
Common Stock or on August 30, 2003, February 28, 2005 and February 26, 2006,
respectively, whichever is earlier.     
 
 Common Stock
 
  As of December 31, 1995, 1,016,662 shares of Common Stock were issued to
employees, scientific founders and consultants of the Company. Certain of
these shares issued are subject to repurchase, at the Company's option, at the
original issuance price in accordance with vesting provisions upon termination
of the relationship. At December 31, 1995, 306,350 shares remain subject to
repurchase.
 
 Notes Receivable from Related Parties
   
  The Company has accepted promissory notes from the Chief Executive Officer
in consideration for the Preferred Stock and Common Stock options issued to
him. The aggregate principal amount of these notes at December 31, 1995 is
$178,901 and is reflected in stockholders' equity as a reduction to paid-in
capital. These notes have an annual interest rate of 4% and fall due between
July 21, 1996 and November 28, 1997. During 1995, $23,615 of principal and
accrued interest under the promissory notes was forgiven and it its expected
that additional amounts will be forgiven in 1996 and 1997.     
 
H. STOCK OPTIONS
 
  The Company has a stock option plan under which options to purchase 571,428
shares of its Common Stock may be granted to employees, directors, officers or
consultants. The options are granted at fair market value on the date of the
grant as determined by the Board of Directors, vest ratably over a four-year
period and expire ten years from the date of grant. In addition, the Company
has issued to certain consultants and directors nonqualified stock options to
purchase 73,428 shares of its Common Stock. During 1995 and 1994, the Company
has allowed employees and consultants to exercise their full grants to take
advantage of certain favorable tax benefits. The Company has reserved the
right to repurchase any unearned shares at the original purchase price if the
employee or consultant does not fulfill their vesting requirement.
 
                                     F-12
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
     
  (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
                                UNAUDITED)     
   
  From inception to December 31, 1995, the Company granted options for 380,857
shares (net of cancellations and repurchased shares) under its stock option
plan at prices ranging from $0.07 to $0.42 per share, of which options for
255,371 shares were exercised at prices ranging from $0.07 to $0.42. There were
25,617 employee shares exercisable at year-end (32,303 shares at December 31,
1994). The Company has granted options for 73,428 shares to consultants and
directors under its stock option plan, of which 39,857 options were exercised
since inception. Stock option activity is summarized as follows:     
 
<TABLE>     
<CAPTION>
                                                            SHARES  OPTION PRICE
                                                            ------- ------------
   <S>                                                      <C>     <C>
   Outstanding at December 31, 1993........................ 124,571  $ .07-$.35
     Granted............................................... 227,335  $ .07-$.35
     Exercised............................................. 302,451  $ .07-$.35
     Cancelled.............................................   7,241  $ .07-$.35
                                                            -------  ----------
   Outstanding at December 31, 1994........................  42,214  $ .07-$.35
     Granted............................................... 121,442  $ .07-$.42
     Exercised.............................................     785  $ .07-$.35
     Cancelled.............................................   3,814  $ .07-$.35
                                                            -------  ----------
   Outstanding at December 31, 1995........................ 159,057  $ .07-$.42
     Granted............................................... 384,715  $.42-$5.95
     Exercised.............................................  15,627  $ .35-$.42
     Cancelled.............................................   7,485  $ .35-$.42
                                                            -------  ----------
   Outstanding at June 30, 1996 (unaudited)................ 520,660  $.07-$5.95
                                                            =======  ==========
</TABLE>    
 
  During 1995, 8,232 shares of previously exercised options were repurchased
because vesting schedules were not fulfilled. These options were originally
exercised during 1994.
 
I. LEASE COMMITMENTS
 
  The Company leases its facilities under an operating lease agreement which
expires on September 15, 2003 and is renewable at the Company's option for one
additional five-year period. Under the terms of the lease, the Company is
obligated to pay its prorated share of common operating expenses and real
estate taxes as well as base rents. In addition, the Company entered into an
amendment to the agreement with the landlord under which the landlord provided
financing to the Company for a portion of the buildout cost ($543,393) at an
interest rate of 12% per year payable in equal monthly installments of $19,773
over five years through October 1998, and $7,685 thereafter through February
2000. At December 31, 1995, the outstanding principal balance was $347,070. The
Company also provided a security deposit of $100,000 upon execution of the
lease. The security deposit bears interest in a segregated account, and is
partially refundable ($79,000 plus interest) upon the fifth anniversary, and
fully refundable plus interest within thirty days after the expiration of the
lease, provided no event of default has occurred. The Company has also financed
an additional $345,500 during the first quarter of 1995 relating to a 6,510
square foot facility expansion completed during the first week of January 1995.
This additional debt is payable over five years with an annual interest rate of
12%. No additional security deposit was required. At December 31, 1995, the
outstanding principal balance was $301,240.
 
                                      F-13
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
     
  (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
                                UNAUDITED)     
 
  The Company leases certain laboratory equipment under long-term capital
leases. The cost of this equipment included in fixed assets was $1,720,940 at
the end of 1995 and $1,173,078 at the end of 1994, with associated accumulated
depreciation of $627,366 at December 31, 1995 and $302,621 at December 31,
1994. The Company has an option 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>
    1996                                 $  148,615                      $  520,060
    1997                                    148,615                         520,060
    1998                                    157,676                         220,969
    1999                                    179,680                         105,568
    2000                                    179,680                             --
    2001 and thereafter                     486,444                             --
                                         ----------                      ----------
Total minimum lease payments             $1,300,710                       1,366,657
                                         ----------                      ----------
Less amount representing interest payments                                  176,417
                                                                         ----------
Present value of minimum lease payments                                   1,190,240
Less current portion                                                        413,223
                                                                         ----------
Long-term obligation                                                     $  777,017
                                                                         ==========
</TABLE>
 
  Lease payments under operating leases were $207,898 in fiscal year 1995 and
$269,991 in fiscal year 1994.
 
J. EMPLOYEE BENEFITS
 
  The Company instituted a 401(k) savings plan in 1993, 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 Company contributes a matching amount of up to 1.5% of
a participant's total compensation or $500 annually, whichever is less. The
Company contributed $14,072 during 1995 and $9,524 during 1994.
 
K. INCOME TAXES
 
  The Company follows the liability method of accounting for income taxes in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes," whereby a deferred tax liability
is measured by the enacted tax rates which will be in effect when any
differences between the financial statements and tax basis of assets reverse.
The deferred tax liability can be reduced by net operating losses being carried
forward for tax purposes.
 
  At December 31, 1995, the Company had available federal and state net
operating loss carryforwards of approximately $11,678,000. The federal and
state net operating loss and tax credit carryforwards begin to expire in the
years 2007 and 1997, respectively. Research and experimentation tax credits of
approximately $325,000 begin to expire in 2008. The net operating loss
carryforwards may be subject to an annual limitation in any given year in the
event of certain occurrences, including significant changes in ownership. The
Company has established a valuation reserve against the deferred tax benefit
arising from these carryforwards due to the uncertainty of earning sufficient
taxable income to receive the benefit and accordingly has not given recognition
to these tax benefits in these financial statements. These carryforwards are
also subject to review by the Internal Revenue Service.
 
                                      F-14
<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
     
  (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
                                UNAUDITED)     
 
L. SUBSEQUENT EVENTS
 
 Collaborative Agreements
 
  In June 1996, the Company entered into a collaborative research agreement
with Bristol-Myers Squibb. Under the terms of the agreement, Bristol-Myers
Squibb purchased from the Company $4,000,000 of the Company's Preferred Stock
upon execution of the agreement, and has agreed to make payments to the Company
upon the achievement of certain milestones. These milestone payments are
recognized as income as earned under the terms of the agreement. In addition,
Bristol-Myers Squibb will reimburse the Company 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 the
Company's targets over three years, with an option to fund a fourth year. These
payments are recognized as revenue when the related expenses are incurred.
 
  In June 1996, the Company entered into a collaborative research agreement
with Merck & Co., Inc. ("Merck"). Under the terms of the agreement, Merck will
pay the Company a technology licensing fee upon execution and certain milestone
payments. These payments are recognized as income as earned under the terms of
the agreement. In addition, Merck will reimburse the Company for research and
development expenses relating to the production of certain targets; for
expenses relating to the screening of Merck compounds against the Company's
targets; and for expenses relating to compound optimization. These payments are
recognized as revenue when the related expenses are incurred.
 
 Common Stock Option Grants
   
  On May 28, 1996, the Company granted 214,285 incentive stock options to
certain employees of the Company at a purchase price of $1.96 per share. In
addition, the Company issued 42,857 shares of non-qualified options at an
exercise price of $1.96 per share to directors of the Company. On June 11,
1996, the Company granted 4,285 incentive stock options to certain employees of
the Company at a purchase price of $5.95 per share, and the Company granted
10,714 nonstatutory stock options to a director and a consultant of the Company
at a purchase price of $5.95 per share. In addition, in June 1996, the Company
increased the options available for grant under the Amended and Restated 1993
Stock Option Plan to 1,500,000 shares.     
 
 Warrants
 
  During February 1996, the Company issued a warrant exercisable for 33,333
shares of Series C Convertible Preferred Stock (convertible to Common Stock
upon the closing of the Company's initial public offering) to Comdisco, Inc. in
conjunction with a $500,000 increase of the Company's equipment lease line over
1996.
   
M. REVERSE STOCK SPLIT     
   
  The Company anticipates that in September 1996 it will effect a 1-for-7
reverse stock split of the Common Stock. Accordingly, all share and per share
amounts have been adjusted to reflect the stock split as though it had occurred
at the beginning of the initial period presented.     
 
                                      F-15
<PAGE>
 
                   INHIBITION OF AMINOACYL - TRNA SYNTHETASE
 
 
       Amino Acid                                     Inhibitor
 
 
                      Aminoacyl - tRNA Synthetase
 
                                         tRNA
                          Charged tRNA                                Inhibited
                                                                      Synthetase
 
    Protein Synthesis                            Inhibition of Protein
                                                       Synthesis
 
 
Binding of an amino acid
to the aminoacyl -tRNA                        Binding of an inhibitor to
synthetase leads to the                       the aminoacyl - tRNA
formation of charged                          synthetase alters the
tRNA and protein                              synthetase structure,
synthesis.                                    blocks amino acid binding
                                              and prevents the formation
                                              of charged tRNA, thereby
                                              inhibiting protein
                                              synthesis.
 
- --------------------------------------------------------------------------------
 
             AMINOACYL - TRNA SYNTHETASE TARGETS FOR DRUG DISCOVERY
 
 
 
                                                                         S.
                                                                         aureus
                                                                        E.
                                                                        faecalis
                                                                       C.
                                                                       albicans
                                                                      H.
                                                                      influenzae
                                                                     S.
                                                                     pneumoniae
                                                                    E. coli
     1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17 18 19 20
                          Aminoacyl - tRNA Synthetases
 
Elevated cubes represent certain screening leads that exhibit significant
inhibitory activity against specific aminoacyl - tRNA synthetase targets.
Glutamine - tRNA synthetase, shown in black, is not present in certain
pathogens.
<PAGE>
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
 No dealer, salesperson, or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer made by this Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or the Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information herein is correct as of any time subsequent to the date
of this Prospectus.
 
                                --------------
 
                               Table of Contents
 
 
<TABLE>   
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   3
Risk Factors.............................................................   6
Use of Proceeds..........................................................  14
Dividend Policy..........................................................  14
Capitalization...........................................................  15
Dilution.................................................................  16
Selected Financial Data..................................................  17
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  18
Business.................................................................  22
Management...............................................................  46
Certain Transactions.....................................................  52
Principal Stockholders...................................................  54
Description of Capital Stock.............................................  57
Shares Eligible for Future Sale..........................................  50
Underwriting.............................................................  62
Legal Matters............................................................  63
Experts..................................................................  63
Additional Information...................................................  63
Index to Financial Statements............................................ F-1
</TABLE>    
 
 Until       , 1996 (25 days after the date of the Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                               2,500,000 SHARES
 
                                    [LOGO]
 
                         CUBIST PHARMACEUTICALS, INC.
 
                                 COMMON STOCK
 
                             --------------------
 
                                  PROSPECTUS
                                       , 1996
 
                             --------------------
 
                                UBS SECURITIES
 
                               HAMBRECHT & QUIST
 
                         PACIFIC GROWTH EQUITIES, INC.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
 
                                    PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
  Expenses of the Registrant in connection with the issuance and distribution
of the securities being registered, other than the underwriting discount, are
estimated as follows:
 
<TABLE>
<CAPTION>
  <S>                                                                 <C>
  SEC Registration Fee............................................... $ 12,888
  NASD Fees..........................................................    4,238
  Nasdaq National Market Listing Fees................................   39,696
  Printing and Engraving Expenses....................................  100,000
  Legal Fees and Expenses............................................  225,000
  Accountants' Fees and Expenses.....................................  125,000
  Expenses of Qualification Under State Securities Laws, Including
   Attorneys' Fees...................................................   20,000
  Transfer Agent and Registrar's Fees................................   10,000
  Miscellaneous Costs................................................   63,178
                                                                      --------
      Total.......................................................... $600,000
                                                                      ========
</TABLE>
 
- --------
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
  Section 145 of the Delaware General Corporation Law empowers a Delaware
corporation to indemnify its officers and directors and certain other persons
to the extent and under the circumstances set forth therein.
 
  The Restated Certificate of Incorporation and the Amended and Restated By-
Laws of the Company, copies of which are filed herein as Exhibit 3.3 and 3.4,
provide for advancement of expenses and indemnification of officers and
directors of the Registrant and certain other persons against liabilities and
expenses incurred by any of them in certain stated proceedings and under
certain stated conditions to the fullest extent permissible under Delaware
law.
 
  Section 9 of the Underwriting Agreement between the Registrant and the
Underwriters, a copy of which is filed herein as Exhibit 1.1, will provide for
indemnification by the Registrant of the Underwriters and each person, if any,
who controls any Underwriter, against certain liabilities and expenses, as
stated therein, which may include liabilities under the Securities Act of
1933. The Underwriting Agreement also provides that the Underwriters shall
similarly indemnify the Registrant, its directors, officers and controlling
persons, as set forth therein.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
  Described below is information regarding all unregistered securities of the
Company sold by the Company within the past three years. The share and per
share amounts set forth below have been adjusted to reflect the Company's one
for seven reverse stock split to occur prior to the consummation of this
Offering.
   
  Between incorporation (May 1992) and June 1996, the Company has issued and
sold an aggregate of approximately 459,513 shares of its Common Stock, at
prices ranging from $0.007 to $0.42 per share, with an aggregate offering
price of approximately $150,601 to certain of its officers, employees and
consultants. The offers and sales of these shares were made in reliance upon
Rule 701 promulgated under the Securities Act and are deemed to be exempt
transactions as sales of an issuer's securities pursuant to a written plan or
contract relating to the compensation of such individuals and upon Section
4(2) of the Securities Act as transactions not involving any public offering.
    
                                     II-1
<PAGE>
 
   
  From its incorporation (May 1992) to June 1996, the Registrant has entered
into stock option agreements with certain employees, officers, directors and
consultants to the Company covering approximately 827,337 shares of its Common
Stock pursuant to the Registrant's Amended and Restated 1993 Stock Option
Plan. The purchase price under the options is $0.007 to $5.95 per share based
on the fair market value of the Common Stock on the date of grant. These
grants and sales were made in reliance upon Rule 701 under the Securities Act
and are deemed to be exempt transactions as sales of an issuer's securities
pursuant to a written contract relating to the compensation of such
individuals.     
 
  In August 1993, the Registrant issued and sold an aggregate of 14,270,000
shares of Series B Convertible Preferred Stock (convertible into 2,038,571
shares of Common Stock) at a purchase price of $0.50 per share ($3.50 per
share on an as-converted basis), to a group of investors. The issuance and
sales of such shares of Series B Convertible Preferred Stock were made in
reliance upon Rule 506 of Regulation D promulgated under the Securities Act
and Section 4(2) of the Securities Act.
 
  In August 1993, the Registrant issued a warrant for the purchase of 240,500
shares of Series B Convertible Preferred Stock (convertible into 34,357 shares
of Common Stock) at an exercise price of $0.50 per share to Comdisco ($3.50
per share on an as-converted basis). In January 1994, the Company issued and
sold an aggregate of 200,000 shares of Series B Convertible Preferred Stock
(convertible into 28,571 shares of Common Stock) at a purchase price of $0.50
per share ($3.50 per share on an as-converted basis) to Comdisco, Inc. The
issuance and sale of such warrant and shares for the purchase of Series B
Convertible Preferred Stock were made in reliance upon Section 4(2) of the
Securities Act.
 
  In January 1994, the Registrant issued and sold 39,496 shares of Common
Stock to the Massachusetts Institute of Technology ("MIT") pursuant to a
License Agreement between MIT and the Company. The issuance and sale of such
shares of Common Stock were made in reliance upon Section 4(2) of the
Securities Act.
 
  In July 1994, the Registrant issued and sold 263,370 shares of Series B
Preferred Stock (convertible into 37,624 shares of Common Stock) at a purchase
price of $0.50 per share ($3.50 per share on an as-converted basis) to Dr.
Scott M. Rocklage, President, Chief Executive Officer and a director of the
Company. The issuance and sale of such shares of Series B Preferred Stock were
made in reliance upon Section 4(2) of the Securities Act.
 
  In December 1994, the Registrant issued $1,000,000 of Convertible Demand
Promissory Notes (the "Notes") to a group of investors. The Notes were issued
in reliance upon Section 4(2) of the Securities Act. The entire amount of
indebtedness was converted to 1,684,644 shares of Series C Convertible
Preferred Stock (convertible into approximately 240,663 shares of Common
Stock) in connection with an offering of Series C Convertible Preferred Stock
in February 1995.
 
  In February 1995, the Registrant issued and sold an aggregate of 7,744,000
shares of Series C Convertible Preferred Stock (convertible into approximately
1,106,285 shares of Common Stock) to a group of investors, at a purchase price
of $0.60 per share ($4.20 per share on an as-converted basis). In addition,
the Registrant issued a warrant to Comdisco, Inc. to purchase 92,500 shares
(convertible into 13,214 shares of Common Stock) at an exercise price of $0.60
per share ($4.20 per share on an as-converted basis). The issuance and sales
of such shares of Series C Convertible Preferred Stock were made in reliance
upon Rule 506 of Regulation D promulgated under the Securities Act and Section
4(2) of the Securities Act.
 
  In May 1995, the Registrant issued and sold an aggregate of 5,589,169 shares
of Series C Convertible Preferred Stock (convertible into approximately
798,452 shares of Common Stock) at a purchase price of $0.60 per share ($4.20
per share on an as-converted basis) to a group of investors. In addition, the
Registrant issued options to each of Dr. Schimmel and Dr. Rebek, to purchase
120,000 shares of Series C Convertible Preferred Stock (convertible into
17,142 shares of Common Stock) at an exercise price of $0.60 per share ($4.20
per share on an as-converted basis). The issuance and sales of such shares of
and options for Series C Convertible Preferred Stock were made in reliance
upon Rule 506 of Regulation D promulgated under the Securities Act and Section
4(2) of the Securities Act.
 
                                     II-2
<PAGE>
 
  In February 1996, the Registrant issued a warrant to Comdisco, Inc. for up
to 33,333 shares of Series C Convertible Preferred Stock (convertible into
4,761 shares of Common Stock) at an exercise price of $0.90 per share ($6.30
per share on an as-converted basis). The issuance and sale of such shares of
Series C Convertible Preferred Stock were made in reliance upon Section 4(2)
of the Securities Act.
 
  In June 1996, the Registrant issued 2,816,902 shares of Series D Convertible
Preferred Stock (convertible into 402,414 shares of Common Stock) to Bristol-
Myers Squibb Company at a purchase price of $1.42 per share ($9.94 per share
on an as-converted basis). The issuance and sale of such shares of Series D
Convertible Preferred Stock were made in reliance upon Section 4(2) of the
Securities Act.
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
  (a) Exhibits:
 
<TABLE>   
<CAPTION>
 EXHIBITS
 --------
 <C>      <S>
  *1.1    Proposed Form of Underwriting Agreement.
  *3.1    Restated Certificate of Incorporation of the Registrant.
  *3.2    Form of Certificate of Amendment to the Restated Certificate of
          Incorporation of the Registrant (to be filed with the Secretary of
          State of the State of Delaware prior to the effectiveness of the
          Registration Statement).
  *3.3    Form of Restated Certificate of Incorporation of the Registrant (to
          be filed with the Secretary of State of the State of Delaware upon
          the closing of the Offering).
   3.4    Amended and Restated By-Laws of the Registrant, as amended to date.
 **4.1    Specimen certificate for shares of Common Stock.
  *4.2    Description of Capital Stock (contained in the Restated Certificate
          of Incorporation of the Corporation of the Registrant, filed as
          Exhibit 3.3).
 **5.1    Opinion of Bingham, Dana & Gould LLP, with respect to the legality of
          the shares being registered.
+*10.1    (a) License Agreement between the Registrant and the Massachusetts
          Institute of Technology, dated November 4, 1992, as amended by the
          First Amendment, dated January 20, 1995, and the Second Amendment,
          dated May 17, 1995.
          (b) Patent License Agreement between the Registrant and the
          Massachusetts Institute of Technology, dated July 21, 1994.
+*10.2    License Agreement between the Registrant and the Board of Trustees of
          the Leland Stanford Junior University, dated April 1, 1994.
 *10.3    Employment Agreement between the Registrant and Scott M. Rocklage,
          dated June 20, 1994.
 *10.4    Consulting Agreement between the Registrant and Paul R. Schimmel,
          dated May 1, 1992.
 *10.5    Consulting Agreement between the Registrant and Julius Rebek, Jr.,
          dated May 1, 1992.
  10.6    Amended and Restated 1993 Stock Option Plan.
+*10.7    Collaborative Research Agreement between the Registrant and Pfizer
          Inc, dated December 15, 1995.
+*10.8    Collaborative Research and License Agreement between the Registrant
          and Merck & Co., Inc., dated June 13, 1996.
+*10.9    Collaborative Research and License Agreement between the Registrant
          and Bristol-Myers Squibb Company and the Registrant, dated June 25,
          1996.
</TABLE>    
 
 
                                     II-3
<PAGE>
 
<TABLE>   
<CAPTION>
 EXHIBITS
 --------
 <C>      <S>
  +*10.10 Supply and Services Agreement, dated as of November 1, 1995, by and
          between Terrapin Technologies, Inc. and the Registrant.
   *10.11 Screening Agreement, dated November 28, 1995, between the Registrant
          and Monsanto Company.
  +*10.12 Letter Agreement, dated January 18, 1996, between Pharm-Eco
          Laboratories, Inc. and the Registrant.
   *10.13 Agreement with ArQule, Inc., dated June 4, 1996.
   *10.14 Lease Agreement between Registrant and Harry F. Stimpson III, trustee
          under the will of Harry F. Stimpson dated April 30, 1993, regarding
          24 Emily Street, Cambridge, MA., as amended by the First Amendment to
          Lease, dated September 19, 1994.
   *10.15 Form of Employee Confidentiality and Non Disclosure Agreement.
   *10.16 Master Lease Agreement between the Registrant and Comdisco, Inc.,
          dated as of August 30, 1993, as amended on February 7, 1995, and as
          further amended on February 26, 1996.
   *10.17 Series B Convertible Preferred Stock Purchase Warrant between the
          Registrant and Comdisco, Inc., dated August 30, 1993.
   *10.18 Series C Convertible Preferred Stock Purchase Warrants between the
          Registrant and Comdisco, Inc., dated February 28, 1995 and February
          26, 1996.
   *10.19 Form of Series C Convertible Preferred Stock Purchase Option issued
          to each of Dr. Paul Schimmel and Dr. Julius Rebek, Jr. in May, 1995.
   *10.20 Amended and Restated Shareholders' Rights Agreement by and among the
          Registrant and the parties signatory thereto.
    11    Computation of Income Per Share.
  **23.1  Consent of Bingham, Dana & Gould LLP (included in Exhibit 5).
    23.2  Consent of Coopers & Lybrand L.L.P.
    23.3  Consent of Hamilton, Brook, Smith & Reynolds, P.C.
   *24.1  Power of Attorney (included in signature page to Registration
          Statement).
    27    Financial Data Schedule.
</TABLE>    
 
- --------
   
*  Previously filed.     
          
** To be filed by amendment.     
   
+  Confidential Treatment requested as to certain portions.     
 
  (b) Financial Statement Schedules:
 
  All financial statement schedules have been omitted because either they are
not required, are not applicable, or the information is otherwise set forth in
the Financial Statements and Notes thereto.
 
ITEM 17. UNDERTAKINGS
 
  Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions described in Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
 
                                     II-4
<PAGE>
 
  The undersigned registrant hereby undertakes:
 
    (1) To provide the Underwriters at the closing specified in the
  Underwriting Agreement certificates in such denominations and registered in
  such names as required by the Underwriters to permit prompt delivery to
  each purchaser.
 
    (2) That for purposes of determining any liability under the Securities
  Act of 1933, the information omitted from the form of prospectus filed as
  part of this registration statement in reliance upon Rule 430A and
  contained in a form of prospectus filed by the registrant pursuant to Rule
  424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be
  part of this registration statement as of the time it was declared
  effective.
 
    (3) That for the purpose of determining any liability under the
  Securities Act of 1933, each post-effective amendment that contains a form
  of prospectus shall be deemed to be a new registration statement relating
  to the securities offered therein, and the offering of such securities at
  that time shall be deemed to be the initial bona fide offering thereof.
 
                                     II-5
<PAGE>
 
                                  SIGNATURES
   
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT, CUBIST PHARMACEUTICALS, INC., DULY CAUSED THIS PRE-EFFECTIVE
AMENDMENT NO. 1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF CAMBRIDGE, COMMONWEALTH OF MASSACHUSETTS, ON THIS
31ST DAY OF JULY, 1996.     
 
                                          Cubist Pharmaceuticals, Inc.
 
                                                   /s/ Scott M. Rocklage
                                          By: _________________________________
                                                    SCOTT M. ROCKLAGE
                                               PRESIDENT AND CHIEF EXECUTIVE
                                                          OFFICER
       
          

  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS PRE-
EFFECTIVE AMENDMENT NO. 1 HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED:     
 
              SIGNATURE                        TITLE                 DATE
 
        /s/ Scott M. Rocklage          President, Chief            
- -------------------------------------   Executive Officer       July 31, 1996
          SCOTT M. ROCKLAGE             and Director                     
                                        (Principal
                                        Executive Officer)
 
                                       Treasurer (Principal     
               *                        Financial and           July 31, 1996
- -------------------------------------   Accounting Officer)              
           THOMAS A. SHEA
 
                                       Chairman of the          
               *                        Board of Directors      July 31, 1996
- -------------------------------------                                    
           JOHN K. CLARKE
 
 
                                     II-6
<PAGE>
 
              SIGNATURE                         TITLE                DATE
 
                                        Director                
               *                                                July 31, 1996
- -------------------------------------                                    
             BARRY BLOOM
 
                                        Director                
               *                                                July 31, 1996
- -------------------------------------                                    
           GEORGE CONRADES
 
                                        Director                
               *                                                July 31, 1996
- -------------------------------------                                    
           ELLEN M. FEENEY
 
                                        Director                
               *                                                July 31, 1996
- -------------------------------------                                    
         TERRANCE G. MCGUIRE
 
                                        Director                
               *                                                July 31, 1996
- -------------------------------------                                    
          JULIUS REBEK, JR
 
                                        Director                
               *                                                July 31, 1996
- -------------------------------------                                    
          PAUL R. SCHIMMEL
        
     /s/ Scott M. Rocklage 

*By: ___________________________ 

       SCOTT M. ROCKLAGE, 
        
        ATTORNEY-IN-FACT     
 
                                      II-7
<PAGE>
 
                                 EXHIBIT INDEX
<TABLE>   
<CAPTION>
 EXHIBITS
 --------
 <C>      <S>                                                               <C>
  *1.1    Proposed Form of Underwriting Agreement.
  *3.1    Restated Certificate of Incorporation of the Registrant.
  *3.2    Form of Certificate of Amendment to the Restated Certificate of
          Incorporation of the Registrant (to be filed with the Secretary
          of State of the State of Delaware prior to the effectiveness of
          the Registration Statement).
   *3.3   Form of Restated Certificate of Incorporation of the Registrant
          (to be filed with the Secretary of State of the State of
          Delaware upon the closing of the Offering).
    3.4   Amended and Restated By-Laws of the Registrant, as amended to
          date.
  **4.1   Specimen certificate for shares of Common Stock.
   *4.2   Description of Capital Stock (contained in the Restated
          Certificate of Incorporation of the Corporation of the
          Registrant, filed as Exhibit 3.3).
  **5.1   Opinion of Bingham, Dana & Gould LLP, with respect to the
          legality of the shares being registered.
 +*10.1   (a) License Agreement between the Registrant and the
          Massachusetts Institute of Technology, dated November 4, 1992,
          as amended by the First Amendment, dated January 20, 1995, and
          the Second Amendment, dated May 17, 1995.
          (b) Patent License Agreement between the Registrant and the
          Massachusetts Institute of Technology, dated July 21, 1994.
 +*10.2   License Agreement between the Registrant and the Board of
          Trustees of the Leland Stanford Junior University, dated April
          1, 1994.
  *10.3   Employment Agreement between the Registrant and Scott M.
          Rocklage, dated June 20, 1994.
  *10.4   Consulting Agreement between the Registrant and Paul R.
          Schimmel, dated May 1, 1992.
  *10.5   Consulting Agreement between the Registrant and Julius Rebek,
          Jr., dated May 1, 1992.
   10.6   Amended and Restated 1993 Stock Option Plan.
 +*10.7   Collaborative Research Agreement between the Registrant and
          Pfizer Inc, dated December 15, 1995.
 +*10.8   Collaborative Research and License Agreement between the
          Registrant and Merck & Co., Inc., dated June 13, 1996.
 +*10.9   Collaborative Research and License Agreement between the
          Registrant and Bristol-Myers Squibb Company and the Registrant,
          dated June 25, 1996.
 +*10.10  Supply and Services Agreement, dated as of November 1, 1995, by
          and between Terrapin Technologies, Inc. and the Registrant.
  *10.11  Screening Agreement, dated November 28, 1995, between the
          Registrant and Monsanto Company.
 +*10.12  Letter Agreement, dated January 18, 1996, between Pharm-Eco
          Laboratories, Inc. and the Registrant.
  *10.13  Agreement with ArQule, Inc., dated June 4, 1996.
  *10.14  Lease Agreement between Registrant and Harry F. Stimpson III,
          trustee under the will, of Harry F. Stimpson dated April 30,
          1993, regarding 24 Emily Street, Cambridge, MA., as amended by
          the First Amendment to Lease, dated September 19, 1994.
  *10.15  Form of Employee Confidentiality and Non Disclosure Agreement.
</TABLE>    
<PAGE>
 
<TABLE>   
<CAPTION>
 EXHIBITS
 --------
 <C>      <S>
  *10.16  Master Lease Agreement between the Registrant and Comdisco, Inc.,
          dated as of August 30, 1993, as amended on February 7, 1995, and as
          further amended on February 26, 1996.
  *10.17  Series B Convertible Preferred Stock Purchase Warrant between the
          Registrant and Comdisco, Inc., dated August 30, 1993.
  *10.18  Series C Convertible Preferred Stock Purchase Warrants between the
          Registrant and Comdisco, Inc., dated February 28, 1995 and February
          26, 1996.
  *10.19  Form of Series C Convertible Preferred Stock Purchase Option issued
          to each of Dr. Paul Schimmel and Dr. Julius Rebek, Jr. in May, 1995.
  *10.20  Amended and Restated Shareholders' Rights Agreement by and among the
          Registrant and the parties signatory thereto.
   11     Computation of Income Per Share.
 **23.1   Consent of Bingham, Dana & Gould LLP (included in Exhibit 5).
   23.2   Consent of Coopers & Lybrand L.L.P.
   23.3   Consent of Hamilton, Brook, Smith & Reynolds, P.C.
  *24.1   Power of Attorney (included in signature page to Registration
          Statement).
   27     Financial Data Schedule.
</TABLE>    
- --------
   
*Previously filed.     
   
**To be filed by amendment.     
   
+Confidential Treatment requested as to certain portions.     

<PAGE>
 
                              AMENDED AND RESTATED
                              --------------------
                                   BY-LAWS OF
                                   ----------
                          CUBIST PHARMACEUTICALS, INC.
                          ----------------------------


  
<PAGE>
 
                              AMENDED AND RESTATED
                              --------------------
                                  BY-LAWS  OF
                                  -----------
                          CUBIST PHARMACEUTICALS, INC.
                          ---------------------------

                             Article 1. - General.
                             --------------------

     1.1. Offices. The registered office shall be in the City of Wilmington,
          -------
County of New Castle, State of Delaware. The Corporation may also have offices
at such other places both within and without the State of Delaware as the
Board of Directors may from time to time determine or the business of the
Corporation may require.

     1.2. Seal. The seal of the Corporation shall be in the form of a circle and
          ----
shall have inscribed thereon the name of the Corporation, the year of its
organization and the words "Corporate Seal, Delaware".

     1.3. Fiscal Year. The fiscal year of the Corporation shall be the period
          -----------
from January 1 through December 31.

                            Article ll. - Stockholders.
                            -------------------------- 

     2.1. Place of Meetings. All meetings of the stockholders shall be held at
          -----------------
the office of the Corporation in Cambridge, Massachusetts except such meetings
as the Board of Directors expressly determine shall be held elsewhere, in which
case meetings may be held upon notice as hereinafter provided at such other
place or places within or without the Commonwealth of Massachusetts as the Board
of Directors shall have determined and as shall be stated in such notice.

     2.2. Annual Meeting. The annual meeting of stockholders of the Corporation
          --------------
shall be held on such date and at such place and time as may be fixed by
resolution of the Board of Directors and stated in the notice of the meeting. At
each annual meeting of stockholders, the stockholders entitled to vote shall
elect such members of the Board of Directors as are standing for election at
such meeting, and shall transact such other business as may properly be brought
before the meeting. At the annual meeting any business may be transacted,
irrespective of whether the notice calling such meeting shall have contained a
reference thereto, except where notice is required by law, the Corporation's
Restated Certificate of Incorporation, as amended and in effect from time to
time (the "Restated Certificate of Incorporation"), or these By-Laws.

     2.3. Special Meeting. Subject to the rights of the holders of any series of
          ---------------
preferred stock, $0.001 par value per share ("Preferred Stock"), of 
<PAGE>
 
                                      -2-
the Corporation with respect to calling special meetings of stockholders of the
Corporation, special meetings of the stockholders for any purpose or purposes
may only be called by the Chairman of the Board of Directors, the President, or
a majority of the total number of directors which the Corporation would have if
there were no vacancies (the "Whole Board"). Only such business shall be
conducted at a special meeting as shall have been brought before the meeting
pursuant to the Corporation's notice of meeting.

     2.4. Notice of Meeting. Written notice of any meeting of the stockholders
          -----------------
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting. Notice need not be given to any
stockholder who submits a written waiver of notice signed by him before or after
the time stated therein. Attendance of a stockholder at a meeting of
stockholders shall constitute a waiver of notice of such meeting, except when
the stockholder attends the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice. Any previously scheduled meeting of
the stockholders may be postponed, and (unless the Restated Certificate of
Incorporation otherwise provides) any special meeting of the stockholders may be
canceled, by resolution of the Board of Directors upon public notice given prior
to the date previously scheduled for such meeting of stockholders.

     2.5. Notice of Stockholder Business and Nominations. 
          ----------------------------------------------

           (a) Nomination of Directors. Only persons who are nominated in
               -----------------------
accordance with the procedures set forth in these By-Laws shall be eligible to
serve as directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made at a meeting of stockholders (a) by or
at the direction of the Board of Directors or (b) by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice for
the election of directors at the meeting and who complies with the notice
procedures set forth in this Section 2.5(a). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 90 days nor more
than 120 days prior to the meeting; provided, however, that in the event that
                                    --------  -------
less than 100 days' notice or prior public disclosure of the date of the meeting
is given or 
<PAGE>
 
                                      -3-


made to stockholders, notice by the stockholder to be timely must be
so received not later than the close of business on the seventh day following
the day on which such notice of the date of the meeting or such public
disclosure was made. Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including such person's written consent to being named
in the proxy statement as a nominee and to serving as a director if elected),
and (b) as to the stockholder giving the notice (i) the name and address, as
they appear on the Corporation's books, of such stockholder and (ii) the class
and number of shares of the Corporation which are beneficially owned by such
stockholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
to serve as a director of the Corporation unless nominated in accordance with
the procedures set forth in this Section 2.5(a). The chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed by the By-
Laws, and if he should so determine, he shall so declare to the meeting and the
defective nomination shall be disregarded. Notwithstanding the foregoing
provisions of this Section 2.5(a), a stockholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder with respect to the matters set forth in
this Section 2.5(a).

       (b) Notice of Business. At any meeting of the stockholders, only such
           ------ -- --------
business shall be conducted as shall have been brought before the meeting (a) by
or at the direction of the Board of Directors or (b) by any stockholder of the
Corporation who is a stockholder of record at the time of giving of the notice
provided for in this Section 2.5(b), who shall be entitled to vote at such
meeting and who complies with the notice procedures set forth in this Section
2.5(b). For business to be properly brought before a stockholder meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 90 days nor more than 120 days prior to the meeting;
provided, however, that in the event that less than 100 days' notice or 
- --------  -------
<PAGE>
 
                                      -4-


prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be received no later
than the close of business on the seventh day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made.
A stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting; (b) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business, (c) the class
and number of shares of the Corporation which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.
Notwithstanding anything in the By-Laws to the contrary, no business shall be
conducted at a stockholder meeting except (i) in accordance with the procedures
set forth in this Section 2.5(b) or (ii) with respect to nominations of persons
for election as directors of the Corporation, in accordance with the provisions
of Section 2.5(a) hereof. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the provisions of the By-Laws,
and if he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions of this Section 2.5(b), a stockholder
shall also comply with all applicable requirements of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder with respect
to the matters set forth in this Section.

     2.6. Quorum and Adjournment. At all meetings of the stockholders, the
          ----------------------
holders of a majority of the stock issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall constitute a quorum
requisite for the transaction of business except as otherwise provided by law,
by the Restated Certificate of Incorporation or by these By-Laws. The chairman
of the meeting or a majority of the shares so represented may, whether or not
there is such a quorum, adjourn the meeting from time to time without notice
other than announcement at the meeting. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting. At such adjourned
meeting, at which the requisite amount of voting stock shall be represented, any
business may be transacted which might have been transacted if the meeting had
been held as originally called. The stockholders present at a duly called
meeting at which quorum is present 
<PAGE>
 
                                      -5-


may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.

     2.7. Right to Vote; Proxies. Each holder of a share or shares of capital
          ----------------------
stock of the Corporation having the right to vote at any meeting shall be
entitled to one vote for each such share of stock held by him. Any stockholder
entitled to vote at any meeting of stockholders may vote either in person or by
proxy, but no proxy which is dated more than three years prior to the meeting at
which it is offered shall confer the right to vote thereat unless the proxy
provides that it shall be effective for a longer period. A proxy may be granted
by a writing executed by the stockholder or his authorized officer, director,
employee or agent or by transmission or authorization of transmission of a
telegram, cablegram, or other means of electronic transmission to the person who
will be the holder of the proxy or to a proxy solicitation firm, proxy support
service organization or like agent duly authorized by the person who will be the
holder of the proxy to receive such transmission, subject to the conditions set
forth in Section 212 of the Delaware General Corporation Law, as it may be
amended from time to time (the "Delaware GCL").

     2.8. Voting. At all meetings of stockholders, except as otherwise expressly
          ------
provided for by statute, the Restated Certificate of Incorporation or these By-
Laws, (i) in all matters other than the election of directors, the affirmative
vote of a majority of shares present in person or represented by proxy at the
meeting and entitled to vote on such matter shall be the act of the stockholders
and (ii) directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors. Except as otherwise expressly provided by law, the
Restated Certificate of Incorporation or these By-Laws, at all meetings of
stockholders the voting shall be by ballot, each of which shall state the name
of the stockholder voting and the number of shares voted by him, and, if such
ballot be cast by a proxy, it shall also state the name of the proxy. The
chairman of the meeting shall fix and announce at the meeting the date and time
of the opening and the closing of the polls for each matter upon which the
stockholders will vote at a meeting.

     2.9.  Inspectors. The Board of Directors by resolutions shall appoint one
           ----------
or more inspectors, which inspector or inspectors may include individuals who
serve the Corporation in other capacities, including, without limitation, as
officers, employees, agents or representatives, to act at the meeting of
stockholders and make a written report thereof. One or more persons may be
designated as alternate inspectors to replace any inspector who fails to act. If
no inspector or alternate has been appointed 
<PAGE>
 
                                      -6-

to act or is able to act at a meeting of stockholders, the chairman of the
meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before discharging his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspectors shall have the
duties prescribed by law.

    2.10.  Stockholders' List. A complete list of the stockholders entitled to
           ------------------
vote at any meeting of stockholders, arranged in alphabetical order and showing
the address of each stockholder, and the number of shares registered in the name
of each stockholder, shall be prepared by the Secretary and filed either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held, at least 10 days before such meeting, and shall
at all times during the usual hours for business, and during the whole time of
said election, be open to the examination of any stockholder for a purpose
germane to the meeting.

    2.11.  No Stockholder Action by Written Consent. Unless otherwise provided
           ----------------------------------------
in the Restated Certificate of Incorporation, and subject to the rights, if any,
of the holders of Preferred Stock to take action by written consent, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of stockholders of the Corporation and
may not be effected by any consent in writing by such stockholders.

                           Article lll. - Directors.
                           ------------------------ 

     3.1.  General Powers. In addition to the powers and authority expressly
           --------------
conferred upon them by these By-Laws, the Board of Directors may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by statute or by the Restated Certificate of Incorporation or by these By-Laws
directed or required to be exercised or done by the stockholders.

     3.2.  Qualifications of Directors. A director need not be a stockholder, a
           ---------------------------
citizen of the United States, or a resident of the State of Delaware.

     3.3.  Number of Directors; Vacancies. The number of directors constituting
           ------------------------------     
the full Board of Directors shall be fixed from time to time exclusively
pursuant to a resolution adopted by a majority of the Whole Board of Directors.
Effective as of the closing (or the first closing) of the Corporation's
registered initial public offering of Common Stock (the "IPO Closing"), the
Board of Directors shall consist of three classes of directors,
<PAGE>
 
                                      -7-

such classes to be as nearly equal in number of directors as possible, having
staggered three-year terms of office, the term of office of the directors of the
first such class to expire at the first annual meeting of the Corporation's
stockholders following the IPO Closing, those of the second class to expire at
the second annual meeting of the Corporation's stockholders following the IPO
Closing, and those of the third class at the third annual meeting of the
Corporation's stockholders following the IPO Closing, such that at each such
annual meeting of stockholders, nominees will stand for election for three-year
terms to succeed those directors whose terms are to expire at such meeting.
Likewise, at each other annual meeting of stockholders held from and after the
IPO Closing, those nominees elected at such meeting to succeed those directors
whose terms expire at such meeting, shall serve for a term expiring at the third
annual meeting of stockholders following their election. Members of the Board of
Directors shall hold office until the annual meeting of stockholders for the
year in which their term is scheduled to expire as set forth above in this
Section 3.3 and their respective successors are duly elected and qualified or
until their earlier death, incapacity, resignation, or removal. Except as the
Delaware GCL may otherwise require, in the interim between annual meetings of
stockholders or special meetings of stockholders called for the election of
directors and/or for the removal of one or more directors and for the filling of
any vacancy in that connection, any vacancies or new directorships in the Board
of Directors, including unfilled vacancies or new directorships resulting from
the removal of directors for cause or any increase in the number of directors,
may be filled only by the vote of a majority of the remaining directors then in
office, although less than a quorum, or by the sole remaining director.

     3.4.  Resignation. Any director of this Corporation may resign at any time
           -----------
by giving written notice to the Chairman of the Board, if any, the President or
the Secretary of the Corporation. Such resignation shall take effect at the time
specified therein, at the time of receipt if no time is specified therein or at
the time of acceptance if the effectiveness of such resignation is conditioned
upon its acceptance. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.

     3.5.  Removal. Subject to the rights of the holders of any series of
           -------
Preferred Stock with respect the removal of any director elected by the holders
of such series and/or any other series of Preferred Stock, any director or the
entire Board of Directors may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of a majority of the then-
outstanding shares entitled to vote thereon, voting together as a class.
<PAGE>
 
                                      -8-

 
     3.6.  Place of Meetings and Books. The Board of Directors may hold their
           ---------------------------
meetings and keep the books of the Corporation outside the State of Delaware, at
such places as they may from time to time determine.

     3.7.  Executive Committee. There may be an executive committee of one or
           --------------------
more directors designated by resolution passed by a majority of the Whole Board.
The act of a majority of the members of such committee shall be the act of the
committee. Said committee may meet at stated times or on notice to all by any of
their own number, and shall have and may exercise those powers of the Board of
Directors in the management of the business affairs of the Corporation as are
provided by law and may authorize the seal of the Corporation to be affixed to
all papers which may require it. Vacancies in the membership of the committee
shall be filled by the Board of Directors at a regular meeting or at a special
meeting called for that purpose.

     3.8.  Other Committees. The Board of Directors may also designate one or
           ----------------
more committees in addition to the executive committee, by resolution or
resolutions passed by a majority of the Whole Board; such committee or
committees shall consist of one or more directors of the Corporation, and to the
extent provided in the resolution or resolutions designating them, shall have
and may exercise specific powers of the Board of Directors in the management of
the business and affairs of the Corporation to the extent permitted by statute
and shall have power to authorize the seal of the Corporation to be affixed to
all papers which may require it. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.

     3.9.  Powers Denied to Committees. Committees of the Board of Directors
           ---------------------------
shall not, in any event, have any power or authority to amend the Restated
Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
adopted by the Board of Directors as provided in Section 151(a) of the Delaware
GCL, fix the designations and any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the Corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the Corporation or fix the number of shares
of any series of stock or authorize the increase or decrease of the shares of
any series), adopt an agreement of merger or consolidation, recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's
<PAGE>
 
                                      -9-


property and assets, recommend to the stockholders a dissolution of the
Corporation or a revocation of a dissolution or to amend the By-Laws of the
Corporation. Further, no committee of the Board of Directors shall have the
power or authority to declare a dividend, to authorize the issuance of stock or
to adopt a certificate of ownership and merger pursuant to Section 253 of the
Delaware GCL, unless the resolution or resolutions designating such committee
expressly so provides.

    3.10.  Substitute Committee Member. In the absence or on the
           ---------------------------
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of such absent or disqualified
member. Any committee shall keep regular minutes of its proceedings and report
the same to the Board of Directors as may be required by the Board of Directors.

    3.11.  Compensation of Directors. The Board of Directors shall have the
           -------------------------
power to fix the compensation of directors and members of committees of the
Board of Directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors and/or a stated annual
fee (some or all of which may be paid in the form of capital stock of the
Corporation) as director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.

    3.12.  Regular Meetings. A regular meeting of the Board of Directors shall
           ----------------
be held without other notice than this Section 3.12, immediately after, and at
the same place as, the Annual Meeting of Stockholders. The Board of Directors
may, by resolutions, provide the time and place for the holding of additional
regular meetings without other notice than such resolution. Such regular
meetings shall be held at such place within or without the State of Delaware as
shall be fixed by the Board of Directors.

    3.13.  Special Meetings. Special meetings of the Board of Directors may be
           ----------------
called by the Chairman of the Board of Directors, if any, or the President, on
two (2) days notice to each director, or such shorter period of time before the
meeting as will nonetheless be sufficient for the convenient assembly of the
directors so notified; special meetings shall be 
<PAGE>
 
                                     -10-

called by the Secretary in like manner and on like notice, on the written
request of two or more directors.

    3.14.  Quorum. At all meetings of the Board of Directors, a majority of the
           ------
total number of directors shall be necessary and sufficient to constitute a
quorum for the transaction of business, and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically permitted or
provided by statute, or by the Restated Certificate of Incorporation, or by
these By-Laws. If at any meeting of the Board of Directors there shall be less
than a quorum present, a majority of those present may adjourn the meeting from
time to time until a quorum is obtained, and no further notice thereof need be
given other than by announcement at said meeting which shall be so adjourned.

    3.15.  Telephonic Participation in Meetings. Members of the Board of
           ------------------------------------
Directors or any committee designated by such board may participate in a meeting
of the Board of Directors or committee thereof by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting pursuant to
this section shall constitute presence in person at such meeting.

    3.16.  Action by Consent. Unless otherwise restricted by the Restated
           -----------------
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if written consent thereto is signed by all
members of the Board of Directors or of such committee, as the case may be, and
such written consent is filed with the minutes of proceedings of the Board of
Directors or committee.

                            Article IV. - Officers.
                            ---------------------- 

     4.1.  Selection; Statutory Officers. The officers of the Corporation shall
           -----------------------------
be chosen by the Board of Directors. There shall be a President, a Secretary and
a Treasurer, and there may be a Chairman of the Board of Directors, one or more
Vice Presidents, one or more Assistant Secretaries, and one or more Assistant
Treasurers, as the Board of Directors may elect. Any number of offices may be
held by the same person, unless the Restated Certificate of Incorporation or
these By-Laws otherwise provide.

     4.2.  Time of Election. The officers above named shall be chosen by the
           ----------------
Board of Directors at its first meeting after each annual meeting of
stockholders. None of said officers need be a director.
<PAGE>
 
                                     -11-

     4.3. Additional Officers. The Board of Directors may appoint such other
          -------------------
officers and agents as it shall deem necessary, who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board of Directors.

     4.4. Terms of Office. The officers of the Corporation shall hold office
          ---------------
until their successors are chosen and qualify. Any officer elected or appointed
by the stockholders may be removed at any time by the affirmative vote of a
majority of the stockholders. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.

     4.5. Compensation of Officers. The Board of Directors (or a duly appointed
          ------------------------
committee of the Board of Directors) shall have power to fix the compensation of
all officers of the Corporation.

     4.6. Chairman of the Board. The Chairman of the Board of Directors, if any,
          ---------------------
otherwise the President, if a director, or such other director as the Board may
choose, shall preside at all meetings of the Board of Directors and of the
stockholders of the Corporation. In the absence of the President, or in the
event of the President's inability or refusal to act, the Chairman of the Board
shall perform the duties and exercise the powers of the President until such
vacancy shall be filled in the manner prescribed by these By-Laws or by law. The
Chairman of the Board shall have such other powers and perform such other duties
as may from time to time be prescribed by the Board of Directors or these By-
Laws.

     4.7. President. Unless the Board of Directors otherwise determines, the
          ---------
President shall be the chief executive officer and head of the Corporation.
Unless there is a Chairman of the Board, the President shall preside at all
meetings of directors and stockholders. Under the supervision of the Board of
Directors and of the executive committee, the President shall have the general
control and management of its business and affairs, subject, however, to the
right of the Board of Directors and of the executive committee to confer any
specific power, except such as may be by statute exclusively conferred on the
President, upon any other officer or officers of the Corporation. The President
shall perform and do all acts and things incident to the position of President
and such other duties as may be assigned to him from time to time by the Board
of Directors or the executive committee.

     4.8. Vice-Presidents. The Vice-Presidents shall perform such of the duties
          ---------------
of the President on behalf of the Corporation as may be respectively assigned to
them from time to time by the Board of Directors 
<PAGE>
 
                                     -12-

or by the executive committee or by the President. The Board of Directors or the
executive committee may designate one of the Vice-Presidents as the Executive
Vice-President, and in the absence or inability of the President to act, such
Executive Vice-President shall have and possess all of the powers and discharge
all of the duties of the President, subject to the control of the Board of
Directors and of the executive committee.

     4.9. Treasurer. The Treasurer shall have the care and custody of all the
          ---------
funds and securities of the Corporation which may come into his hands as
Treasurer, and the power and authority to endorse checks, drafts and other
instruments for the payment of money for deposit or collection when necessary or
proper and to deposit the same to the credit of the Corporation in such bank or
banks or depository as the Board of Directors or the executive committee, or the
officers or agents to whom the Board of Directors or the executive committee may
delegate such authority, may designate, and he may endorse all commercial
documents requiring endorsements for or on behalf of the Corporation. He may
sign all receipts and vouchers for the payments made to the Corporation. He
shall render an account of his transactions to the Board of Directors or to the
executive committee as often as the Board of Directors or the committee shall
require the same. He shall enter regularly in the books to be kept by him for
that purpose full and adequate account of all moneys received and paid by him on
account of the Corporation. He shall perform all acts incident to the position
of Treasurer, subject to the control of the Board of Directors and of the
executive committee. He shall when requested, pursuant to vote of the Board of
Directors or the executive committee, give a bond to the Corporation conditioned
for the faithful performance of his duties, the expense of which bond shall be
borne by the Corporation.

     4.10. Secretary. The Secretary shall keep the minutes of all meetings of
           ---------
the Board of Directors and of the stockholders; and shall attend to the giving
and serving of all notices of the Corporation. Except as otherwise ordered by
the Board of Directors or the executive committee, the Secretary shall attest
the seal of the Corporation upon all contracts and instruments executed under
such seal and shall affix the seal of the Corporation thereto and to all
certificates of shares of capital stock of the Corporation. The Secretary shall
have charge of the stock certificate book, transfer book and stock ledger, and
such other books and papers as the Board of Directors or the executive committee
may direct. He shall, in general, perform all the duties of Secretary, subject
to the control of the Board of Directors and of the executive committee.

     4.11. Assistant Secretary. The Assistant Secretary, or if there be more
           -------------------
than one, the assistant secretaries in the order determined by the 
<PAGE>
 
                                     -13-

Board of Directors (or if there be no such determination, then in the order of
their election) shall, in the absence of the Secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.

     4.12. Assistant Treasurer. The Assistant Treasurer, or if there shall be
           -------------------
more than one, the Assistant Treasurers in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election), shall, in the absence of the Treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.

     4.13. Subordinate Officers. The Board of Directors may select such
           --------------------
subordinate officers as it may deem desirable. Each such officer shall hold
office for such period, have such authority, and perform such duties as the
Board of Directors may prescribe. The Board of Directors may, from time to time,
authorize any officer to appoint and remove subordinate officers and to
prescribe the powers and duties thereof.

     4.14. Removal. Any officer elected, or agent appointed, by the Board of
           -------
Directors may be removed by the affirmative vote of a majority of the Whole
Board whenever, in their judgment, the best interests of the Corporation would
be served thereby. Any officer or agent appointed by the President may be
removed by him whenever, in his judgment, the best interests of the Corporation
would be served thereby. No elected officer shall have any contractual rights
against the Corporation for compensation by virtue of such election beyond the
date of the election of his successor, his death, his resignation or his
removal, whichever event shall first occur, except as otherwise provided in an
employment contract or under an employee deferred compensation plan.

     4.15. Vacancies. A newly created elected office and a vacancy in any
           ---------
elected office because of death, resignation or removal may be filled by the
Board of Directors for the unexpired portion of the term at any meeting of the
Board of Directors. Any vacancy in an office appointed by the President because
of death, resignation, or removal may be filled by the President.
<PAGE>
 
                                     -14-

                              Article V. - Stock.
                              ------------------ 

     5.1. Stock. Each stockholder shall be entitled to a certificate or
          -----
certificates of stock of the Corporation in such form as the Board of Directors
may from time to time prescribe. The certificates of stock of the Corporation
shall be numbered and shall be entered in the books of the Corporation as they
are issued. They shall certify the holder's name and number and class of shares
and shall be signed by both of (i) either the President or a Vice-President, and
(ii) any one of the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, and shall be sealed with the corporate seal of the
Corporation. If such certificate is countersigned (l) by a transfer agent other
than the Corporation or its employee, or, (2) by a registrar other than the
Corporation or its employee, the signature of the officers of the Corporation
and the corporate seal may be facsimiles. In case any officer or officers who
shall have signed, or whose facsimile signature or signatures shall have been
used on, any such certificate or certificates shall cease to be such officer or
officers of the Corporation, whether because of death, resignation or otherwise,
before such certificate or certificates shall have been delivered by the
Corporation, such certificate or certificates may nevertheless be adopted by the
Corporation and be issued and delivered as though the person or persons who
signed such certificate or certificates or whose facsimile signature shall have
been used thereon had not ceased to be such officer or officers of the
Corporation.

     5.2. Fractional Share Interests. The Corporation may, but shall not be
          --------------------------
required to, issue fractions of a share. If the Corporation does not issue
fractions of a share, it shall (i) arrange for the disposition of fractional
interests by those entitled thereto, (ii) pay in cash the fair value of
fractions of a share as of the time when those entitled to receive such
fractions are determined, or (iii) issue scrip or warrants in registered or
bearer form which shall entitle the holder to receive a certificate for a full
share upon the surrender of such scrip or warrants aggregating a full share. A
certificate for a fractional share shall, but scrip or warrants shall not unless
otherwise provided therein, entitle the holder to exercise voting rights, to
receive dividends thereon, and to participate in any of the assets of the
Corporation in the event of liquidation. The Board of Directors may cause scrip
or warrants to be issued subject to the conditions that they shall become void
if not exchanged for certificates representing full shares before a specified
date, or subject to the conditions that the shares for which scrip or warrants
are exchangeable may be sold by the Corporation and the proceeds thereof
distributed to the


<PAGE>
 
                                     -15
holders of scrip or warrants, or subject to any other conditions which
the Board of Directors may impose.

     5.3. Transfers of Stock. Subject to any transfer restrictions then in
          ------------------
force, the shares of stock of the Corporation shall be transferable only upon
its books by the holders thereof in person or by their duly authorized attorneys
or legal representatives and upon such transfer the old certificates shall be
surrendered to the Corporation by the delivery thereof to the person in charge
of the stock and transfer books and ledgers or to such other person as the
directors may designate by whom they shall be cancelled and new certificates
shall thereupon be issued. The Corporation shall be entitled to treat the holder
of record of any share or shares of stock as the holder in fact thereof and
accordingly shall not be bound to recognize any equitable or other claim to or
interest in such share on the part of any other person whether or not it shall
have express or other notice thereof save as expressly provided by the laws of
Delaware.

     5.4. Record Date. For the purpose of determining the stockholders entitled
          -----------
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or the
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion, or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) days nor less than ten (10) days before the date of
such meeting, nor more than sixty (60) days prior to any other action. If no
such record date is fixed by the Board of Directors, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
necessary, shall be the day on which the first written consent is expressed; and
the record date for determining stockholders for any other purpose shall be at
the close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at any meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
<PAGE>
 
                                     -16-

     5.5. Transfer Agent and Registrar. The Board of Directors may appoint one
          ----------------------------
or more transfer agents or transfer clerks and one or more registrars and may
require all certificates of stock to bear the signature or signatures of any of
them.

     5.6. Dividends.
          ---------

          a.  Power to Declare. Dividends upon the capital stock of the
              ----------------
     Corporation, subject to the provisions of the Restated Certificate of
     Incorporation, if any, may be declared by the Board of Directors at any
     regular or special meeting, pursuant to law. Dividends may be paid in cash,
     in property, in promissory notes or in shares of the capital stock, subject
     to the provisions of the Restated Certificate of Incorporation and the laws
     of Delaware.

          b.  Reserves. Before payment of any dividend, there may be set aside
              --------
     out of any funds of the Corporation available for dividends such sum or
     sums as the directors from time to time, in their absolute discretion,
     think proper as a reserve or reserves to meet contingencies, or for
     equalizing dividends, or for repairing or maintaining any property of the
     Corporation, or for such other purpose as the directors shall think
     conducive to the interest of the Corporation, and the directors may modify
     or abolish any such reserve in the manner in which it was created.

     5.7. Lost, Stolen or Destroyed Certificates. No certificates for shares of
          --------------------------------------
stock of the Corporation shall be issued in place of any certificate alleged to
have been lost, stolen or destroyed, except upon production of such evidence of
the loss, theft or destruction and upon indemnification of the Corporation and
its agents to such extent and in such manner as the Board of Directors may from
time to time prescribe.

              Article VI. - Miscellaneous Management Provisions.
              ------------------------------------------------- 

     6.1. Checks, Drafts and Notes. All checks, drafts or orders for the payment
          ------------------------
of money, and all notes and acceptances of the Corporation shall be signed by
such officer or officers, agent or agents as the Board of Directors may
designate.

     6.2. Notices.
          -------

          a.  Notices to directors may, and notices to stockholders shall, be in
     writing and delivered personally or mailed to the directors or stockholders
     at their addresses appearing on the books of the Corporation. Notice by
     mail shall be deemed to be given at the time when the same shall be mailed.
     Notice to directors may 
<PAGE>
 
                                     -17-

     also be given by telegram, telecopy or orally, by telephone or in person.

           b.  Whenever any notice is required to be given under the provisions
     of the statutes or of the Restated Certificate of Incorporation of the
     Corporation or of these By-Laws, a written waiver of notice, signed by the
     person or persons entitled to said notice, whether before or after the time
     stated therein or the meeting or action to which such notice relates, shall
     be deemed equivalent to notice. Attendance of a person at a meeting shall
     constitute a waiver of notice of such meeting except when the person
     attends a meeting for the express purpose of objecting, at the beginning of
     the meeting, to the transaction of any business because the meeting is not
     lawfully called or convened.

     6.3.  Conflict of Interest. No contract or transaction between the
           --------------------
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorized the contract or transaction, or solely because his or their votes are
counted for such purpose, if: (i) the material facts as to his relationship or
interest and as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee and the Board of Directors or committee in
good faith authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum; or (ii) the material facts as to his relationship or
interest and as to the contract or transaction are disclosed or are known to the
stockholders of the Corporation entitled to vote thereon, and the contract or
transaction as specifically approved in good faith by vote of such stockholders;
or (iii) the contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.

     6.4.  Voting of Securities owned by this Corporation. Subject always to the
           ----------------------------------------------
specific directions of the Board of Directors, (i) any shares or other
securities issued by any other corporation and owned or controlled by this
Corporation may be voted in person at any meeting of security holders of such
other corporation by the President of this Corporation if he 
<PAGE>
 
                                     -18-


is present at such meeting, or in his absence by the Treasurer of this
Corporation if he is present at such meeting, and (ii) whenever, in the judgment
of the President, it is desirable for this Corporation to execute a proxy or
written consent in respect to any shares or other securities issued by any other
corporation and owned by this Corporation, such proxy or consent shall be
executed in the name of this Corporation by the President, without the necessity
of any authorization by the Board of Directors, affixation of corporate seal or
countersignature or attestation by another officer, provided that if the
President is unable to execute such proxy or consent by reason of sickness,
absence from the United States or other similar cause, the Treasurer may execute
such proxy or consent. Any person or persons designated in the manner above
stated as the proxy or proxies of this Corporation shall have full right, power
and authority to vote the shares or other securities issued by such other
corporation and owned by this Corporation the same as such shares or other
securities might be voted by this Corporation.

     6.5. Inspection of Books. The stockholders of the Corporation, by a
          -------------------
majority vote at any meeting of stockholders duly called, or in case the
stockholders shall fail to act, the Board of Directors shall have power from
time to time to determine whether and to what extent and at what times and
places and under what conditions and regulations the accounts and books of the
Corporation (other than the stock ledger) or any of them, shall be open to
inspection of stockholders; and no stockholder shall have any right to inspect
any account or book or document of the Corporation except as conferred by
statute or authorized by the Board of Directors or by a resolution of the
stockholders.

                        Article VII. - Indemnification.
                        ------------------------------ 

     7.1. Right to Indemnification. Each person who was or is made a party or is
          ------------------------
threatened to be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of being or having been a director or officer of the
Corporation or serving or having served at the request of the Corporation as a
director, trustee, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (an "Indemnitee"), whether the basis of such
proceeding is alleged action or failure to act in an official capacity as a
director, trustee, officer, employee or agent or in any other capacity while
serving as a director, trustee, officer, employee or agent, shall be indemnified
and held harmless by the Corporation to the fullest extent authorized by the
Delaware General Corporation Law, as the same exists or may hereafter be amended
(but, in
<PAGE>
 
                                     -19-


the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than permitted prior
thereto) (as used in this Article VII, the "Delaware Law"), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such Indemnitee in connection therewith and such indemnification
shall continue as to an Indemnitee who has ceased to be a director, trustee,
officer, employee or agent and shall inure to the benefit of the Indemnitee's
heirs, executors and administrators; provided, however, that, except as provided
in Section 7.2 hereof with respect to Proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such Indemnitee in
connection with a Proceeding (or part thereof) initiated by such Indemnitee only
if such Proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Article VII
shall be a contract right and shall include the right to be paid by the
Corporation the expenses (including attorneys' fees) incurred in defending any
such Proceeding in advance of its final disposition (an "Advancement of
Expenses"); provided, however, that, if the Delaware Law so requires, an
Advancement of Expenses incurred by an Indemnitee shall be made only upon
delivery to the Corporation of an undertaking (an "Undertaking"), by or on
behalf of such Indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (a "Final Adjudication") that such Indemnitee is not
entitled to be indemnified for such expenses under this Article VII or
otherwise.

     7.2. Right of Indemnitee to Bring Suit. If a claim under Section 7.1 hereof
          ---------------------------------
is not paid in full by the Corporation within sixty days after a written claim
has been received by the Corporation, except in the case of a claim for an
Advancement of Expenses, in which case the applicable period shall be twenty
days, the Indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the Corporation to recover an
Advancement of Expenses pursuant to the terms of an Undertaking, the Indemnitee
shall be entitled to be paid also the expense of prosecuting or defending such
suit. In (i) any suit brought by the Indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the Indemnitee to
enforce a right to an Advancement of Expenses) it shall be a defense that, and
(ii) in any suit by the Corporation to recover an Advancement of Expenses
pursuant to the terms of an Undertaking the Corporation shall be entitled to
recover such expenses upon a Final Adjudication that, the Indemnitee has not met
the applicable standard of conduct set forth in the Delaware Law. Neither the
failure of the Corporation (including its board of directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the Indemnitee is proper in
the circumstances because the Indemnitee has met the applicable standard of
conduct set forth in the
<PAGE>
 
                                     -20-


Delaware Law, nor an actual determination by the Corporation (including its
board of directors, independent legal counsel, or its stockholders) that the
Indemnitee has not met such applicable standard of conduct, shall create a
presumption that the Indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by the Indemnitee, be a defense to such
suit. In any suit brought by the Indemnitee to enforce a right to
indemnification or to an Advancement of Expenses hereunder, or by the
Corporation to recover an Advancement of Expenses pursuant to the terms of an
Undertaking, the burden of proving that the Indemnitee is not entitled to be
indemnified, or to such Advancement of Expenses, under this Article VII or
otherwise shall be on the Corporation.

     7.3.  Non-Exclusivity of Rights. The rights to indemnification and to the
           -------------------------
Advancement of Expenses conferred in this Article 7 shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, the Corporation's Restated Certificate of Incorporation, By-Law,
agreement, vote of stockholders or disinterested directors or otherwise.

     7.4.  Insurance. The Corporation may maintain insurance, at its expense, to
           ---------
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under this Article VII or under the Delaware Law.

     7.5.  Indemnification of Employees and Agents of the Corporation. The
           ----------------------------------------------------------
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification, and to the Advancement of Expenses,
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article VII with respect to the indemnification and
Advancement of Expenses of directors and officers of the Corporation.

                          Article VIII. - Amendments.
                          -------------------------- 

     8.1.  Amendments. Subject always to any limitations imposed by the
           ----------
Corporation's Restated Certificate of Incorporation, these By-Laws may be 
altered, amended, or repealed, or new By-Laws may be adopted, only by (i) the 
affirmative vote of the holders of at least three-quarters (75%) of the 
outstanding voting stock of the Corporation (in addition to any separate class 
vote that may be required pursuant to the terms of any then outstanding 
preferred stock of the Corporation), or (ii) by resolution of the Board of 
Directors duly adopted by not less than a majority of the directors then 
constituting the full Board of Directors.

<PAGE>
 
                          CUBIST PHARMACEUTICALS, INC.

                  AMENDED AND RESTATED 1993 STOCK OPTION PLAN
            (adopted by the Board of Directors on June 11, 1996, but
            effective only upon the closing of the Company's initial
                                public offering)

       This Amended and Restated 1993 Stock Option Plan hereby further amends
and restates the Company's current Amended and Restated 1993 Stock Option Plan,
as heretofore amended, to read in its entirety as follows:

       1.   Definitions.  As used in this Amended and Restated 1993 Stock Option
            -----------                                                         
Plan of Cubist Pharmaceuticals, Inc., the following terms shall have the
following meanings:

       1.1. Awarded Grant Date means the date as of which an Awarded Option is
            ------- ----- ----                                                
granted, as determined under Section 7.1.

       1.2. Awarded Option means Options granted pursuant to Section 7 hereof.
            ------- ------                                                    

       1.3. Board means the Company's Board of Directors.
            -----                                        

       1.4. Change in Corporate Control means (1) the time of approval by the
            ------ -- --------- -------                                      
shareholders of the Company of (A) any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation or pursuant to
which Shares would be converted into cash, securities or other property, other
than a merger in which the holders of Stock immediately prior to the merger will
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger as before the merger, (B) any sale,
lease, exchange, or other transfer (in one transaction or a series of related
transactions) of all or substantially all the assets of the Company, or (C)
adoption of any plan or proposal for the liquidation or dissolution of the
Company, or (2) the date on which any "person" (as defined in Section 13(d) of
the Exchange Act), other than the Company or a Subsidiary or employee benefit
plan or trust maintained by the Company or any of its Subsidiaries shall become
(together with its "affiliates" and "associates," as defined in Rule 12b-2 under
the Exchange Act) the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of more than 25% of the Stock outstanding
at the time, without the prior approval of the Board of Directors of the
Company.

       1.5. Code means the federal Internal Revenue Code of 1986, as amended.
            ----                                                             
<PAGE>
 
                                      -2-

       1.6.  Committee means a committee comprised of two or more Outside
             ---------                                                   
Directors, appointed by the Board of Directors, responsible for the
administration of the Plan, as provided in Section 5; provided, that the Board
                                                      --------                
of Directors itself may at any time, in its sole discretion, exercise any or all
functions and authority of the Committee.

       1.7.  Company means Cubist Pharmaceuticals, Inc., a Delaware corporation.
             -------                                                            

       1.8.  Exchange Act means the Securities Exchange Act of 1934, as amended.
             -------- ---                                                       

       1.9.  Eligible Director means a director of one or more of the Company
             -------- --------
and its Subsidiaries who is not also an employee or officer of one or more of
the Company and its Subsidiaries.

       1.10. Fair Market Value means on any date (i) if the Stock is traded on
             ---- ------ -----                                                
a stock exchange or on the Nasdaq National Market, the closing price on the date
in question or, if no trades were reported on such date, the closing price on
the most recent trading day preceding such date on which a trade occurred, and
(ii) if the Stock is not traded on a stock exchange or on the Nasdaq National
Market, the value of a Share on such date as determined by the Committee.

       1.11. Formula Grant means the grant of a Formula Option.
             ------- -----                                     

       1.12. Formula Grant Date shall have the meaning specified in Section 8.1
             ------- ----- ----                                                
hereof.

       1.13. Formula Options means Options granted pursuant to Section 8
             ------- -------                                            
hereof.

       1.14. Holder means, with respect to any Option, (i) the Optionee to whom
             ------                                                            
such Option shall have been granted under the Plan, or (ii) any transferee of
such Option to whom such Option shall have been transferred in accordance with
the provisions of Section 14.

       1.15. Incentive Option means an Awarded Option which by its terms is to
             --------- ------                                                 
be treated as an "incentive stock option" within the meaning of Section 422 of
the Code.

       1.16. Nonstatutory Option means any Option that is not an Incentive
             ------------ ------                                          
Option.

       1.17. Option means an Awarded Option or Formula Option granted under the
             ------                                                            
Plan to purchase Shares.
<PAGE>
 
                                      -3-

       1.18. Option Agreement means an agreement between the Company and an
             ------ ---------                                              
Optionee, setting forth the terms and conditions of an Option.

       1.19. Option Price means the price paid by an Optionee for a Share upon
             ------ -----                                                     
exercise of an Option.

       1.20. Optionee means a person eligible to receive an Option, as provided
             --------                                                          
in Section 6, to whom an Option shall have been granted under the Plan.

       1.21. Outside Director shall mean a member of the Board who is not an
             ------- --------                                               
officer, employee or consultant of the Company or any Subsidiary.

       1.22. Plan means this Amended and Restated 1993 Stock Option Plan of the
             ----                                                              
Company, as amended from time to time.

       1.23. Retirement means, with respect to any Optionee that is an employee
             ----------                                                        
or director of the Company, the voluntary retirement of such Optionee as an
employee and/or director, as the case may be, of the Company at any time after
age 65 or such earlier age as the Committee shall determine.

       1.24. Securities Act means the Securities Act of 1933, as amended.
             ---------- ---                                              

       1.25. Shares means shares of Stock.
             ------                       

       1.26. Stock means common stock, $.001 par value per share, of the
             -----                                                      
Company.

       1.27. Subsidiary means any corporation which qualifies as a subsidiary
             ----------                                                      
of the Company under the definition of "subsidiary corporation" in Section
424(f) of the Code.

       1.28. Ten Percent Owner means a person who owns, or is deemed within the
             --- ------- -----                                                 
meaning of Section 422(b)(6) of the Code to own, stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company (or
its parent or Subsidiaries).  Whether a person is a Ten Percent Owner shall be
determined with respect to each Awarded Option based on the facts existing
immediately prior to the applicable Awarded Grant Date.

       1.29. Vesting Year for any portion of any Incentive Option means the
             ------- ----                                                  
calendar year in which that portion of the Incentive Option first becomes
exercisable.

       2.    Purpose.  This Plan is intended to encourage ownership of Stock by
             -------                                                           
officers, employees and directors of and consultants to the Company and its
Subsidiaries and to provide additional incentives for them to promote the
<PAGE>
 
                                      -4-

success of the Company's business.  The Plan is intended to be an incentive
stock option plan within the meaning of Section 422 of the Code but not all
Options granted hereunder are required to be Incentive Options.

       3.    Term of the Plan.  Options may be granted hereunder at any time in
             ---- -- --- ----                                                  
the period commencing upon the effectiveness of the Plan pursuant to Section 21
and ending on May 6, 2003.

       4.    Stock Subject to the Plan.  Subject to the provisions of Section 15
             ----- ------- --  -- ----                                          
of the Plan, at no time shall the number of Shares then outstanding which are
attributable to the exercise of Options granted under the Plan, plus the number
                                                                ----           
of Shares then issuable upon exercise of outstanding Options granted under the
Plan exceed 1,500,000 Shares, which aggregate number of Shares, automatically
and without further action, shall increase, on January 1, 1998, and each 
January 1 thereafter during the term of the Plan, by an additional number of
Shares equal to fifteen percent (15%) of the difference between (i) the total
number of Shares and Stock equivalents (other than Options) issued and
outstanding as of the close of business on December 31 of the immediately
preceding year and (ii) the total number of Shares and Stock equivalents (other
than Options) issued and outstanding as of the close of business on December 31
of the year prior to such immediately preceding year. Notwithstanding the
foregoing, no more than an aggregate of 3,000,000 Shares (subject to adjustment
pursuant to the provisions of Section 15 hereof) may be issued pursuant to the
exercise of Incentive Stock Options granted under the Plan. Shares to be issued
upon the exercise of Options granted under the Plan may be either authorized but
unissued Shares or Shares held by the Company in its treasury. If any Option
expires or terminates for any reason without having been exercised in full, the
Shares not purchased thereunder shall again be available for Options thereafter
to be granted.

       5.    Administration.  The Plan shall be administered by the Committee.
             --------------                                                    
Subject to the provisions of the Plan, the Committee shall have complete
authority, in its discretion, to make or to select the manner of making the
following determinations with respect to each Option, other than a Formula
Option, to be granted by the Company:  (a) the officer, employee or consultant
to receive the Option; (b) whether the Option (if granted to an employee) will
be an Incentive Option or Nonstatutory Option; (c) the time of granting the
Option; (d) the number of Shares subject to the Option; (e) the Option Price;
(f) the Option period; (g) the Option exercise date or dates or, if the Option
is immediately exercisable in full on its Awarded Grant Date, the vesting
schedule, if any, applicable to the Shares issuable upon the exercise of the
Option; (h) the effect of termination of employment, consulting or association
with the Company on the subsequent exercisability of the Option; and (i) whether
a Nonstatutory 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 
<PAGE>
 
                                      -5-

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) other than for
Formula Options, 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.

       6.    Eligibility.  An Awarded Option may be granted only to an employee
             -----------                                                       
or officer of or consultant to one or more of the Company and its Subsidiaries,
provided that Incentive Options may be granted only to an employee (including an
- --------                                                                        
officer that is an employee) of the Company or one or more of its Subsidiaries.
Each Eligible Director shall receive Formula Options pursuant to Section 8
hereof.  Eligible Directors may not be granted Awarded Options in their
capacities as directors of the Company, but those Eligible Directors that are
also consultants to the Company may be granted Awarded Options in their
capacities as consultants.  Subject to adjustment pursuant to Section 15 hereof,
no person in any year may be granted Options with respect to more than 500,000
Shares.

       7.    Awarded Options.
             ------- -------

       7.1.  Time of Granting Awarded Options.  The granting of an Awarded
             ---- -- -------- ------- -------
Option shall take place at the time specified by the Committee. Only if
expressly so provided by the Committee, shall the Awarded Grant Date be the date
on which an Option Agreement shall have been duly executed and delivered by the
Company and the Optionee.

       7.2.  Option Price.  The Option Price under each Awarded Option shall be
             ------ -----                                                      
determined by the Committee but, in the case of any Incentive Option, shall be
not less than 100% of the Fair Market Value of Stock on the Awarded Grant Date,
or not less than 110% of the Fair Market Value of Stock on the Awarded Grant
Date if the Optionee is a Ten Percent Owner.  The Option Price under each
Nonstatutory Option shall not be so limited solely by reason of this 
Section 7.2.

       7.3.  Awarded Option Period.  No Incentive Option may be exercised later
             ------- ------ ------                                             
than the tenth (10th) anniversary of the Awarded Grant Date but in any case not
later than the fifth (5th) anniversary of the Awarded Grant Date if the Optionee
is a Ten Percent Owner.  The Option period under each Nonstatutory Option shall
not be so limited solely by reason of this Section 7.3.
<PAGE>
 
                                      -6-

       7.4.  Vesting.  An Awarded Option may become exercisable in such
             -------                                                   
installments, cumulative or non-cumulative, as the Committee may determine.  In
the case of an Awarded Option not otherwise immediately exercisable in full, the
Committee may accelerate the exercisability of such Awarded Option in whole or
in part at any time, provided the acceleration of the exercisability of any
                     --------                                             
Incentive Option would not cause the Awarded Option to fail to comply with the
provisions of Section 422 of the Code.

       7.5.  Limit on Incentive Option Characterization.  No Incentive Option
             ----- -- --------- ------ ----------------                      
shall be considered an Incentive Option to the extent pursuant to its terms it
would permit the Optionee to purchase for the first time in any Vesting Year
under that Incentive Option more than the number of Shares calculated by
dividing the current limit by the Option Price.  The current limit for any
Optionee for any Vesting Year shall be $100,000 minus the aggregate Fair Market
Value (determined as of the respective Awarded Grant Dates) of the number of
Shares available for purchase for the first time in the Vesting Year under each
other Incentive Option granted to the Optionee under the Plan and each other
incentive stock option granted to the Optionee after December 31, 1986 under any
other incentive stock option plan of the Company (and any parent corporation and
Subsidiaries).  Any Shares subject to an Incentive Option in excess of the
foregoing limitation shall be treated as if granted under a Nonstatutory Option
with otherwise identical terms.

       8.    Formula Options.
             ------- ------- 

       8.1.  Directors Elected For First Time.  Subject to the Plan's
             --------- ------- --- ----- ----                        
effectiveness as set forth in Section 21, each Eligible Director who is elected
to the Board, and was never before a member of the Board, and who is elected to
the Board during the term of the Plan (whether elected at an annual or special
stockholders' meeting or by action of the Board or written consent of
stockholders without a meeting), shall be granted, on the date of such meeting
or other appointment (as used in or with reference to this Section 8.1, a
"Formula Grant Date"), a Nonstatutory Option to purchase 7,000 Shares.  Grants
 ------- ----- ----                                                           
of Formula Options under this Section 8.1 occur automatically without any action
being required of the Optionee, the Committee, the Board of Directors, the
Company or any other person, entity or body.

       8.2.  Annual Formula Grants.  Subject to the Plan's effectiveness as set
             ------ ------- ------                                             
forth in Section 21, on the date of each annual meeting of stockholders of the
Company commencing with the 1997 Annual Meeting of Stockholders of the Company,
each Eligible Director who continues to be a director of the Company on the
business day immediately following such annual meeting of stockholders shall be
granted a Nonstatutory Option on such business day (also referred to as a
"Formula Grant Date"), to purchase 700 Shares.  Grants of Formula Options under
- -------- ----------                                                            
this Section 8.2 occur automatically without any action being required of
<PAGE>
 
                                      -7-

the Optionee, the Committee, the Board of Directors, the Company or any other
person, entity or body.

       8.3.  Certain Terms of Formula Options.  Each Formula Option granted to
             ------- ----- -- ------- -------
an Optionee under this Section 8 shall have an exercise price equal to 100% of
the Fair Market Value of the Stock on the applicable Formula Grant Date. No
Formula Option granted pursuant to this Section 8 is intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code. The
Formula Grants shall be evidenced by Option Agreements. The Option Agreements
shall contain provisions consistent with this Section 8, and the Option
Agreements shall contain identical terms and conditions, except as otherwise
required by this Section 8.

       8.4.  Option Period.  The Option period for any Formula Option granted
             ------ ------                                                   
pursuant to this Section 8 shall be ten years from the date of grant.

       8.5.  Exercisability.  Each Formula Option granted to an Eligible
             --------------
Director pursuant to Section 8.1 hereof (a "Section 8.1 Formula Option") shall
become exercisable in twelve (12) equal installments, with the first installment
becoming exercisable on the last day of the first full fiscal quarter following
the Formula Grant Date applicable to such Section 8.1 Formula Option and an
additional installment becoming exercisable on the last day of each of the
eleven successive fiscal quarters following such first fiscal quarter; provided,
                                                                       --------
however, that if the Optionee with respect to such Section 8.1 Formula Option
- -------
shall cease to be a director of the Company and each of its subsidiaries, then,
notwithstanding anything in this Section 8.5 to the contrary and subject to
Section 13 hereof, such Section 8.1 Formula Option shall thereafter be
exercisable only with respect to those of such installments for which such
Section 8.1 Formula Option is exercisable, pursuant to this Section 8.5, at the
time of such cessation. Each Formula Option granted to an Eligible Director
pursuant to Section 8.2 hereof (a "Section 8.2 Formula Option") shall become
exercisable in four (4) equal installments, with the first installment becoming
exercisable on the last day of the first full fiscal quarter following the
Formula Grant Date applicable to such Section 8.2 Formula Option and an
additional installment becoming exercisable on the last day of each of the three
successive fiscal quarters following such first fiscal quarter; provided,
                                                                --------
however, that if the Optionee with respect to such Section 8.2 Formula Option
- -------
shall cease to be a director of the Company and each of its subsidiaries, then,
notwithstanding anything in this Section 8.5 to the contrary and subject to
Section 13 hereof, such Section 8.2 Formula Option shall thereafter be
exercisable only with respect to those of such installments for which such
Section 8.2 Formula Option is exercisable, pursuant to this Section 8.5, at the
time of such cessation.
<PAGE>
 
                                      -8-

       9.    Exercise of Option.
             -------- -- ------ 

             (a)  An Option may be exercised only by giving written notice, in
the manner provided in Section 20 hereof, specifying the number of Shares as to
which the Option is being exercised, accompanied (except as otherwise provided
in paragraph (b) of this Section 9) by full payment for such Shares in the form
of check or bank draft payable to the order of the Company or other Shares with
a current Fair Market Value equal to the Option Price of the Shares to be
purchased. Receipt by the Company of such notice and payment shall constitute
the exercise of the Option or a part thereof. Subject to the provisions of the
Plan (including, without limitation, Sections 10, 11 and 12) or any applicable
Option Agreement, within 30 days after receipt of such notice and payment, the
Company shall deliver or cause to be delivered to the Holder a certificate or
certificates for the number of Shares then being purchased by the Holder. Such
Shares shall be fully paid and nonassessable. If such Shares are not at that
time effectively registered under the Securities Act, the Holder shall include
with such notice a letter, in form and substance satisfactory to the Company,
confirming that such Shares are being purchased for the Holder's own account for
investment and not with a view to distribution.

             (b)  In lieu of payment by check, bank draft or other Shares
accompanying the written notice of exercise as described in paragraph (a) of
this Section 9, a Holder may, unless prohibited by applicable law, elect to
effect payment by including with the written notice referred to in paragraph (a)
of this Section 9 irrevocable instructions to deliver for sale to a registered
securities broker acceptable to the Company that number of Shares subject to the
Option being exercised sufficient, after brokerage commissions, to cover the
aggregate exercise price of such Option and, if the Holder further elects, the
withholding obligations of the Optionee and/or such Holder pursuant to Section
12 with respect to such exercise, together with irrevocable instructions to such
broker to sell such Shares and to remit directly to the Company such aggregate
exercise price and, if the Holder has so elected, the amount of such withholding
obligation.  The Company shall not be required to deliver to such securities
broker any stock certificate for such Shares until it has received from the
broker such exercise price and, if the Holder has so elected, the amount of such
withholding obligation.

             (c)  The right of the Holder to exercise an Option pursuant to any
provision of this Section 9, and the obligation of the Company to issue Shares
upon any exercise of an Option pursuant to this Section 9, is subject to
compliance with all of the other provisions of the Plan (including, without
limitation, Sections 10, 11 and 12) or any applicable Option Agreement.
<PAGE>
 
                                      -9-

       10.   Restrictions on Issue of Shares.
             ------------ -- ----- -- ------ 

             (a)  Notwithstanding any other provision of the Plan, if, at any
time, in the reasonable opinion of the Company the issuance of Shares covered by
the exercise of any Option may constitute a violation of law, then the Company
may delay such issuance and the delivery of a certificate for such Shares until
(i) approval shall have been obtained from such governmental agencies, other
than the Securities and Exchange Commission, as may be required under any
applicable law, rule, or regulation; and (ii) in the case where such issuance
would constitute a violation of a law administered by or a regulation of the
Securities and Exchange Commission, one of the following conditions shall have
been satisfied:

       (1)   the Shares with respect to which such Option has been exercised are
at the time of the issue of such Shares effectively registered under the
Securities Act; or

       (2)   a no-action letter in form and substance reasonably satisfactory to
the Company with respect to the issuance of such Shares shall have been obtained
by the Company from the Securities and Exchange Commission.

The Company shall make all reasonable efforts to bring about the occurrence of
said events.

             (b)  Each certificate representing Shares issued upon the exercise
of an Option will bear restrictive legends which may refer to this Plan.

       11.   Purchase for Investment; Subsequent Registration.
             -------- --- ----------  ---------- ------------ 

             (a)  Without limiting the generality of Section 10 hereof, if the
Shares to be issued upon exercise of an Option granted under the Plan have not
been effectively registered under the Securities Act, the Company shall be under
no obligation to issue any Shares covered by any Option unless the person who
exercises such Option, in whole or in part, shall give a written representation
to the Company which is satisfactory in form and substance to its counsel and
upon which the Company may reasonably rely, that he or she is acquiring the
Shares issued pursuant to such exercise of the Option as an investment and not
with a view to, or for sale in connection with, the distribution of any such
Shares.

             (b)  Each Share issued pursuant to the exercise of an Option
granted pursuant to this Plan may bear a reference to the investment
representation made in accordance with this Section 11 and to the fact that no
registration statement has been filed with the Securities and Exchange
Commission in respect to said Stock.
<PAGE>
 
                                     -10-

             (c)  If the Company shall deem it necessary or desirable to
register under the Securities Act or other applicable statutes any Shares with
respect to which an Option shall have been granted, or to qualify any such
Shares for exemption from the Securities Act or other applicable statutes, then
the Company shall take such action at its own expense. The Company may require
from each Option holder, or each holder of Shares acquired pursuant to the Plan,
such information in writing for use in any registration statement, prospectus,
preliminary prospectus or offering circular as is reasonably necessary for such
purpose and may require reasonable indemnity to the Company and its officers and
directors from such holder against all losses, claims, damage and liabilities
arising from such use of the information so furnished and caused by any untrue
statement of any material fact therein or caused by the omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made.

       12.   Withholding; Notice of Disposition of Stock Prior to Expiration of
             -----------  ------ -- ----------- -- ----- ----- -- ---------- --
Specified Holding Period.
- --------- ------- ------ 

             (a)  Whenever Shares are to be issued in satisfaction of an Option
granted hereunder, the Company shall have the right to require the Optionee
and/or any subsequent Holder to remit to the Company an amount sufficient to
satisfy federal, state, local, employment or other tax withholding requirements
if and to the extent required by law (whether so required to secure for the
Company an otherwise available tax deduction or otherwise) prior to the delivery
of any certificate or certificates for such Shares.

             (b)  The Company may require as a condition to the issuance of
Shares covered by any Incentive Option that the party exercising such Option
give a written representation to the Company which is satisfactory in form and
substance to its counsel and upon which the Company may reasonably rely, that he
or she will report to the Company any disposition of such Shares prior to the
expiration of the holding periods specified by Section 422(a)(1) of the Code. If
and to the extent that the realization of income in such a disposition imposes
upon the Company federal, state, local or other withholding tax requirements, or
any such withholding is required to secure for the Company an otherwise
available tax deduction, the Company shall have the right to require that the
recipient remit to the Company an amount sufficient to satisfy those
requirements; and the Company may require as a condition to the issuance of
Shares covered by an Incentive Option that the party exercising such option give
a satisfactory written representation promising to make such a remittance.

             (c)  The Committee may, at or after grant, permit an Optionee
and/or subsequent Holder to satisfy any tax withholding requirements pertaining
to the exercise of an Option by delivery to the Company of Shares 
<PAGE>
 
                                     -11-

(including, without limitation, Shares retained from the Option exercise that is
creating the tax obligation) having a value equal to the amount to be withheld.
The value of Shares to be so delivered shall be based on the Committee's
determination of the Fair Market Value of a Share on the date the amount of tax
to be withheld is to be determined.

       13.   Termination of Association with the Company.  If an Optionee ceases
             ----------- -- ----------- ---- --- -------                        
to be an employee, director or consultant of the Company and its Subsidiaries
for any reason other than Retirement or death of such Optionee, any Option held
by such Optionee and/or any subsequent Holder may be exercised by such Optionee
and/or such subsequent Holder at any time within 90 days after the termination
of such relationship, but only to the extent exercisable at termination and in
no event after the applicable option period.  If an Optionee enters Retirement
or dies, any Option held by such Optionee and/or any subsequent Holder may be
exercised by such Optionee, such subsequent Holder and/or the executor or
administrator of such Optionee or such subsequent Holder at any time within the
shorter of the applicable option period or 12 months after the date of the
Optionee's Retirement or death, but only to the extent exercisable at the time
of such Optionee's Retirement or death.  Options which are not exercisable at
the time of termination of such relationship between the Company and the
Optionee or which are so exercisable but are not exercised within the time
periods described above shall terminate.  Notwithstanding the foregoing, in the
event that the applicable Option Agreement with respect to an Option shall
contain specific provisions governing the effect that any such termination shall
have on the exercisability of such Option, such provisions shall, to the extent
that they are inconsistent with the provisions of this Section 13, control and
be deemed to supersede the provisions of this Section 13.   For purposes of this
Section 13, military or sick leave shall not be deemed a termination of
employment, provided that it does not exceed the longer of 90 days or the period
            --------                                                            
during which the absent Optionee's reemployment rights, if any, are guaranteed
by statute or by contract.

       14.   Transferability of Options.  Incentive Options shall not be
             --------------- -- -------                                 
transferable, otherwise than by will or the laws of descent and distribution,
and may be exercised during the life of the Optionee only by the Optionee.
Nonstatutory Options shall not be transferable; provided, however, that
                                                --------  -------      
Nonstatutory Options shall be transferable by will or the laws of descent and
distribution; and provided, further, that Nonstatutory Options may be
                  --------  -------                                  
transferred to a third party if and to the extent authorized and permitted by
the Compensation Committee.  In granting its authorization and permission to any
proposed transfer of a Nonstatutory Option to a third party, the Compensation
Committee may impose conditions or requirements that must be satisfied by the
transferor or the third party transferee prior to or in connection with such
transfer, including, without limitation, any conditions or requirements that may
be necessary or desirable, in the sole and absolute discretion of the Committee,
<PAGE>
 
                                     -12-

to ensure that such proposed transfer complies with applicable securities laws
or to prevent the Company, such transferor or such third party transferee from
violating or otherwise not be in compliance with applicable securities laws as a
result of such transfer.  For purposes of this Section 14, the term Nonstatutory
Option shall include an Option that was an Incentive Option at the time of
grant, but that has been subsequently been disqualified or otherwise lost its
status as an Incentive Option.  The restrictions on transferability set forth in
this Section 14 shall in no way preclude any Holder from effecting "cashless"
exercises of an Option pursuant to, and in accordance with, Section 9(b) hereof.

       15.   Adjustment of Number of Option Shares.  In the event of any stock
             ---------- -- ------ -- ------ ------                            
dividend payable in Stock or any split-up or contraction in the number of Shares
prior to the exercise in full of an Option, the number of Shares subject to the
Option and the price to be paid for each Share subject to the Option shall be
proportionately adjusted.  In the event of any reclassification or change of
outstanding Stock or in case of any consolidation or merger of the Company with
or into another company or in case of any sale or conveyance to another company
or entity of the property of the Company as a whole or substantially as a whole,
shares of stock or other securities equivalent in kind and value to those shares
a Holder would have received if he or she had held the full number of Shares
subject to the Option immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance and had continued to hold those shares
(together with all other shares, stock and securities thereafter issued in
respect thereof) to the time of the exercise of the Option shall thereupon be
subject to the Option.  Upon dissolution or liquidation of the Company, the
Option shall terminate, but the Holder (if at the time the Optionee is in the
employ or retained as a consultant or serving as a director of the Company or
any of its Subsidiaries) shall have the right, immediately prior to such
dissolution or liquidation, to exercise the Option to the extent not theretofore
exercised.  No fraction of a share shall be purchasable or deliverable upon
exercise, but in the event any adjustment hereunder of the number of shares
covered by the Option shall cause such number to include a fraction of a share,
such number of shares shall be adjusted to the nearest smaller whole number of
shares.  In the event of changes in the outstanding Stock by reason of any stock
dividend, split-up, contraction, reclassification, or change of outstanding
Shares of the nature contemplated by this Section 15, the number of Shares
available for the purpose of the Plan as stated in Section 4 hereof shall be
correspondingly adjusted.

       16.   Change in Corporate Control.  Upon a Change in Corporate Control,
             ------ -- --------- -------                                      
each outstanding Option shall immediately become fully exercisable.

       17.   Reservation of Stock.  The Company shall at all times during the
             ----------- --  ----                                            
term of the Plan and, without duplication, of any outstanding Options reserve or
otherwise keep available such number of Shares as will be sufficient to satisfy
<PAGE>
 
                                     -13-

the requirements of the Plan (if not then terminated) and such outstanding
Options and shall pay all fees and expenses necessarily incurred by the Company
in connection therewith.

       18.   Limitation of Rights in Stock; No Special Employment or Other
             ---------- -- ------ -- -----  -- ------- ---------- -- -----
Rights.  A Holder shall not be deemed for any purpose to be a stockholder of the
- ------                                                                          
Company with respect to any of the Shares covered by an Option, except to the
extent that the Option shall have been exercised with respect thereto and, in
addition, a certificate shall have been issued therefor and delivered to the
Holder or his agent.  Any Stock issued pursuant to the Option shall be subject
to all restrictions upon the transfer thereof which may be now or hereafter
imposed by the Certificate of Incorporation, and the By-laws of the Company, if
any.  Nothing contained in the Plan or in any Option shall confer upon any
Optionee any right with respect to the continuation of his or her employment
with, or retention as a consultant, director or advisor to, the Company (or any
Subsidiary), or interfere in any way with the right of the Company (or any
Subsidiary), subject to the terms of any separate employment or consulting
agreement or provision of law or corporate articles or by-laws to the contrary,
at any time to terminate such employment, consulting, directorship or advisory
relationship or to increase or decrease the compensation of the Optionee from
the rate in existence at the time of the grant of an Option.

       19.   Termination and Amendment of the Plan.  The Board may at any time
             ----------- --- --------- -- --- ----                            
terminate the Plan or make such modifications of the Plan as it shall deem
advisable.  No termination or amendment of the Plan may, without the consent of
the Holder of any Option, adversely affect the rights of such Holder under such
Option.  Notwithstanding the foregoing, the provisions of Sections 1, 5, 6, and
this Section 19, insofar as they relate to Formula Options, and Section 8 shall
not be amended more often than once every six (6) months, other than to comport
with changes in the Code, the Employee Retirement Income Security Act of 1974,
as amended, or the rules and regulations thereunder.

       20.   Notices and Other Communications.  All notices and other
             ------- --- ----- --------------                        
communications required or permitted under the Plan shall be effective if in
writing and if delivered or sent by certified or registered mail, return receipt
requested (a) if to the Holder, at his or her residence address last filed with
the Company, and (b) if to the Company, at 24 Emily Street, Cambridge,
Massachusetts 02139, Attention: President or to such other persons or addresses
as the Holder or the Company may specify by a written notice to the other from
time to time.  Copies of all notices sent to any Holder that is not the Optionee
shall also be sent to the Optionee in the manner set forth in this Section 20.

       21.   Effectiveness.  This Amended and Restated 1993 Stock Option Plan
             -------------
was approved by the Board of Directors on June 11, 1996 and by the stockholders
of the Company on June 12, 1996, but shall not become effective 
<PAGE>
 
                                     -14-

until and unless the Company's proposed initial public offering is consummated.
Prior to the consummation of the Company's initial public offering, the
Company's existing Amended and Restated 1993 Stock Option Plan, as amended from
time to time, shall remain in full force and effect.

<PAGE>
 
                                                                      EXHIBIT 11
 
                          CUBIST PHARMACEUTICALS, INC.
 
                        COMPUTATION OF INCOME PER SHARE
 
                     AS OF DECEMBER 31, 1993, 1994 AND 1995
                     
                  AND THE SIX MONTHS ENDED JUNE 30, 1996     
 
<TABLE>   
<CAPTION>
                                                       HISTORICAL    PRO FORMA
                                                       -----------  -----------
<S>                                                    <C>          <C>
Beginning Balance 1/1/93..............................     444,899
Issuance of Common Stock..............................      36,751
Issuance of Cheap Stock...............................     496,523
Issuance of Preferred Stock...........................           0
                                                       -----------
  Weighted Average Shares at 12/31/93.................     978,173
  Net Loss............................................ $(1,687,894)
  Net Loss per Share..................................      $(1.73)
                                                       ===========
Beginning Balance 1/1/94..............................     546,864
Issuance of Common Stock..............................      85,661
Issuance of Cheap Stock...............................     496,523
Issuance of Preferred Stock...........................           0
                                                       -----------
  Weighted Average Shares at 12/31/94.................   1,129,048
  Net Loss............................................ $(4,813,035)
  Net Loss per Share..................................      $(4.26)
                                                       ===========
Beginning Balance 1/1/95..............................     910,030    3,729,083
Issuance of Common Stock..............................      76,228       76,228
Issuance of Cheap Stock...............................     496,523      496,523
Issuance of Preferred Stock...........................           0    1,631,673
                                                       -----------  -----------
  Weighted Average Shares at 12/31/95.................   1,482,781    5,933,507
  Net Loss............................................ $(5,396,006) $(5,396,006)
  Net Loss per Share..................................      $(3.64)      $(0.91)
                                                       ===========  ===========
Beginning Balance 1/1/96..............................   1,016,666    5,981,120
Issuance of Common Stock..............................      (5,760)      (5,760)
Issuance of Cheap Stock...............................     496,523      496,523
Issuance of Preferred Stock...........................           0       13,266
                                                       -----------  -----------
  Weighted Average Shares at 6/30/96..................   1,507,429    6,485,149
  Net Loss............................................ $(2,073,213) $(2,073,213)
  Net Loss per Share..................................      $(1.38)      $(0.32)
                                                       ===========  ===========
</TABLE>    

<PAGE>
 
                                                                   EXHIBIT 23.2
 
  This is the form of the consent which will be issued upon effectiveness of
the stock split described in Note M to the financial statements.
 
                                          /s/ Coopers & Lybrand L.L.P.
                                          Coopers & Lybrand L.L.P.
 
Boston, Massachusetts
   
July 31, 1996     
 
                      CONSENT OF INDEPENDENT ACCOUNTANTS
 
  We consent to the inclusion in this registration statement on Form S-1 of
our report dated January 12, 1996, except as to the information in Notes L and
M for which the date is     , 1996, on our audits of the financial statements
of Cubist Pharmaceuticals, Inc. We also consent to the references to our firm
under the captions "Selected Financial Data" and "Experts."
 
Boston, Massachusetts
   
    , 1996     

<PAGE>
 
                                                                   EXHIBIT 23.3
 
              HAMILTON, BROOK, SMITH & REYNOLDS, P.C. LETTERHEAD
 
 
          CONSENT OF SPECIAL COUNSEL FOR CUBIST PHARMACEUTICALS, INC.
 
  We hereby consent to the reference to our name, and to the statements with
respect to us, in Cubist Pharmaceuticals, Inc.'s Registration Statement on
Form S-1 and the Prospectus relating thereto under the caption "Experts."
 
                                          Hamilton, Brook, Smith & Reynolds,
                                           P.C.
 
                                                   /s/ David E. Brook
                                          By: _________________________________
                                                     DAVID E. BROOK
   
Dated: July 31, 1996     

<TABLE> <S> <C>

<PAGE>
 
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CUBIST FORM
S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
       
<S>                             <C>                     <C>
<PERIOD-TYPE>                   YEAR                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1995             JUN-30-1996
<PERIOD-START>                             JAN-01-1995             JAN-01-1996
<PERIOD-END>                               DEC-31-1995             JUN-30-1996
<CASH>                                       2,049,555               4,732,273
<SECURITIES>                                 1,006,569                       0
<RECEIVABLES>                                  988,000               1,915,000         
<ALLOWANCES>                                         0                       0
<INVENTORY>                                          0                       0
<CURRENT-ASSETS>                                66,996                 734,086
<PP&E>                                       3,834,953               4,171,086
<DEPRECIATION>                               1,056,802               1,368,476
<TOTAL-ASSETS>                               7,047,842              10,355,229
<CURRENT-LIABILITIES>                          896,307               2,358,690
<BONDS>                                      1,838,550               1,833,138
                                0                       0
                                     34,751                  37,568
<COMMON>                                         1,017                   1,006
<OTHER-SE>                                   4,859,005               6,751,637
<TOTAL-LIABILITY-AND-EQUITY>                 7,047,842              10,355,229
<SALES>                                              0                       0
<TOTAL-REVENUES>                             1,271,333               2,046,653
<CGS>                                                0                       0
<TOTAL-COSTS>                                        0                       0
<OTHER-EXPENSES>                             6,673,389               4,056,195
<LOSS-PROVISION>                                     0                       0
<INTEREST-EXPENSE>                             (6,050)                  63,671
<INCOME-PRETAX>                            (5,396,006)             (2,073,213)
<INCOME-TAX>                                         0                       0
<INCOME-CONTINUING>                        (5,396,006)             (2,073,213)
<DISCONTINUED>                                       0                       0
<EXTRAORDINARY>                                      0                       0
<CHANGES>                                            0                       0
<NET-INCOME>                               (5,396,006)             (2,073,213)
<EPS-PRIMARY>                                    (.86)<F1>               (.32)<F1>
<EPS-DILUTED>                                        0                       0
<FN>
<F1>Computed on a pro forma basis as described in Note B of the Notes to the
Financial Statements.
</FN>
        

</TABLE>


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