##### 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 March 31, 2007
 Commission File Number 000-13789
 NASTECH PHARMACEUTICAL COMPANY INC.
  Delaware
    
    11-2658569(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)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 OutstandingApril 30, 2007
    
    Common stock  $0.006 par value
    
    25,479,735




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##### 



NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTS (unaudited)Condensed Consolidated Balance Sheets as of December 31, 2006 and March 31, 2007
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and March 31, 2007
    
    
    4Condensed Consolidated Statement of Stockholders Equity and Comprehensive Loss for the three months ended March 31, 2007
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and March 31, 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    14ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    26ITEM 4  CONTROLS AND PROCEDURES
    
    
    27PART II  OTHER INFORMATION
    
    
    27ITEM 5  OTHER INFORMATION
    
    
    27ITEM 6  EXHIBITS
    
    
    27SIGNATURES
    
    
    27EXHIBIT INDEX
    
    
    28EXHIBIT 10.42EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Items 1, 1A, 2, 3 and 4 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 SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 December 31,
    
    
    March 31,2006
    
    
    2007(In thousands, except share and per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    28,481
    
    
    $
    50,048Restricted cash
    
    
    2,155
    
    
    
    2,150Short-term investments
    
    
    20,357
    
    
    
    29,236Accounts receivable
    
    
    2,798
    
    
    
    816Inventories
    
    
    2,203
    
    
    
    2,211Prepaid expenses and other current assets
    
    
    1,564
    
    
    
    1,688Total current assets
    
    
    57,558
    
    
    
    86,149Property and equipment, net
    
    
    15,444
    
    
    
    16,151Other assets
    
    
    830
    
    
    
    854Total assets
    
    $
    73,832
    
    
    $
    103,154LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,437
    
    
    $
    3,908Accrued payroll and employee benefits
    
    
    2,652
    
    
    
    1,616Accrued expenses
    
    
    882
    
    
    
    561Capital lease obligations  current portion
    
    
    4,226
    
    
    
    4,490Deferred revenue  current portion
    
    
    2,528
    
    
    
    3,046Total current liabilities
    
    
    14,725
    
    
    
    13,621Capital lease obligations, net of current portion
    
    
    7,457
    
    
    
    7,375Deferred revenue, net of current portion
    
    
    6,138
    
    
    
    5,542Other liabilities
    
    
    2,176
    
    
    
    2,239Total liabilities
    
    
    30,496
    
    
    
    28,777Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value; 100,000
authorized: no shares issued and outstanding:
    
    
    
    
    
    
    Common stock and additional paid-in capital,
$0.006 par value; 50,000,000 authorized:22,117,124 shares issued and outstanding as
of December 31, 2006 and 25,467,625 issued
and outstanding as of March 31, 2007
    
    
    185,849
    
    
    
    228,438Accumulated deficit
    
    
    (142,493
    )
    
    
    (154,033
    )Accumulated other comprehensive loss
    
    
    (20
    )
    
    
    (28
    )Total stockholders equity
    
    
    43,336
    
    
    
    74,377Total liabilities and stockholders equity
    
    $
    73,832
    
    
    $
    103,154
  3




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2007(In thousands, except per share data)RevenueLicense and research fees
    
    $
    6,299
    
    
    $
    4,672Government grants
    
    
    
    
    
    
    100Product revenue
    
    
    419
    
    
    
    220Total revenue
    
    
    6,718
    
    
    
    4,992Operating expenses:Cost of product revenue
    
    
    239
    
    
    
    59Research and development
    
    
    11,801
    
    
    
    12,874Sales and marketing
    
    
    395
    
    
    
    581General and administrative
    
    
    2,951
    
    
    
    3,704Total operating expenses
    
    
    15,386
    
    
    
    17,218Loss from operations
    
    
    (8,668
    )
    
    
    (12,226
    )Other income (expense):Interest income
    
    
    638
    
    
    
    957Interest and other expense
    
    
    (108
    )
    
    
    (271
    )Total other income (expense)
    
    
    530
    
    
    
    686Loss before cumulative effect of change in accounting principle
    
    
    (8,138
    )
    
    
    (11,540
    )Cumulative effect of change in accounting principle
    
    
    291
    
    
    
    Net Loss
    
    $
    (7,847
    )
    
    $
    (11,540
    )Loss per common share  basic and diluted:Loss before cumulative effect of change in accounting principle
    
    $
    (0.39
    )
    
    $
    (0.47
    )Cumulative effect of change in accounting principle
    
    
    .01
    
    
    
    Net loss per common share  basic and diluted
    
    $
    (0.38
    )
    
    $
    (0.47
    )Shares used in computing net loss per share  basic and diluted
    
    
    20,689
    
    
    
    24,549
  4




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE LOSS
 For the Three Months Ended March 31, 2007
 (Unaudited)
 AccumulatedCommon Stock and Additional
    
    
    
    
    
    
    Other
    
    
    TotalPaid-In Capital
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Deficit
    
    
    Loss
    
    
    Equity(In thousands, except share data)Balance December 31, 2006
    
    
    22,117,124
    
    
    $
    185,849
    
    
    $
    (142,493
    )
    
    $
    (20
    )
    
    $
    43,336Proceeds from the exercise of options
    
    
    14,500
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Proceeds from the issuance of common
shares, net
    
    
    3,250,000
    
    
    
    40,928
    
    
    
    
    
    
    
    
    
    
    
    40,928Compensation related to restricted stock
    
    
    86,001
    
    
    
    834
    
    
    
    
    
    
    
    
    
    
    
    834Compensation related to stock options
    
    
    
    
    
    
    722
    
    
    
    
    
    
    
    
    
    
    
    722Net loss
    
    
    
    
    
    
    
    
    
    
    (11,540
    )
    
    
    
    
    
    
    (11,540
    )Unrealized loss on securities available
for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,548
    )Balance March 31, 2007
    
    
    25,467,625
    
    
    $
    228,438
    
    
    $
    (154,033
    )
    
    $
    (28
    )
    
    $
    74,377
  5




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2007(In thousands)Operating activities:Net loss
    
    $
    (7,847
    )
    
    $
    (11,540
    )Adjustments to reconcile net loss to net cash used in operating activities:Non-cash compensation related to stock options
    
    
    652
    
    
    
    722Non-cash compensation related to restricted stock
    
    
    548
    
    
    
    834Depreciation and amortization
    
    
    583
    
    
    
    1,007Gain on sale of property and equipment
    
    
    1
    
    
    
    Cumulative effect of change in accounting principle
    
    
    (291
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (1,359
    )
    
    
    1,982Inventories
    
    
    (44
    )
    
    
    (8
    )Prepaid expenses and other assets
    
    
    (128
    )
    
    
    (148
    )Accounts payable
    
    
    (847
    )
    
    
    (529
    )Deferred revenue
    
    
    5,516
    
    
    
    (78
    )Accrued expenses and other liabilities
    
    
    (407
    )
    
    
    (1,294
    )Net cash used in operating activities
    
    
    (3,623
    )
    
    
    (9,052
    )Investing activities:Change in restricted cash
    
    
    (500
    )
    
    
    5Purchases of property and equipment
    
    
    (1,360
    )
    
    
    (1,714
    )Purchases of investments
    
    
    (15,642
    )
    
    
    (19,525
    )Sales and maturities of investments
    
    
    7,600
    
    
    
    10,638Net cash used in investing activities
    
    
    (9,902
    )
    
    
    (10,596
    )Financing activities:Borrowings under capital lease obligations
    
    
    953
    
    
    
    1,301Payments on capital lease obligations
    
    
    (734
    )
    
    
    (1,119
    )Proceeds from exercise of stock options
    
    
    2,466
    
    
    
    105Proceeds from exercise of warrants
    
    
    5,325
    
    
    
    Proceeds from the issuance of common shares, net
    
    
    
    
    
    
    40,928Net cash provided by financing activities
    
    
    8,010
    
    
    
    41,215Net decrease in cash and cash equivalents
    
    
    (5,515
    )
    
    
    21,567Cash and cash equivalents  beginning of period
    
    
    26,769
    
    
    
    28,481Cash and cash equivalents  end of period
    
    $
    21,254
    
    
    $
    50,048Supplemental disclosure:Cash paid for interest
    
    $
    118
    
    
    $
    270
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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the three months ended March 31, 2007 and March 31, 2006 (Unaudited)
 Note 1  Summary of Significant Accounting Policies
 Basis of Preparation
 Principles of Consolidation
 Use of Estimates
 Reclassifications
 Recent Accounting Pronouncements
 Note 2  Inventories
  7




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Note 3  Concentration of Credit Risk and Significant Customers
    Note 4  Net Loss Per Common Share
  Three Months Ended March 31,2006
    
    2007Stock options outstanding under our various stock option plans
    
    
    2,523
    
    
    
    2,486Unvested restricted stock
    
    
    496
    
    
    
    598Warrants
    
    
    733
    
    
    
    661Total
    
    
    3,752
    
    
    
    3,745
 Note 5 Stockholders equity and comprehensive loss
 Common Stock Offerings
 Comprehensive Loss
 Stockholder Rights Plan
  8




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Note 6  Stock-based compensation
   Three Months ended March 31,2006
    
    
    2007Stock-based compensation:Research and development
    
    $
    480
    
    
    $
    725Sales and marketing
    
    
    45
    
    
    
    117General and administrative
    
    
    675
    
    
    
    714Total stock-based compensation
    
    $
    1,200
    
    
    $
    1,556
 Restricted Stock Awards
 Unvested restricted shares outstanding, January 1, 2007
    
    
    544Restricted shares issued
    
    
    92Restricted shares forfeited
    
    
    (3
    )Restricted shares vested
    
    
    (35
    )Unvested restricted shares outstanding, March 31, 2007
    
    
    598Weighted average grant date fair value per share
    
    $
    13.89
   Stock Options
 WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life
    
    
    Value(in thousands)
    
    
    
    
    
    
    
    
    
    
    (in thousands)Outstanding December 31, 2006
    
    
    2,412
    
    
    $
    13.18Options granted
    
    
    88
    
    
    
    13.16Options exercised
    
    
    (15
    )
    
    
    9.72Options canceled
    
    
    
    
    
    
    Options expired
    
    
    
    
    
    
    Outstanding at March 31, 2007
    
    
    2,486
    
    
    $
    13.20
    
    
    6.0 years
    
    $
    869Exercisable at March 31, 2007
    
    
    1,792
    
    
    $
    12.79
    
    
    5.1 years
    
    $
    860
 9




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2006
    
    2007Expected dividend yield
    
    
    0
    %
    
    
    0
    %Risk free interest rate
    
    
    4.1
    %
    
    
    4.8
    %Expected stock volatility
    
    
    74
    %
    
    
    66
    %Expected option life
    
    6 years
    
    6 yearsWeighted average fair value granted
    
    $
    10.39
    
    
    $
    8.36
     Warrants
 Note 7  Contractual Agreements
 Procter & Gamble (P&G)
  10




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Galenea
   Amylin Pharmaceuticals, Inc. 
   Par Pharmaceutical
  11




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®
 ®
 Questcor/QOL Medical, LLC ® ® ® ® ®
 ®
 ® ®
 Alnylam Pharmaceuticals, Inc.  
 12




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Merck
  Government Grants
 Thiakis Limited
 Cytyc Corporation 
 City of Hope
 Feasibility Agreements
 Note 8  Commitments and Contingencies
 Leases
  13




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Contingencies
 
 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.
     14




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
    
    Applying Our Tight Junction Technology and Other Drug Delivery Methods to Product
Candidates.We focus our research and development efforts on product candidates, including
peptides, large and small molecules and therapeutic siRNA, for which our proprietary
technologies may offer clinical advantages, such as improved safety and clinical efficacy,
or increased patient compliance. We also will continue to search for applications of our
tight junction technology to improve other forms of drug delivery, including oral, pulmonary
and intravenous delivery.
    
    Collaborations with Pharmaceutical and Biotechnology Companies.We will continue to
establish strategic collaborations with pharmaceutical and biotechnology companies.
Typically, we collaborate with partners to commercialize our internal product candidates by
utilizing their late stage clinical development, regulatory, marketing and sales
capabilities. We 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 generally 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.
    
    Developing and Commercializing Our Own Product Candidates.In select cases in which we
deem it to be strategically advantageous to us, we plan to internally develop, manufacture
and commercialize our products.
    
    Leveraging 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 in the near
term. These capabilities give us competitive advantages, including the ability to prepare
the chemistry, manufacturing and controls (CMC) section of new drug application (NDA)
filings with the U.S. Food and Drug Administration (FDA) and to 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.
  Procter & Gamble Partnership
 ® ®
   15




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Par Pharmaceutical Partnership
    ®
 Merck Partnership
  16




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Amylin Pharmaceuticals, Inc.
    RNAi Technology and Intellectual Property Acquisitions
  Alnylam.
 Galenea.
  17




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City of Hope.
 Independent Product Development
  Other Collaborations
 Questcor Pharmaceuticals, Inc./QOL Medical LLC. ® ® ®
 ® ® ®
 ® ®
 Novo Nordisk A/S feasibility agreement.
 Cytyc Corporation.
 18




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Cash Position and Recent Financings
   Critical Accounting Policies and Estimates
  Revenue Recognition
   19




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Research and Development Costs
    20




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Stock-Based Compensation
    Income Taxes
  Recently Issued Accounting Standards
  21




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Consolidated Results of Operations
 Comparison of Quarterly Results of Operations
  Three Months EndedMarch 31,
    
    
    Change2006
    
    
    2007
    
    
    $
    
    
    %RevenueLicense and research fees
    
    $
    6,299
    
    
    $
    4,672
    
    
    $
    (1,627
    )
    
    
    (26
    )%Government grants
    
    
    
    
    
    
    100
    
    
    
    100Product revenue
    
    
    419
    
    
    
    220
    
    
    
    (199
    )
    
    
    (47
    )%Total revenue
    
    
    6,718
    
    
    
    4,992
    
    
    
    (1,726
    )
    
    
    (26
    )%Operating expensesCost of product revenue
    
    
    239
    
    
    
    59
    
    
    
    (180
    )
    
    
    (75
    )%Research and development
    
    
    11,801
    
    
    
    12,874
    
    
    
    1,073
    
    
    
    9
    %Sales and marketing
    
    
    395
    
    
    
    581
    
    
    
    186
    
    
    
    47
    %General and administrative
    
    
    2,951
    
    
    
    3,704
    
    
    
    753
    
    
    
    26
    %Total operating expenses
    
    
    15,386
    
    
    
    17,218
    
    
    
    1,832
    
    
    
    12
    %Interest income
    
    
    638
    
    
    
    957
    
    
    
    319
    
    
    
    50
    %Interest and other expense
    
    
    (108
    )
    
    
    (271
    )
    
    
    (163
    )
    
    
    151
    %Loss before cumulative effect of change in accounting principle
    
    
    (8,138
    )
    
    
    (11,540
    )
    
    
    (3,402
    )
    
    
    42
    %Cumulative effect of change in accounting principle
    
    
    291
    
    
    
    
    
    
    
    (291
    )
    
    
    (100
    )%Net loss
    
    $
    (7,847
    )
    
    $
    (11,540
    )
    
    $
    (3,693
    )
    
    
    47
    %
 Comparison of the Three Months Ended March 31, 2006 to the Three Months Ended March 31, 2007
 Revenue.
 License and research fees revenue.
  Government grants revenue.
 Product Revenue. ® ®
 Cost of product revenue. ® ®
 22




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® ®
 Research and Development.
 
    
    Personnel-related expenses increased by 36% to $5.3 million in the first quarter of 2007
compared to $3.9 million in the first quarter of 2006 due to an increase in headcount in
support of our R&D programs.
    
    Costs of clinical trials, consulting, outside services and laboratory supplies increased
by 132% to approximately $4.0 million in the first quarter of 2007 compared to approximately
$1.7 million in the first quarter of 2006 due primarily to our increased efforts related to
pre-clinical and clinical programs for PTH(1-34), PYY, calcitonin and RNAi.
    
    Facilities and equipment costs increased by 76% to $2.4 million in the first quarter of
2007 compared to $1.4 million in the first quarter of 2006 due to rent and related expenses
on additional space leased at the Bothell facility and an increase in depreciation of
equipment resulting from capital expenditures to acquire needed technical capabilities and
to support increased capacity. Depreciation expense included in R&D in the first quarter of
2007 was $0.7 million, compared with $0.5 million in the first quarter of 2006.
    
    Non-cash stock-based compensation included in R&D expense increased to $0.7 million in
the first quarter of 2007 from approximately $0.5 million in the first quarter of 2006.
    
    In November 2006, we acquired a license from the Beckman Research Institute/City of Hope
for exclusive and non-exclusive licenses to the Dicer-substrate RNAi IP developed there. We
obtained exclusive rights to five undisclosed targets selected by us, as well as broad
non-exclusive rights to Dicer-substrates directed against all mammalian targets subject to
certain City of Hope limitations that will have no impact on our programs. We intend to
further develop this IP and technology, which should cause a related increase in R&D
expenses.
   Three Months Ended March 31,2006(2)
    
    2007PTH(1-34)
    
    
    28
    %
    
    
    32
    %Tight Junctions and RNAi
    
    
    32
    %
    
    
    17
    %Insulin
    
    
    7
    %
    
    
    11
    %PYY
    
    
    5
    %
    
    
    8
    %Influenza
    
    
    4
    %
    
    
    7
    %Carbetocin
    
    
    0
    %
    
    
    6
    %Calcitonin
    
    
    11
    %
    
    
    3
    %Other research and development projects(1)
    
    
    13
    %
    
    
    16
    %Total
    
    
    100
    %
    
    
    100
    %
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(1)
    
    Other research and development projects include our excipient projects, feasibility projects and other projects.(2)
    
    Excludes purchased IPR&D in the field of RNAi related to influenza from Galenea of approximately $4.1 million
in 2006. We believe that presenting R&D expense by project as a percentage of total R&D project expense without
the Galenea transaction allows for better comparability between periods given the significance of the amount
relative to total R&D project expense.  
    
    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.
 General and administrative.
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
    
    Costs of legal and accounting fees, corporate insurance and other administrative costs
increased by 17% to approximately $1.5 million in the first quarter of 2007 compared to
approximately $1.3 million in the first quarter of 2006.
    
    Personnel-related expenses increased by 43% to $1.3 million in the first quarter of 2007
compared to $0.9 million in the first quarter of 2006 due primarily to increased headcount
related to administrative activities.
  Interest Income.
 Interest and Other Expense.
 Liquidity and Capital Resources
 Cash Requirements
  Sources and Uses of Cash
    
    
    Under our collaborative arrangement with P&G, we received an initial cash payment of
$10.0 million in February 2006, which has been recorded as deferred revenue and is being
amortized into revenue over the estimated development period. A $7.0 million milestone
payment received from P&G in second quarter 2006 was recognized in full as revenue in that
period.
    
    Under our collaborative arrangement with Merck for PYY(3-36), we received an initial cash
payment of $5.0 million in October 2004. The $5.0 million initial payment was being
amortized over the estimated development period until the collaboration was terminated in
March 2006, at which time the unamortized balance of the license payment of approximately
$3.7 million was recognized as revenue and we reacquired our rights in the PYY program.
    
    Under our supply agreement with Questcor, in February 2005 we received and recognized a
payment of $2.0 million from Questcor upon FDA approval of an NDA for our Nascobal® nasal
spray product. In October 2005, with our consent, Questcor assigned all of its rights and
obligations under the Questcor Agreements dated June 2003 to QOL. We received $2.0 million
from
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Questcor in October 2005 in consideration for our consent to the assignment and in connection
with our entering into an agreement with QOL that modified certain terms of the Questcor
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.
    Liquidity
   Contractual Obligations
  
    
    Our purchase obligations decreased by approximately $3.0 million from approximately $3.6
million at December 31, 2006 to approximately $0.6 million at March 31, 2007 due to the
timing of purchase order activity (primarily for PTH(1-34)) .
 Off-Balance Sheet Arrangements
  
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  26




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ITEM 4  CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
 Internal Control Over Financial Reporting.
 
 PART II  OTHER INFORMATION
 
 ITEM 5  OTHER INFORMATION
  
 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 27




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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 our 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 our 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
    
    Amendment No. 1 to Rights Agreement dated as of January 17, 2007 by and
between the Company and American Stock Transfer & Trust Company (filed as
Exhibit 4.1 to our Current Report on Form 8-K dated January 19, 2007 and
incorporated herein by reference).4.4
    
    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).4.5
    
    Form of Warrant (filed as Exhibit 99.3 to our Current Report on Form 8-K
dated June 25, 2004 and incorporated herein by reference).4.6
    
    Certificate of Designation, Rights and Preferences of Series A Junior
Participating Preferred Stock dated January 17, 2007 (filed as Exhibit 3.1
to our Current Report on Form 8-K dated January 19, 2007 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 our 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 our 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 our 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 our 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 our 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 our Current Report on Form
8-K/A dated March 1, 2006 and filed on July 26, 2006 and incorporated
herein by reference).(1)10.7
    
    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 our 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 our Quarterly Report on
Form 10-Q for the Quarter Ended March 31, 2002 and incorporated herein by
reference).
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ExhibitNo.
    
    Description10.9
    
    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 our 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 our 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
our 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 our 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 (filed as Exhibit
10.1 to our 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 our 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 our 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 our 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 our 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 our
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. (Filed as Exhibit 10.19 to our
Annual Report on Form 10-K for the year ended December 31, 2006 and
incorporated herein by reference).10.20
    
    Nastech Pharmaceutical Company Inc. 2002 Stock Option Plan (filed as
Exhibit 10.28 to our Quarterly Report on Form 10-Q for the Quarter Ended
June 30, 2002 and incorporated herein by reference).10.21
    
    Amendment No. 1 to the Nastech Pharmaceutical Company Inc. 2002 Stock
Option Plan. (filed as Exhibit 10.20 to our 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 our 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 our 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 our 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 our 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 our 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. (Filed as Exhibit 10.27 to our Annual Report on Form 10-K for the
year ended December 31, 2006 and incorporated herein by reference).10.28
    
    Asset Purchase Agreement dated June 16, 2003, by and between the Company
and Questcor Pharmaceuticals, Inc. (filed as Exhibit 2.1 to our Current
Report on Form 8-K dated June 17, 2003 and incorporated herein by
reference).
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ExhibitNo.
    
    Description10.29
    
    Form of Purchase Agreement (filed as Exhibit 99.2 to our Current Report on
Form 8-K dated September 4, 2003 and incorporated herein by reference).10.30
    
    Form of Warrant (filed as Exhibit 99.3 to our Current Report on Form 8-K
dated September 4, 2003, and incorporated herein by reference).10.31
    
    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 our Current Report on Form 8-K dated
September 24, 2004 and incorporated herein by reference).(1)10.32
    
    Supply Agreement by and between the Company and Merck & Co., Inc. effective
as of September 24, 2004 (filed as Exhibit 10.2 to our Current Report on
Form 8-K dated September 24, 2004 and incorporated herein by reference).(1)10.33
    
    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 our Current Report on Form 8-K dated October 22, 2004
and incorporated herein by reference).(1)10.34
    
    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 our Current Report on Form 8-K/A dated October 17, 2005
and filed on July 26, 2006 and incorporated herein by reference).(1)10.35
    
    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 our Current Report on Form
8-K dated January 27, 2006 and incorporated herein by reference).(1)10.36
    
    First Amendment dated as of December 4, 2006 to Product Development and
License Agreement by and between Nastech and Procter & Gamble
Pharmaceuticals, Inc (filed as Exhibit 10.46 to our Annual Report on Form
10-K dated March 7, 2007 and incorporated herein by reference).10.37
    
    Supply Agreement by and between the Company and Procter & Gamble
Pharmaceuticals, Inc. dated June 2, 2006 (filed as Exhibit 10.1 to our
Current Report on Form 8-K dated June 2, 2006 and incorporated herein by
reference).(1)10.38
    
    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 our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2006 and incorporated herein by reference).10.39
    
    Employment Agreement effective as of November 1, 2006 by and between the
Company and Paul H. Johnson, Ph.D. (filed as Exhibit 10.1 to our Current
Report on Form 8-K dated November 1, 2006 and incorporated herein by
reference).10.40
    
    Form of Restricted Stock Grant Agreement (filed as Exhibit 10.1 to our
Current Report on Form 8-K, dated February 6, 2007 and incorporated herein
by reference).10.41
    
    Form of Stock Option Agreement (filed as Exhibit 10.2 to our Current Report
on Form 8-K, dated February 6, 2007 and incorporated herein by reference).10.42
    
    Form of Omnibus Amendment to Certain Grant Agreements, dated May 4, 2007.(2)31.1
    
    Certification of our 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 our 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 our 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)32.2
    
    Certification of our 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. 30