Exhibit 10.4

PENWEST PHARMACEUTICALS CO.
Nonstatutory Stock Option Agreement
Granted Under 2005 Stock Incentive Plan

1. Grant of Option.

     This agreement (this “Agreement”) evidences the grant by Penwest
Pharmaceuticals Co., a Washington corporation (the “Company”), on [ ______ ],
20[ ___ ] (the “Grant Date”) to [ ______ ], [a consultant/a director] of the
Company (the “Participant”), of an option to purchase, in whole or in part, on
the terms provided herein and in the Company’s 1997 Equity Incentive Plan (the
“Plan”), a total of [ ______ ] shares (the “Shares”) of common stock, $.001 par
value per share, of the Company (“Common Stock”) at an exercise price of $[
        .         ] per Share. Unless earlier terminated, this option shall
expire at 5:00 p.m., Eastern time, the day after the tenth anniversary of the
Grant Date (the “Final Exercise Date”).

     It is intended that the option evidenced by this Agreement shall not be an
incentive stock option as defined in Section 422 of the Internal Revenue Code of
1986, as amended, and any regulations promulgated thereunder (the “Code”).
Except as otherwise indicated by the context, the term “Participant”, as used in
this option, shall be deemed to include any person who acquires the right to
exercise this option validly under its terms.

2. Vesting Schedule.

     (a) This option will become exercisable (“vest”) as to [ _________ ].

     (b) The right of exercise shall be cumulative so that to the extent the
option is not exercised in any period to the maximum extent permissible it shall
continue to be exercisable, in whole or in part, with respect to all Shares for
which it is vested until the earlier of (i) the Final Exercise Date or (ii) the
termination of this option under Section 3 or the Plan.

     (c) Notwithstanding the foregoing, this option shall automatically become
exercisable in full (i) upon a Change in Control Event (as defined below) prior
to the date the Participant ceases to be an Eligible Participant (as defined
below), (ii) upon the Participant’s death or disability (within the meaning of
Section 22(e)(3) of the Code) prior to the date the Participant ceases to be an
Eligible Participant (as defined below) or (iii) upon the Participant’s
retirement in accordance with the Company’s normal retirement policy, provided
in each case that the Company has not terminated the Participant’s relationship
with the Company for “cause” or determined that discharge for “cause” was
warranted as specified in Section 3(e) below.

     (d) For the purposes of this Section 2, a “Change in Control Event” shall
mean:

  (i)   the acquisition by an individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the 1934 Securities Exchange Act, as amended) (a
“Person”) of beneficial ownership of any capital stock of the

 

--------------------------------------------------------------------------------

 

      Company if, after such acquisition, such Person beneficially owns (within
the meaning of Rule 13d-3 promulgated under the 1934 Securities Exchange Act, as
amended) 50% or more of the combined voting power of the then-outstanding
securities of the Company entitled to vote generally in the election of
directors (the “Outstanding Company Voting Securities”); provided, however, that
for purposes of this subsection (i), the following acquisitions shall not
constitute a Change in Control Event: (A) any acquisition directly from the
Company, (B) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company or (C) any acquisition by any corporation pursuant to a Business
Combination (as defined below) which complies with clauses (x) and (y) of
subsection (iii) of this definition; or     (ii)   such time as the Continuing
Directors (as defined below) do not constitute a majority of the Board of
Directors of the Company (the “Board”) (or, if applicable, the Board of
Directors of a successor corporation to the Company), where the term “Continuing
Director” means at any date a member of the Board (x) who was a member of the
Board on the Grant Date or (y) who was nominated or elected subsequent to such
date by at least a majority of the directors who were Continuing Directors at
the time of such nomination or election or whose election to the Board was
recommended or endorsed by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election; provided,
however, that there shall be excluded from this clause (y) any individual whose
initial assumption of office occurred as a result of an actual or threatened
election contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents, by or on behalf of a
person other than the Board; or     (iii)   the consummation of a merger,
consolidation, reorganization, recapitalization or share exchange involving the
Company or a sale or other disposition of all or substantially all of the assets
of the Company (a “Business Combination”), unless, immediately following such
Business Combination, each of the following two conditions is satisfied: (x) all
or substantially all of the individuals and entities who were the beneficial
owners of the Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% the
combined voting power of the then-outstanding securities entitled to vote
generally in the election of directors, of the resulting or acquiring
corporation in such Business Combination (which shall include, without
limitation, a corporation which as a result of such transaction owns the Company
or substantially all of the Company’s assets either directly or through one or
more subsidiaries) (such resulting or acquiring corporation is referred to
herein as the “Acquiring Corporation”) in substantially the same proportions as
their ownership of the Outstanding Company Voting Securities immediately prior
to such Business

-2-

--------------------------------------------------------------------------------

 

      Combination and (y) no Person (excluding any employee benefit plan (or
related trust) maintained or sponsored by the Company or by the Acquiring
Corporation) beneficially owns, directly or indirectly, 50% or more of the
combined voting power of the then-outstanding securities of the Acquiring
Corporation entitled to vote generally in the election of directors (except to
the extent that such ownership existed prior to the Business Combination); or  
  (iv)   the liquidation or dissolution of the Company.

3. Exercise of Option.

     (a) Form of Exercise. Each election to exercise this option shall be in
writing, signed by the Participant, and received by the Company at its principal
office, accompanied by this agreement, and payment in full in the manner
provided in Section 4 below. The Participant may purchase less than the number
of shares covered hereby, provided that no partial exercise of this option may
be for any fractional share or for fewer than five whole shares.

     (b) Continuous Relationship with the Company Required. Except as otherwise
provided in this Section 3, this option may not be exercised unless the
Participant, at the time the Participant exercises this option, is, and has been
at all times since the Grant Date, [a director of/a consultant to] the Company
(an “Eligible Participant”).

     (c) Termination of Relationship with the Company. If the Participant ceases
to be an Eligible Participant for any reason, then, except as provided in
paragraphs (d) and (e) below, the right to exercise this option shall terminate
one year after such cessation (but in no event after the Final Exercise Date),
provided that this option shall be exercisable only to the extent that the
Participant was entitled to exercise this option on the date of such cessation.
Notwithstanding the foregoing, if the Participant, prior to the Final Exercise
Date, violates the non-competition or confidentiality provisions of any
employment contract, confidentiality and nondisclosure agreement or other
agreement between the Participant and the Company, the right to exercise this
option shall terminate immediately upon such violation.

     (d) Exercise Period Upon Death or Disability. If, prior to the Final
Exercise Date while the Participant is an Eligible Participant, the Participant
(i) dies or (ii) becomes disabled (within the meaning of Section 22(e)(3) of the
Code) and in each case the Company has not terminated such relationship for
“cause” or determined that discharge for “cause” was warranted as specified in
Section 3(e) below, this option shall be exercisable, within the period of one
year following the date of death or disability of the Participant, by the
Participant or an authorized transferee, provided that this option shall not be
exercisable after the Final Exercise Date.

     (e) Discharge for Cause. If the Participant, prior to the Final Exercise
Date, is discharged or removed by the Company for “cause” (as defined below),
the right to exercise this option shall terminate immediately upon the effective
date of such discharge or removal. “Cause” shall mean willful misconduct by the
Participant or willful failure by the Participant to perform his or her
responsibilities to the Company (including, without limitation, breach by the
Participant of any provision of any employment, consulting, advisory,
nondisclosure, non-

-3-

--------------------------------------------------------------------------------

 

competition or other similar agreement between the Participant and the Company),
as determined by the Company, which determination shall be conclusive. The
Participant shall be considered to have been discharged or removed for “Cause”
if the Company determines, within 30 days after the final day of the
Participant’s relationship with the Company, that discharge or removal for cause
was warranted.

4. Payment Upon Exercise. Common Stock purchased upon the exercise of this
option shall be paid for as follows:

     (a) in cash, by wire transfer to the Company, by bank transfer to the
Company or by check payable to the order of the Company; or

     (b) by any combination of the above permitted forms of payment.

5. Withholding. No Shares will be issued pursuant to the exercise of this option
unless and until the Participant pays to the Company, or makes provision
satisfactory to the Company for payment of, any federal, state or local
withholding taxes required by law to be withheld in respect of this option.

6. Nontransferability of Option. This option may not be sold, assigned,
transferred, pledged or otherwise encumbered by the Participant, either
voluntarily or by operation of law, except (i) by will or the laws of descent
and distribution applicable if the Participant dies, (ii) pursuant to a
qualified domestic relations order or (iii) provided the transfer is without
consideration, to the spouse, children or grandchildren of the Participant
(“Immediate Family Members”), or to a trust for the exclusive benefit of such
Immediate Family Members or to a partnership in which such Immediate Family
Members are the only partners.

7. Headings. The headings in this Agreement are for convenience of reference
only and shall not be deemed a part of this Agreement for purposes of the
interpretation or construction of this Agreement.

8. Provisions of the Plan. This option is subject to the provisions of the Plan,
a copy of which is furnished to the Participant with this option.

     IN WITNESS WHEREOF, the Company has caused this option to be executed under
its corporate seal by its duly authorized officer. This option shall take effect
as a sealed instrument.

                      Penwest Pharmaceuticals Co.
 
                Dated: [_________, 20__]   By:    
 
               

          Name:    

          Title:    

-4-

--------------------------------------------------------------------------------

 

PARTICIPANT’S ACCEPTANCE

     The undersigned hereby accepts the foregoing option and agrees to the terms
and conditions thereof. The undersigned hereby acknowledges receipt of a copy of
the Company’s 2005 Stock Incentive Plan.

              PARTICIPANT:
 
             
 
       

  Address:    
 
       

       

-5-