##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended September 30, 2006
 Commission File Number 000-13789
 NASTECH PHARMACEUTICAL COMPANY INC.
  Delaware
    
    11-2658569(State or other jurisdiction ofincorporation or organization)
    
    (I.R.S. Employer Identification No.)3830 Monte Villa Parkway, Bothell, WA
    
    98021(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
  þ o
  o þ o
  o þ
  Date
    
    Class
    
    Shares OutstandingOctober 30, 2006
    
    Common stock  $0.006 par value
    
    22,004,264




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##### 



NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTS (unaudited)Condensed Consolidated Balance Sheets as of December 31, 2005 and September 30, 2006
    
    
    3Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2005 and September 30, 2006
    
    
    4Condensed Consolidated Statement of Stockholders Equity and Comprehensive Loss for the nine months ended September 30, 2006
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and September 30, 2006
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    19ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    33ITEM 4  CONTROLS AND PROCEDURES
    
    
    33PART II  OTHER INFORMATION
    
    
    34ITEM 1A  RISK FACTORS
    
    
    34ITEM 6  EXHIBITS
    
    
    34SIGNATURES
    
    
    34EXHIBIT INDEX
    
    
    35EXHIBIT 10.19EXHIBIT 10.27EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Items 1, 2, 3, 4 and 5 of PART II have not been included as they are not applicable
 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1  FINANCIAL STATEMENTS
 NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (In Thousands, Except Share Data)
 December 31,
    
    
    September 30,2005
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    26,769
    
    
    $
    21,081Restricted cash and short-term investments
    
    
    998
    
    
    
    2,155Short-term investments
    
    
    32,142
    
    
    
    33,174Accounts receivable
    
    
    189
    
    
    
    2,589Inventories
    
    
    2,733
    
    
    
    2,758Prepaid expenses and other current assets
    
    
    1,545
    
    
    
    1,097Total current assets
    
    
    64,376
    
    
    
    62,854Property and equipment, net
    
    
    8,173
    
    
    
    14,401Security deposits and other assets
    
    
    404
    
    
    
    408Total assets
    
    $
    72,953
    
    
    $
    77,663LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,944
    
    
    $
    3,433Accrued payroll and employee benefits
    
    
    1,740
    
    
    
    2,277Accrued expenses
    
    
    474
    
    
    
    611Capital lease obligations  current portion
    
    
    2,431
    
    
    
    3,560Deferred revenue  current portion
    
    
    1,589
    
    
    
    4,074Total current liabilities
    
    
    9,178
    
    
    
    13,955Capital lease obligations, net of current portion
    
    
    3,170
    
    
    
    6,093Deferred revenue, net of current portion
    
    
    4,250
    
    
    
    4,933Other liabilities
    
    
    788
    
    
    
    1,168Total liabilities
    
    
    17,386
    
    
    
    26,149Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value; 100,000 authorized: no shares issued and outstanding:
    
    
    
    
    
    
    Common stock, $0.006 par value; 50,000,000 authorized: 20,750,477 and 21,968,342
shares outstanding at December 31, 2005 and September 30, 2006, respectively
    
    
    124
    
    
    
    132Additional paid-in capital
    
    
    176,068
    
    
    
    183,250Deferred compensation
    
    
    (4,902
    )
    
    
    Accumulated deficit
    
    
    (115,616
    )
    
    
    (131,831
    )Accumulated other comprehensive loss
    
    
    (107
    )
    
    
    (37
    )Total stockholders equity
    
    
    55,567
    
    
    
    51,514Total liabilities and stockholders equity
    
    $
    72,953
    
    
    $
    77,663
  3




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##### Table of Contents



NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (In Thousands, Except Share Data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006RevenuesProduct revenue, net
    
    
    
    
    
    $
    32
    
    
    
    
    
    
    $
    624License and research fees
    
    $
    1,223
    
    
    
    5,130
    
    
    $
    6,155
    
    
    
    22,667Government grants
    
    
    
    
    
    
    383
    
    
    
    
    
    
    
    383Total revenue
    
    
    1,223
    
    
    
    5,545
    
    
    
    6,155
    
    
    
    23,674Operating expenses:Cost of product revenue
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    314Research and development
    
    
    8,099
    
    
    
    10,483
    
    
    
    22,559
    
    
    
    31,050Sales and marketing
    
    
    345
    
    
    
    505
    
    
    
    963
    
    
    
    1,335General and administrative
    
    
    2,019
    
    
    
    2,942
    
    
    
    6,949
    
    
    
    9,194Total operating expenses
    
    
    10,463
    
    
    
    13,943
    
    
    
    30,471
    
    
    
    41,893Loss from operations
    
    
    (9,240
    )
    
    
    (8,398
    )
    
    
    (24,316
    )
    
    
    (18,219
    )Other income (expense):Interest income
    
    
    496
    
    
    
    751
    
    
    
    1,321
    
    
    
    2,107Interest expense
    
    
    (75
    )
    
    
    (162
    )
    
    
    (265
    )
    
    
    (405
    )Other income and expense, net
    
    
    5
    
    
    
    1
    
    
    
    15
    
    
    
    11Loss before change in accounting principle
    
    
    (8,814
    )
    
    
    (7,808
    )
    
    
    (23,245
    )
    
    
    (16,506
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    291Net Loss
    
    $
    (8,814
    )
    
    $
    (7,808
    )
    
    $
    (23,245
    )
    
    $
    (16,215
    )Basic and diluted net loss per share:Loss before change in accounting principle
    
    $
    (0.46
    )
    
    $
    (0.36
    )
    
    $
    (1.28
    )
    
    $
    (0.78
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.01Net loss per common share  basic and diluted
    
    $
    (0.46
    )
    
    $
    (0.36
    )
    
    $
    (1.28
    )
    
    $
    (0.77
    )Shares used in computing net loss per share  basic and diluted
    
    
    19,009
    
    
    
    21,408
    
    
    
    18,208
    
    
    
    21,115
  4




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 AND COMPREHENSIVE LOSS
 For the Nine Months Ended September 30, 2006
 (Unaudited)
 (In Thousands, Except Share Data)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Deferred
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Compensation
    
    
    Loss
    
    
    EquityBalance December 31, 2005
    
    
    20,750,477
    
    
    $
    124
    
    
    $
    176,068
    
    
    $
    (115,616
    )
    
    $
    (4,902
    )
    
    $
    (107
    )
    
    $
    55,567Proceeds from the exercise of
options
    
    
    277,899
    
    
    
    2
    
    
    
    3,054
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,056Proceeds from the exercise of
warrants
    
    
    694,856
    
    
    
    4
    
    
    
    5,506
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,510Compensation related to
restricted stock
    
    
    245,110
    
    
    
    2
    
    
    
    1,751
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,753Compensation related to stock
options
    
    
    
    
    
    
    
    
    
    
    2,064
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,064Cumulative effect of change
in accounting principle
    
    
    
    
    
    
    
    
    
    
    (5,193
    )
    
    
    
    
    
    
    4,902
    
    
    
    
    
    
    
    (291
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,215
    )
    
    
    
    
    
    
    
    
    
    
    (16,215
    )Change in unrealized loss on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    70Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,215
    )
    
    
    
    
    
    
    70
    
    
    
    (16,145
    )Balance September 30, 2006
    
    
    21,968,342
    
    
    $
    132
    
    
    $
    183,250
    
    
    $
    (131,831
    )
    
    
    
    
    
    $
    (37
    )
    
    $
    51,514
  5




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (In Thousands)
 Nine Months EndedSeptember 30,2005
    
    
    2006Operating activities:Net loss
    
    $
    (23,245
    )
    
    $
    (16,215
    )Adjustments to reconcile net loss to net cash used in operating activities:Non-cash compensation related to stock options
    
    
    287
    
    
    
    2,064Non-cash compensation related to restricted stock
    
    
    1,006
    
    
    
    1,753Depreciation and amortization of property and equipment
    
    
    1,289
    
    
    
    1,957Loss on disposition of property and equipment
    
    
    124
    
    
    
    24Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (291
    )Changes in assets and liabilities:Accounts receivable
    
    
    (582
    )
    
    
    (2,400
    )Inventories
    
    
    (977
    )
    
    
    (25
    )Prepaid expenses and other assets
    
    
    (646
    )
    
    
    444Accounts payable
    
    
    1,233
    
    
    
    489Deferred revenue
    
    
    (1,624
    )
    
    
    3,168Accrued expenses and other liabilities
    
    
    (234
    )
    
    
    1,054Net cash used in operating activities
    
    
    (23,369
    )
    
    
    (7,978
    )Investing activities:Property and equipment acquisitions
    
    
    (4,209
    )
    
    
    (8,209
    )Purchases of investments
    
    
    (104,280
    )
    
    
    (61,529
    )Sales and maturities of investments
    
    
    93,699
    
    
    
    60,567Net cash used in investing activities
    
    
    (14,790
    )
    
    
    (9,171
    )Financing activities:Change in restricted cash and short-term investments
    
    
    8,002
    
    
    
    (1,157
    )Payments on notes payable
    
    
    (8,352
    )
    
    
    Borrowings under capital lease obligations
    
    
    2,940
    
    
    
    6,286Payments on capital lease obligations
    
    
    (1,350
    )
    
    
    (2,234
    )Proceeds from exercise of stock options
    
    
    5,385
    
    
    
    3,056Proceeds from exercise of warrants
    
    
    
    
    
    
    5,510Public offering of common shares
    
    
    21,648
    
    
    
    Net cash provided by financing activities
    
    
    28,273
    
    
    
    11,461Net decrease in cash and cash equivalents
    
    
    (9,886
    )
    
    
    (5,688
    )Cash and cash equivalents  beginning of period
    
    
    25,797
    
    
    
    26,769Cash and cash equivalents  end of period
    
    $
    15,911
    
    
    $
    21,081Supplemental disclosures of investing and financing activities:Cash paid for interest
    
    $
    250
    
    
    $
    405Non-cash investing activity:Change in unrealized loss on available-for-sale securities
    
    $
    54
    
    
    $
    70
  6




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the nine months ended September 30, 2006 and September 30, 2005 (Unaudited)
 Note 1  Business and Summary of Significant Accounting Policies
 Business
       7




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Basis of Preparation
  Reclassifications
  Principles of Consolidation
  Use of Estimates
  Inventories
  Revenue Recognition
 Revenue
Recognition, Revenue Arrangements with Multiple Deliverables.
  8




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Income Taxes
  Research and Development Costs
  9




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Recent Accounting Pronouncements
       10




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Stock-based Compensation
   11




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##### Table of Contents



Net Loss per Common Share
  Note 2  Stock-based compensation plans
 Determining Fair Value Under SFAS 123R
  Valuation and Amortization Method.
 Expected Life
 Expected Volatility
 Risk-Free Interest Rate.
 12




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##### Table of Contents



Expected Dividend Yield.
 Expected Forfeitures.
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2006
    
    2005
    
    2006Expected dividend yield
    
    
    0
    %
    
    
    *
    
    
    
    0
    %
    
    
    0
    %Risk free interest rate
    
    
    4.1
    %
    
    
    *
    
    
    
    4.0
    %
    
    
    4.8
    %Expected stock volatility
    
    
    0.77
    
    
    
    *
    
    
    
    0.79
    
    
    
    0.69Expected option life
    
    6 years
    
    
    *
    
    
    6 years
    
    5.7 yearsWeighted average fair value granted during period
    
    $
    10.36
    
    
    
    *
    
    
    $
    8.65
    
    
    $
    9.05
 
 *
    
    No options were granted in the three months ended
September 30, 2006. Stock-based Compensation Under SFAS 123R
  Three months ended
    
    
    Nine months endedSeptember 30, 2006
    
    
    September 30, 2006(dollars in thousands)Stock-based compensation:Research and development
    
    $
    598
    
    
    $
    1,576Sales and marketing
    
    
    58
    
    
    
    178General and administrative
    
    
    589
    
    
    
    2,063Total stock-based compensation
    
    $
    1,245
    
    
    $
    3,817
   Three months ended
    
    Nine months endedSeptember 30, 2006
    
    September 30, 2006As Reported
    
    If Reported
    
    As Reported
    
    If ReportedFollowing
    
    Following
    
    Following
    
    FollowingSFAS 123R
    
    APB 25
    
    SFAS 123R
    
    APB 25Condensed consolidated statement of operations:Net loss
    
    $
    (7,808
    )
    
    $
    (7,225
    )
    
    $
    (16,215
    )
    
    $
    (14,824
    )Net loss per shareBasic and Diluted
    
    $
    (0.36
    )
    
    $
    (0.34
    )
    
    $
    (0.77
    )
    
    $
    (0.70
    )Condensed consolidated statement of cash flows:Net cash provided by (used in) operating activities
    
    $
    7,093
    
    
    $
    7,093
    
    
    $
    (7,978
    )
    
    $
    (7,978
    )Net cash provided by financing activities
    
    $
    2,667
    
    
    $
    2,667
    
    
    $
    11,461
    
    
    $
    11,461
 13




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Stock Option Activity
   WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life
    
    
    ValueOutstanding December 31, 2005
    
    
    2,688
    
    
    $
    12.92Options granted
    
    
    124
    
    
    
    13.98Options exercised
    
    
    (278
    )
    
    
    11.81Options canceled
    
    
    (7
    )
    
    
    11.05Options expired
    
    
    (2
    )
    
    
    12.65Outstanding at September 30, 2006
    
    
    2,525
    
    
    $
    13.10
    
    
    5.9 years
    
    $
    6,458Exercisable at September 30, 2006
    
    
    1,868
    
    
    $
    12.71
    
    
    4.9 years
    
    $
    5,744
   Options OutstandingWeighted-
    
    
    
    
    
    
    Options ExercisableAverage
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageContractual Life
    
    
    Exercise
    
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    (Years)
    
    
    Price
    
    
    Exercisable
    
    
    Price$5.62 - $9.99
    
    
    351,867
    
    
    
    2.4
    
    
    $
    8.20
    
    
    
    320,336
    
    
    $
    8.10$10.00 - $12.43
    
    
    325,100
    
    
    
    4.6
    
    
    
    10.95
    
    
    
    305,268
    
    
    
    10.94$12.94 - $12.94
    
    
    800,000
    
    
    
    5.6
    
    
    
    12.94
    
    
    
    800,000
    
    
    
    12.94$13.35 - $16.00
    
    
    948,433
    
    
    
    7.9
    
    
    
    14.53
    
    
    
    342,201
    
    
    
    14.48$25.00 - $25.00
    
    
    100,000
    
    
    
    5.6
    
    
    
    25.00
    
    
    
    100,000
    
    
    
    25.00Totals
    
    
    2,525,400
    
    
    
    5.9
    
    
    $
    13.10
    
    
    
    1,867,805
    
    
    $
    12.71
 Pro Forma Information
  14




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Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005(dollars in thousands)Net loss as reported
    
    $
    (8,814
    )
    
    $
    (23,245
    )Add: Stock-based employee compensation included in the reported net loss
    
    
    536
    
    
    
    1,293Deduct: Stock-based employee compensation, determined under fair value
based methods
    
    
    (1,025
    )
    
    
    (3,391
    )Pro forma net loss
    
    $
    (9,303
    )
    
    $
    (25,343
    )Net Loss per shareBasic and diluted  as reported
    
    $
    (0.46
    )
    
    $
    (1.28
    )Basic and diluted  pro forma
    
    $
    (0.49
    )
    
    $
    (1.39
    )
 Note 3  Contractual Agreements
 Procter & Gamble (P&G) :
   Galenea :
   15




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Accounting for Research and Development Costs.
 Amylin Pharmaceuticals, Inc.
   Par Pharmaceutical
    16




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##### Table of Contents



®
 Questcor Pharmaceuticals, Inc. ® ® ® ® ®
 ® ® ® ® ®
 ®
 Questcor assignment to QOL Medical, LLC 
 Alnylam Pharmaceuticals, Inc .
 Merck/PYY
  17




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##### Table of Contents



Government Grants
 Note 4  Stockholders Equity
 Common Stock Offerings
     Warrants
 Exercise Price of Warrants
    
    
    Total$6.34
    
    
    $11.09
    
    
    $14.26
    
    
    WarrantsWarrants outstanding at December 31, 2005
    
    
    458,395
    
    
    
    433,288
    
    
    
    516,384
    
    
    
    1,408,067Exercised during the nine months ended September 30, 2006
    
    
    (458,395
    )
    
    
    (240,715
    )
    
    
    
    
    
    
    (699,110
    )Warrants outstanding at September 30, 2006
    
    
    
    
    
    
    192,573
    
    
    
    516,384
    
    
    
    708,957Warrants expiring in September 2008
    
    
    
    
    
    
    192,573
    
    
    
    
    
    
    
    192,573Warrants expiring in June 2009
    
    
    
    
    
    
    
    
    
    
    516,384
    
    
    
    516,384
 Restricted Stock Awards
 18




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Unvested restricted shares outstanding, beginning of period
    
    
    148,823
    
    
    
    493,228
    
    
    
    145,620
    
    
    
    444,322Restricted shares issued
    
    
    308,169
    
    
    
    125,710
    
    
    
    389,052
    
    
    
    276,656Restricted shares forfeited
    
    
    (15,955
    )
    
    
    (2,328
    )
    
    
    (25,515
    )
    
    
    (14,635
    )Restricted shares vested
    
    
    (14,703
    )
    
    
    (76,096
    )
    
    
    (82,823
    )
    
    
    (165,829
    )Unvested restricted shares outstanding, end of period
    
    
    426,334
    
    
    
    540,514
    
    
    
    426,334
    
    
    
    540,514Non-cash restricted stock compensation expense, net of forfeitures
    
    $
    492,000
    
    
    $
    547,000
    
    
    $
    1,006,000
    
    
    $
    1,753,000Average award price during period
    
    $
    14.59
    
    
    $
    13.04
    
    
    $
    13.85
    
    
    $
    14.26
 Shelf Registration Statement
 Stockholders Rights Plan
 
 ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
 Statements contained herein that are not historical fact may be forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that are subject to a variety of risks and
uncertainties. There are a number of important factors that could cause actual results to differ
materially from those projected or suggested in any forward-looking statement made by us. These
factors include, but are not limited to: (i) our ability to obtain additional funding; (ii) our
ability to attract and/or maintain manufacturing, research, development and commercialization
partners; (iii) our and/or a partners ability to successfully complete product research and
development, including pre-clinical and clinical studies and commercialization; (iv) our and/or a
partners ability to obtain required governmental approvals, including product and patent
approvals; and (v) our and/or a partners ability to develop and commercialize products that can
compete favorably with those of competitors. In addition, significant fluctuations in quarterly
results may occur as a result of the timing of milestone payments, the recognition of revenue from
milestone payments and other sources not related to product sales to third parties, and the timing
of costs and expenses related to our research and development programs. Additional factors that
would cause actual results to differ materially from those projected or suggested in any
forward-looking statements are contained in our filings with the Securities and Exchange
Commission, including those factors discussed under the captions Forward-Looking Information and
Risk Factors in our most recent Annual Report on Form 10-K , as may be supplemented or amended by
our Quarterly Reports on Form 10-Q , which we urge investors to consider. We undertake no obligation
to publicly release revisions in such forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrences of unanticipated events or
circumstances, except as otherwise required by securities and other applicable laws.
 19




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##### Table of Contents




    
    Applying Our Tight Junction Technology and Other Drug Delivery Methods to Product
Candidates.We will focus our research and development efforts on product candidates,
including, peptides, large molecules, small molecules and therapeutic siRNA, where our
proprietary technologies utilizing tight junctions may offer clinical advantages such as
improved safety and clinical efficacy or increased patient compliance due to elimination of
injection site pain and avoidance of injection site irritation. We will also continue to
search for applications of our tight junction technology to improve other forms of drug
delivery, including oral, pulmonary and intravenous delivery.
    
    Pursuing Collaborations with Pharmaceutical and Biotechnology Companies.We will continue
to try to establish strategic collaborations with pharmaceutical and biotechnology
companies. Typically, we collaborate with partners to commercialize our product candidates
by utilizing their research and development, regulatory compliance, marketing and
distribution capabilities. We may also assist our collaboration partners in developing more
effective drug delivery methods for their product candidates that have already completed
early stage clinical trials, or are even currently marketed. We intend to structure our
collaborative arrangements to receive research and development funding and milestone
payments during the development phase, revenue from manufacturing upon commercialization and
patent-based royalties on future sales of products.
    
    Strategically Developing and Commercializing Product Candidates on Our Own.In select
cases where we deem it to be strategically advantageous to us, we plan to internally
develop, manufacture and distribute our products.
    
    Utilizing Our Manufacturing Expertise and Capabilities.We have invested substantial
time, money and intellectual capital in developing our manufacturing facilities and know-how
which we believe would be difficult for our competitors to replicate easily. These
capabilities give us competitive advantages including the ability to prepare the chemistry,
manufacturing and controls section of the new drug application (the NDA) filing with the
U.S. Food and Drug Administration (the FDA) and maintain a high-level of quality control
in manufacturing product candidates for clinical trials and FDA-approved products for
commercialization. We believe our manufacturing capabilities will meet our projected
capacity needs for the foreseeable future.
  20




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Procter & Gamble Partnership
    ®
 ®
 Amylin Pharmaceuticals, Inc.
 21




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##### Table of Contents



Par Pharmaceutical Partnership
     ®
 22




---



##### Table of Contents



Merck Partnership/PYY
   RNAi Technology and Intellectual Property Acquisitions
  Alnylam.
 Galenea Corp./MIT.
   Government Grants.
 23




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##### Table of Contents



Cash Position and Recent Financings
    Critical Accounting Policies and Estimates
  Revenue Recognition
 Revenue Recognition,
 24




---



##### Table of Contents



Revenue Arrangements with Multiple Deliverables.
         Stock-Based Compensation
   25




---



##### Table of Contents



Income Taxes
  Research and Development Costs
   Results of Operations
 Revenue and cost of revenue
  26




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006(dollars in thousands)Product revenue, net
    
    $
    
    
    
    $
    32
    
    
    $
    
    
    
    $
    624License and research feesQuestcor FDA approval milestone payment
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    Revenue recognized under the terminated Merck agreements
    
    
    913
    
    
    
    
    
    
    
    2,789
    
    
    
    3,741Revenue recognized under the P&G agreement
    
    
    
    
    
    
    4,752
    
    
    
    
    
    
    
    17,660Other license and research fees
    
    
    310
    
    
    
    378
    
    
    
    1,366
    
    
    
    1,266License and research fees, total
    
    
    1,223
    
    
    
    5,130
    
    
    
    6,155
    
    
    
    22,667Government grant revenue
    
    
    
    
    
    
    383
    
    
    
    
    
    
    
    383Total revenue
    
    $
    1,223
    
    
    $
    5,545
    
    
    $
    6,155
    
    
    $
    23,674Dollar increase
    
    
    
    
    
    $
    4,322
    
    
    
    
    
    
    $
    17,519Percentage increase
    
    
    
    
    
    
    353
    %
    
    
    
    
    
    
    285
    %
 Research and development
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006(dollars in thousands)PTH(1-34)
    
    
    17
    %
    
    
    33
    %
    
    
    15
    %
    
    
    29
    %Tight Junctions and RNAi
    
    
    29
    %
    
    
    21
    %
    
    
    25
    %
    
    
    24
    %Insulin
    
    
    
    
    
    
    10
    %
    
    
    
    
    
    
    11
    %Influenza
    
    
    
    
    
    
    9
    %
    
    
    
    
    
    
    8
    %Calcitonin
    
    
    18
    %
    
    
    5
    %
    
    
    30
    %
    
    
    7
    %Peptide YY
    
    
    22
    %
    
    
    4
    %
    
    
    16
    %
    
    
    4
    %Other R&D projects (1)
    
    
    14
    %
    
    
    18
    %
    
    
    14
    %
    
    
    17
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Total R&D expense
    
    $
    8,099
    
    
    $
    10,483
    
    
    $
    22,559
    
    
    $
    26,956
    (2)Dollar increase
    
    
    
    
    
    
    2,384
    
    
    
    
    
    
    
    4,397Percentage increase
    
    
    
    
    
    
    29
    %
    
    
    
    
    
    
    19
    %
 27




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##### Table of Contents



(1)
    
    Other research and development projects include our feasibility projects, oral
abuse-resistant opioid, morphine gluconate and other projects.(2)
    
    Excludes purchased in-process R&D from Galenea of approximately $4.1 million in the nine
months ended September 30, 2006. We believe that presenting R&D expense without the Galenea
transaction allows for better comparability between periods given the significance of the
amount relative to total R&D expense.  
    
    Personnel-related expenses increased by approximately 44% to $4.9 million compared to
$3.4 million in the prior year period due to an increase in headcount in support of our
research and development programs and due to an increase of approximately $0.4 million in
non-cash stock compensation. R&D headcount increased from 100 at September 30, 2005 to 151
at September 30, 2006.
    
    Costs of clinical trials, consulting, outside services and laboratory supplies increased
by approximately 23% to $3.2 million compared to $2.6 million in the prior year period due
to purchases of active pharmaceutical ingredients used in our PTH and RNAi programs and
clinical trials initiated for our PYY and insulin programs.
    
    Facilities and equipment costs increased approximately 67% to $2.0 million from $1.2
million in the prior year period due to rent and related expenses on additional space
leased and an increase in depreciation of equipment resulting from capital expenditures to
acquire needed technical capabilities and to support increased capacity.
    
    Research and development administrative expenses decreased by approximately 56% to $0.4
million from $0.9 million in the prior year period due to patent license fees incurred in
2005.
  
    
    Personnel-related expenses increased by approximately 48% to $13.9 million compared
to $9.4 million in the prior year period due to an increase in headcount in support of our
research and development programs and due to an increase of approximately $1.3 million in
non-cash stock compensation.
    
    Costs of clinical trials, consulting, outside services and laboratory supplies decreased
by approximately 15% to $7.1 million compared to $8.4 million in the prior year period as
the 2005 period included significant clinical trial expenses for calcitonin.
    
    Facilities and equipment costs increased approximately 43% to $5.0 million from $3.5
million in the prior year period due to rent and related expenses on additional space
leased and an increase in depreciation of equipment resulting from capital expenditures to
acquire needed technical capabilities and to support increased capacity.
    
    Research and development administrative expenses decreased by approximately 31% to $0.9
million from $1.3 million in the prior year period due to patent license fees incurred in
2005.
   28




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##### Table of Contents




    
    the number of sites included in the clinical trials;
    
    the length of time required to enroll suitable patient subjects;
    
    the number of patients that participate in the trials;
    
    the duration of patient follow-up that seems appropriate in view of results; and
    
    the number and complexity of safety and efficacy parameters monitored during the study.
   Sales and marketing
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2006
    
    2005
    
    2006(dollars in thousands)Total sales and marketing expense
    
    $
    345
    
    
    $
    505
    
    
    $
    963
    
    
    $
    1,335Dollar increase
    
    
    
    
    
    
    160
    
    
    
    
    
    
    
    372Percentage increase
    
    
    
    
    
    
    46
    %
    
    
    
    
    
    
    39
    %
  General and administrative
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2006
    
    2005
    
    2006(dollars in thousands)Total general and administrative expense
    
    $
    2,019
    
    
    $
    2,943
    
    
    $
    6,949
    
    
    $
    9,194Dollar increase
    
    
    
    
    
    
    924
    
    
    
    
    
    
    
    2,245Percentage increase
    
    
    
    
    
    
    46
    %
    
    
    
    
    
    
    32
    %
 29




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##### Table of Contents



Interest Income
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2006
    
    2005
    
    2006(dollars in thousands)Interest income
    
    $
    496
    
    
    $
    751
    
    
    $
    1,321
    
    
    $
    2,107Average funds available for investment
    
    $
    59,800
    
    
    $
    60,800
    
    
    $
    61,400
    
    
    $
    59,500Average interest rate, annualized
    
    
    3.3
    %
    
    
    5.1
    %
    
    
    2.9
    %
    
    
    4.7
    %
  Interest Expense
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2006
    
    2005
    
    2006(dollars in thousands)Interest expense
    
    $
    75
    
    
    $
    162
    
    
    $
    265
    
    
    $
    405Average borrowings under capital leases and notes payable
    
    $
    4,300
    
    
    $
    7,600
    
    
    $
    5,400
    
    
    $
    6,300Average interest rate, annualized
    
    
    7.0
    %
    
    
    8.5
    %
    
    
    7.0
    %
    
    
    8.6
    %
  Liquidity and Capital Resources
 Cash Requirements
  Sources and Uses of Cash
  30




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##### Table of Contents




    
    Under our collaborative arrangement with P&G, we received an initial cash payment of $10
million in February 2006. The $10 million initial payment has been recorded as deferred
revenue and is being amortized into revenue over the estimated development period. In the
three months ended June 30, 2006 we received and recognized a $7.0 million milestone payment
from P&G. The arrangement includes the potential for additional contractual payments of up
to $15 million during the remainder of 2006. In total, contractual payments could reach $577
million over the life of the project depending upon the successful completion of specified
development, regulatory and commercialization goals, although there can be no assurance that
any such milestones will be achieved. Under our agreement with P&G, we are eligible to
receive double-digit patent-based royalties, with the rate escalating upon the achievement
of certain sales levels.
    
    Under our collaborative arrangement with Merck, we received an initial cash payment of
$5 million in October 2004. The $5 million initial payment was being amortized over the
estimated development period until the collaboration with Merck for PYY was terminated on
March 1, 2006, at which time the $3.7 million balance of the unamortized license payment was
recognized as revenue. Under the agreement, Nastech reacquired its rights in the PYY
program.
    
    Under our collaborative arrangement with Par Pharmaceutical, we received an initial cash
payment in October 2004 which was amortized over the estimated development period.
    
    Under our supply agreement with Questcor, in February 2005 we received and recognized a
payment of $2 million from Questcor upon FDA approval of a New Drug Application for the
Nascobal® nasal spray product. On October 17, 2005, with our consent, Questcor assigned all
of its rights and obligations under the Questcor Asset Purchase and Supply Agreements dated
June 2003 to QOL. We received $2.0 million from Questcor on October 19, 2005 in
consideration for our consent to the assignment and in connection with us entering into an
agreement with QOL which modified certain terms of the Asset Purchase and Supply Agreements.
The $2.0 million is being recognized ratably over the five-year life of the QOL agreement.
QOL has assumed Questcors obligation to pay us an additional $2.0 million contingent upon
issuance of a U.S. patent for the Nascobal® nasal spray product.
 31




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##### Table of Contents



Nine Months EndedSeptember 30,2005
    
    
    2006(dollars in thousands)Cash used in operating activities
    
    $
    (23,369
    )
    
    $
    (7,978
    )Cash used in investing activities
    
    
    (14,790
    )
    
    
    (9,171
    )Cash provided by financing activities
    
    
    28,273
    
    
    
    11,461Net decrease in cash and cash equivalents
    
    $
    (9,886
    )
    
    $
    (5,688
    )
    Liquidity
   32




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##### Table of Contents



Contractual Obligations
  
    
    At September 30, 2006 our operating lease obligations increased to approximately $30.4
million (through February 2016) from approximately $19.3 million at December 31, 2005. This
is due to a new facility lease signed in 2006 adding approximately $12.6 million in rental
payments through February 2016, partially offset by approximately $1.5 million in rents paid
during the nine months ended September 30, 2006.
    
    Our capital lease obligations increased by approximately $4.9 million to approximately
$11.2 million (including future interest payments) at September 30, 2006 due to
approximately $7.5 million (including approximately $1.2 million of future interest
payments) in new leases funded offset by approximately $2.6 million in payments (including
$0.4 million in interest payments made during the nine months ended September 30, 2006.
    
    Our purchase obligations increased by approximately $2.9 million from approximately $0.6
million to approximately $3.5 million at September 30, 2006 due to purchase order activity
(primarily for PTH(1-34)) during the nine months ended September 30, 2006.
 Off-Balance Sheet Arrangements
  
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4  CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
 Internal Control Over Financial Reporting.
 33




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1A  RISK FACTORS
   
 ITEM 6  EXHIBITS
  
 SIGNATURES
  NASTECH PHARMACEUTICAL COMPANY INC.By:
    /s/ Steven C. QuaySteven C. Quay, M.D., Ph.D.Chairman of the Board, President and Chief Executive OfficerBy:
    /s/ Philip C. RankerPhilip C. RankerChief Financial Officer 34




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description2.1
    
    Agreement and Plan of Reorganization, dated August 8, 2000, among
the Company, Atossa Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of the Company, and Atossa
HealthCare, Inc. (filed as Exhibit 2.1 to the Companys Current
Report on Form 8-K dated August 8, 2000, and incorporated herein
by reference).2.2
    
    Asset Purchase Agreement, dated September 30, 2002, with Schwarz
Pharma, Inc.(filed as Exhibit 2.1 to the Companys Current Report
on Form 8-K dated September 30, 2002 and incorporated herein by
reference).3.1
    
    Restated Certificate of Incorporation of the Company dated July
20, 2005 (filed as Exhibit 3.1 to our Current Report on Form 8-K
dated July 20, 2005, and incorporated herein by reference).3.2
    
    Amended and Restated Bylaws of the Company dated August 11, 2004
(filed as Exhibit 3.10 to our Registration Statement on Form S-3,
File No. 333-119429, and incorporated herein by reference).4.1
    
    Investment Agreement, dated as of February 1, 2002, by and between
the Company and Pharmacia & Upjohn Company (filed as Exhibit 4.1
to the Company Current Report on Form 8-K dated February 1, 2002
and incorporated herein by reference).4.2
    
    Rights Agreement, dated February 22, 2000, between the Company and
American Stock Transfer & Trust Company as Rights Agent (filed as
Exhibit 1 to our Current Report on Form 8-K dated February 22,
2000 and incorporated herein by reference).4.3
    
    Securities Purchase Agreement dated as of June 25, 2004 (filed as
Exhibit 99.2 to our Current Report on Form 8-K dated June 25, 2004
and incorporated herein by reference).4.4
    
    Form of Warrant (filed as Exhibit 99.3 to the Companys Current
Report on Form 8-K dated June 25, 2004 and incorporated herein by
reference).10.1
    
    Lease Agreement for facilities at 45 Davids Drive, Hauppauge, NY,
effective as of July 1, 2005 (filed as Exhibit 10.30 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
March 31, 2005 and incorporated herein by reference).10.2
    
    Lease Agreement, dated April 23, 2002, with Phase 3 Science Center
LLC, Ahwatukee Hills Investors LLC and J. Alexanders LLC (filed
as Exhibit 10.26 to the Companys Quarterly Report on Form 10-Q
for the Quarter Ended March 31, 2002 and incorporated herein by
reference).10.3
    
    First Amendment, dated June 17, 2003, to Lease Agreement dated
April 23, 2002, with Phase 3 Science Center LLC, Ahwatukee Hills
Investors LLC and J. Alexanders LLC (filed as Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q for the Quarter ended June
30, 2003 and incorporated herein by reference).10.4
    
    Second Amendment, dated February 4, 2004, to Lease Agreement dated
April 23, 2002, with Phase 3 Science Center LLC, Ahwatukee Hills
Investors LLC and J. Alexanders LLC (filed as Exhibit 10.24 to
the Companys Annual Report on Form 10-K for the year ended
December 31, 2003 and incorporated herein by reference).10.5
    
    Lease Agreement for facilities at 80 Davids Drive, Hauppauge, NY,
effective as of July 1, 2005 (filed as Exhibit 10.5 to the
Companys Quarterly Report on Form 10-Q for the Quarter Ended June
30, 2005 and incorporated herein by reference).10.6
    
    Lease Agreement for facilities at 3830 Monte Villa Parkway,
Bothell, WA, with Ditty Properties Limited Partnership, effective
as of March 1, 2006 (filed as Exhibit 10.1 to Amendment No. 1 to
the Companys Current Report on Form 8-K/A dated March 1, 2006 and
filed on July 26, 2006 and incorporated herein by reference).(1)
 35




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##### Table of Contents



ExhibitNo.
    
    Description10.7
    
    First Amendment, dated July 17, 2006, to Lease Agreement dated
March 1, 2006 with Ditty Properties Limited Partnership for
facilities at 3830 Monte Villa Parkway, Bothell, WA (filed as
Exhibit 10.7 to the Companys Quarterly Report on
Form 10-Q for the quarter ended June 30, 2006 and
incorporated herein by reference).10.8
    
    Amended and Restated Employment Agreement, dated May 2, 2002, with
Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.27 to the
Companys Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 2002 and incorporated herein by reference).10.9
    
    Employment Agreement dated June 3, 2005 by and between Nastech
Pharmaceutical Company Inc. and Steven C. Quay, M.D., Ph.D. (filed
as Exhibit 10.1 to the Companys Current Report on Form 8-K dated
June 3, 2005 and incorporated herein by reference).10.10
    
    Amended and Restated Employment Agreement dated December 16, 2005
by and between Nastech Pharmaceutical Company Inc. and Steven C.
Quay, M.D., Ph.D. (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K dated December 16, 2005 and incorporated herein
by reference).10.11
    
    Employment Agreement effective as of January 1, 2006 by and
between Nastech Pharmaceutical Company Inc. and Philip C. Ranker
(filed as Exhibit 10.1 to the Companys Current Report on Form 8-K
dated January 1, 2006 and incorporated herein by reference).10.12
    
    Employment Agreement effective as of August 17, 2006 by and
between Nastech Pharmaceutical Company Inc. and Gordon C. Brandt,
M.D. (filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K dated August 17, 2006 and incorporated herein by
reference).10.13
    
    Employment Agreement effective as of September 15, 2006 by and
between Nastech Pharmaceutical Company Inc. and Timothy M. Duffy
(field as Exhibit 10.1 to the Companys Current Report on Form 8-K
dated September 15, 2006 and incorporated herein by reference).10.14
    
    Termination and Mutual Release Agreement, dated September 30,
2002, with Schwarz Pharma, Inc. (Filed as Exhibit 10.3 to the
Companys Current Report on Form 8-K dated September 30, 2002 and
incorporated herein by reference).10.15
    
    Divestiture Agreement, dated January 24, 2003, with Pharmacia &
Upjohn Company (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K dated January 24, 2003 and incorporated herein
by reference).10.16
    
    Nastech Pharmaceutical Company Inc. 1990 Stock Option Plan (filed
as Exhibit 4.2 to the Companys Registration Statement on Form
S-8, File No. 333-28785, and incorporated herein by reference).10.17
    
    Amended and Restated Nastech Pharmaceutical Company Inc. 2000
Nonqualified Stock Option Plan (filed as Exhibit 4.4 to the
Companys Registration Statement on Form S-8, File No. 333-49514,
and incorporated herein by reference).10.18
    
    Amendment No. 1 to the Amended and Restated Nastech Pharmaceutical
Company Inc. 2000 Nonqualified Stock Option Plan. (filed as
Exhibit 10.18 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2005 and incorporated herein by
reference).10.19
    
    Amendment No. 2 to the Amended and Restated Nastech Pharmaceutical
Company Inc. 2000 Nonqualified Stock Option Plan. (2).10.20
    
    Nastech Pharmaceutical Company Inc. 2002 Stock Option Plan (filed
as Exhibit 10.28 to the Companys Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2002 and incorporated herein by
reference).
 36




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##### Table of Contents



ExhibitNo.
    
    Description10.21
    
    Amendment No. 1 to the Nastech Pharmaceutical Company Inc. 2002 Stock Option Plan.
(filed as Exhibit 10.20 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2005 and incorporated herein by reference).10.22
    
    Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan (filed as Exhibit 99 to
the Companys Registration Statement on Form S-8, File No. 333-118206, and
incorporated herein by reference).10.23
    
    Amendment No. 1 to Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan
(filed as Exhibit 10.4 to the Companys Current Report on Form 8-K dated July 20,
2005 and incorporated herein by reference).10.24
    
    Amendment No. 2 to Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan
(filed as Exhibit 10.18 to the Companys Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 2005 and incorporated herein by reference).10.25
    
    Amendment No. 3 to Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan.
(filed as Exhibit 10.24 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2005 and incorporated herein by reference).10.26
    
    Amendment No. 4 to Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan.
(filed as Exhibit 10.5 to the Companys Registration Statement on Form S-8, File No.
333-135724, and incorporated herein by reference).10.27
    
    Amendment No. 5 to Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan. (2).10.28
    
    Restricted Stock Grant Agreement effective July 20, 2005 by and between Nastech
Pharmaceutical Company Inc. and Dr. Steven C. Quay, M.D., Ph.D. (filed as Exhibit
10.1 to the Companys Current Report on Form 8-K dated July 20, 2005 and incorporated
herein by reference).10.29
    
    Incentive Stock Option Grant Agreement effective July 20, 2005 by and between Nastech
Pharmaceutical Company Inc. and Dr. Steven C. Quay, M.D., Ph.D. (filed as Exhibit
10.2 to the Companys Current Report on Form 8-K dated July 20, 2005 and incorporated
herein by reference).10.30
    
    Non-Qualified Stock Option Grant Agreement effective July 20, 2005 by and between
Nastech Pharmaceutical Company Inc. and Dr. Steven C. Quay, M.D., Ph.D. (filed as
Exhibit 10.3 to the Companys Current Report on Form 8-K dated July 20, 2005 and
incorporated herein by reference).10.31
    
    Amendments to Certain Grant Agreements effective as of July 20, 2005 by and between
Nastech Pharmaceutical Company Inc. and Steven C. Quay, M.D., Ph.D. (filed as Exhibit
10.2 to the Companys Current Report on Form 8-K dated December 16, 2005 and
incorporated herein by reference).10.32
    
    Stock Option Agreement dated as of August 25, 2004 between Nastech Pharmaceutical
Company Inc. and Mr. Philip C. Ranker (filed as Exhibit 10.34 to the Companys
Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2005 and
incorporated herein by reference).10.33
    
    Restricted Stock Grant Agreement effective August 25, 2004 by and between Nastech
Pharmaceutical Company Inc. and Mr. Philip C. Ranker (filed as Exhibit 10.35 to the
Companys Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2005 and
incorporated herein by reference).10.34
    
    Restricted Stock Grant Agreement effective July 1, 2005 by and between Nastech
Pharmaceutical Company Inc. and Mr. Philip C. Ranker (filed as Exhibit 10.36 to the
Companys Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2005 and
incorporated herein by reference).
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##### Table of Contents



ExhibitNo.
    
    Description10.35
    
    Restricted Stock Grant Agreement effective September 7, 2005 by
and between Nastech Pharmaceutical Company Inc. and Mr. Philip C.
Ranker. (filed as Exhibit 10.38 to the Companys Quarterly Report
on Form 10-Q for the Quarter Ended September 30, 2005 and
incorporated herein by reference).10.36
    
    Restricted Stock Grant Agreement effective as of January 1, 2006
by and between Nastech Pharmaceutical Company Inc. and Philip C.
Ranker (filed as Exhibit 10.2 to the Companys Current Report on
Form 8-K dated January 1, 2006 and incorporated herein by
reference).10.37
    
    Incentive Stock Option Grant Agreement dated as of January 1, 2006
by and between Nastech Pharmaceutical Company Inc. and Philip C.
Ranker (filed as Exhibit 10.3 to the Companys Current Report on
Form 8-K dated January 1, 2006 and incorporated herein by
reference).10.38
    
    Non-Qualified Stock Option Grant Agreement dated as of January 1,
2006 by and between Nastech Pharmaceutical Company Inc. and Philip
C. Ranker (filed as Exhibit 10.4 to the Companys Current Report
on Form 8-K dated January 1, 2006 and incorporated herein by
reference).10.39
    
    Restricted Stock Grant Agreement effective January 21, 2005 by and
between Nastech Pharmaceutical Company Inc. and Mr. Gordon Brandt,
M.D. (filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K dated January 21, 2005 and incorporated herein by
reference).10.40
    
    Stock Option Agreement dated as of January 21, 2005 between
Nastech Pharmaceutical Company Inc. and Mr. Gordon Brandt,
M.D.(filed as Exhibit 10.2 to the Companys Current Report on Form
8-K dated January 21, 2005 and incorporated herein by reference).10.41
    
    Restricted Stock Grant Agreement effective December 16, 2005 by
and between Nastech Pharmaceutical Company Inc. and Dr. Gordon C.
Brandt (filed as Exhibit 10.3 to the Companys Current Report on
Form 8-K dated December 16, 2005 and incorporated herein by
reference).10.42
    
    Stock Option Agreement dated as of December 16, 2005 between
Nastech Pharmaceutical Company Inc. and Dr. Gordon C. Brandt
(filed as Exhibit 10.4 to the Companys Current Report on Form 8-K
dated December 16, 2005 and incorporated herein by reference).10.43
    
    Restricted Stock Grant Agreement effective January 21, 2005 by and
between Nastech Pharmaceutical Company Inc. and Mr. Paul H.
Johnson, Ph.D. (filed as Exhibit 10.3 to the Companys Current
Report on Form 8-K dated January 21, 2005 and incorporated herein
by reference).10.44
    
    Restricted Stock Grant Agreement effective October 5, 2005 by and
between Nastech Pharmaceutical Company Inc. and Dr. Paul H.
Johnson, Ph.D (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K dated October 5, 2005 and incorporated herein
by reference).10.45
    
    Stock Option Agreement dated as of January 21, 2005 between
Nastech Pharmaceutical Company Inc. and Mr. Paul H. Johnson, Ph.D.
(filed as Exhibit 10.4 to the Companys Current Report on Form 8-K
dated January 21, 2005 and incorporated herein by reference).10.46
    
    Stock Option Agreement dated as of October 5, 2005 between Nastech
Pharmaceutical Company Inc. and Dr. Paul H. Johnson, Ph.D. (filed
as Exhibit 10.2 to the Companys Current Report on Form 8-K dated
October 5, 2005 and incorporated herein by reference).10.47
    
    Restricted Stock Grant Agreement effective May 25, 2005 by and
between Nastech Pharmaceutical Company Inc. and Mr. David E.
Wormuth (filed as Exhibit 10.3 to the Companys Current Report on
Form 8-K dated May 25, 2005 and incorporated herein by reference).
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##### Table of Contents



ExhibitNo.
    
    Description10.48
    
    Stock Option Agreement dated as of May 25, 2005 between Nastech
Pharmaceutical Company Inc. and Mr. David E. Wormuth (filed as
Exhibit 10.4 to the Companys Current Report on Form 8-K dated May
25, 2005 and incorporated herein by reference).10.49
    
    Restricted Stock Grant Agreement effective as of January 30, 2006
by and between Nastech Pharmaceutical Company Inc. and Timothy M.
Duffy (filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K dated January 30, 2006 and incorporated herein by
reference).10.50
    
    Incentive Stock Option Grant Agreement dated as of January 30,
2006 by and between Nastech Pharmaceutical Company Inc. and
Timothy M. Duffy (filed as Exhibit 10.2 to the Companys Current
Report on Form 8-K dated January 30, 2006 and incorporated herein
by reference).10.51
    
    Non-Qualified Stock Option Grant Agreement dated as of January 30,
2006 by and between Nastech Pharmaceutical Company Inc. and
Timothy M. Duffy (filed as Exhibit 10.3 to the Companys Current
Report on Form 8-K dated January 30, 2006 and incorporated herein
by reference).10.52
    
    Restricted Stock Grant Agreement effective August 11, 2004 by and
between Nastech Pharmaceutical Company Inc. and Mr. Bruce R. York.
(filed as Exhibit 10.33 to the Companys Quarterly Report on Form
10-Q for the Quarter Ended September 30, 2005 and incorporated
herein by reference).10.53
    
    Restricted Stock Grant Agreement effective July 1, 2005 by and
between Nastech Pharmaceutical Company Inc. and Mr. Bruce R. York
(filed as Exhibit 10.37 to the Companys Quarterly Report on Form
10-Q for the Quarter Ended September 30, 2005 and incorporated
herein by reference).10.54
    
    Restricted Stock Grant Agreement effective September 7, 2005 by
and between Nastech Pharmaceutical Company Inc. and Mr. Bruce R.
York (filed as Exhibit 10.39 to the Companys Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 2005 and
incorporated herein by reference).10.55
    
    Restricted Stock Grant Agreement effective July 14, 2006 by and
between Nastech Pharmaceutical Company Inc. and Mr. Bruce R. York
(filed as Exhibit 10.1 to the Companys Current Report on Form 8-K
dated July 14, 2006 and incorporated herein by reference).10.56
    
    Amendments to Certain Grant Agreements by and between Nastech
Pharmaceutical Company Inc. and Gordon C. Brandt, M.D. (filed as
Exhibit 10.2 to the Companys Current Report on Form 8-K dated
August 17, 2006 and incorporated herein by reference).10.57
    
    Amendments to Certain Grant Agreements by and between Nastech
Pharmaceutical Company Inc. and Timothy M. Duffy (filed as Exhibit
10.2 to the Companys Current Report on Form 8-K dated September
15, 2006 and incorporated herein by reference).10.58
    
    Asset Purchase Agreement dated June 16, 2003, by and between the
Company and Questcor Pharmaceuticals, Inc. (filed as Exhibit 2.1
to the Companys Current Report on Form 8-K dated June 17, 2003
and incorporated herein by reference).10.59
    
    Form of Purchase Agreement (filed as Exhibit 99.2 to the Companys
Current Report on Form 8-K dated September 4, 2003 and
incorporated herein by reference).10.60
    
    Form of Warrant (filed as Exhibit 99.3 to the Companys Current
Report on Form 8-K dated September 4, 2003, and incorporated
herein by reference).10.61
    
    Revolving Line of Credit Agreement with Wells Fargo Bank, dated
December 19, 2003 (filed as Exhibit 10.20 to the Companys Annual
Report on Form 10-K for the year ended December 31, 2003 and
incorporated herein by reference).
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##### Table of Contents



ExhibitNo.
    
    Description10.62
    
    Addendum to Promissory Note with Wells Fargo Bank, dated January
20, 2004 (filed as Exhibit 10.21 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2003 and incorporated
herein by reference).10.63
    
    Security Agreement Securities Account with Wells Fargo Bank, dated
December 19, 2003 (filed as Exhibit 10.22 to the Companys Annual
Report on Form 10-K for the year ended December 31, 2003 and
incorporated herein by reference).10.64
    
    Addendum to Security Agreement: Securities Account with Wells
Fargo Bank, dated December 19, 2003 (filed as Exhibit 10.23 to the
Companys Annual Report on Form 10-K for the year ended December
31, 2003 and incorporated herein by reference).10.65
    
    Revolving Line of Credit Agreement with Wells Fargo Bank, dated
October 20, 2004 (filed as Exhibit 10.29 to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30,
2004 and incorporated herein by reference).10.66
    
    Exclusive Development, Commercialization and License Agreement by
and between Merck & Co., Inc. and the Company effective as of
September 24, 2004 (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K dated September 24, 2004 and incorporated
herein by reference).(1)10.67
    
    Supply Agreement by and between the Company and Merck & Co., Inc.
effective as of September 24, 2004 (filed as Exhibit 10.2 to the
Companys Current Report on Form 8-K dated September 24, 2004 and
incorporated herein by reference).(1)10.68
    
    License and Supply Agreement by and between Par Pharmaceutical,
Inc. and Nastech Pharmaceutical Company Inc. effective as of
October 22, 2004 (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K dated October 22, 2004 and incorporated herein
by reference).(1)10.69
    
    Agreement dated as of September 23, 2005 by and between Nastech
Pharmaceutical Company Inc. and QOL Medical, LLC. (filed as
Exhibit 10.1 to Amendment No. 1 to the Companys Current Report on
Form 8-K/A dated October 17, 2005 and filed on July 26, 2006 and
incorporated herein by reference).(1)10.70
    
    Product Development and License Agreement by and between Nastech
Pharmaceutical Company Inc. and Procter & Gamble Pharmaceuticals,
Inc. dated January 27, 2006 (filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K dated January 27, 2006 and
incorporated herein by reference).(1)10.71
    
    Supply Agreement by and between Nastech Pharmaceutical Company
Inc. and Procter & Gamble Pharmaceuticals, Inc. dated June 2, 2006
(filed as Exhibit 10.1 to the Companys Current Report on Form 8-K
dated June 2, 2006 and incorporated herein by reference).(1)10.72
    
    Development and License Agreement by and between Nastech
Pharmaceutical Company Inc. and Amylin Pharmaceuticals, Inc. dated
June 23, 2006.(1) (filed as exhibit 10.66 to the Companys
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2006 and incorporated herein by reference).10.73
    
    Employment Agreement effective as
of November 1, 2006 by and between Nastech Pharmaceutical Company
Inc. and Paul H. Johnson, Ph.D. (filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K dated November 1,
2006 and incorporated herein by reference).31.1
    
    Certification of the Companys Chairman of the Board, President
and Chief Executive Officer pursuant to Rules 13a14 and 15d-14
under the Securities Exchange Act of 1934, as amended.(2)31.2
    
    Certification of the Companys Chief Financial Officer pursuant to
Rules 13a14 and 15d-14 under the Securities Exchange Act of 1934,
as amended.(2)32.1
    
    Certification of the Companys Chairman of the Board, President
and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(2)
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##### Table of Contents



ExhibitNo.
    
    Description32.2
    
    Certification of the Companys Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.(2)
 
 (1)
    
    Portions of this exhibit have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 of the Securities Exchange Act
of 1934, amended, and the omitted material has been separately filed
with the Securities and Exchange Commission.(2)
    
    Filed Herewith. 41