##### 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, 2007
 Commission File Number 000-13789
 NASTECH PHARMACEUTICAL COMPANY INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    11-2658569
(I.R.S. Employer Identification No.)3830 Monte Villa Parkway, Bothell, WA
(Address of principal executive offices)
    
    98021
(Zip Code)
 Registrants telephone number, including area code:
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  o þ
  Date
October 22, 2007
    
    Class
Common stock  $0.006 par value
    
    Shares Outstanding
25,810,636




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##### 



NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTS (unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2006 and September 30, 2007
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and
September 30, 2007
    
    
    4Condensed Consolidated Statement of Stockholders Equity and Comprehensive Loss for the nine months ended
September 30, 2007
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and September 30, 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    15ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    30ITEM 4  CONTROLS AND PROCEDURES
    
    
    31PART II  OTHER INFORMATIONITEM 1A  RISK FACTORS
    
    
    31ITEM 6  EXHIBITS
    
    
    31SIGNATURES
    
    
    32EXHIBIT INDEX
    
    
    33EXHIBIT 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 SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 December 31,
    
    
    September 30,2006
    
    
    2007(In thousands, except share and per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    28,481
    
    
    $
    41,295Restricted cash
    
    
    2,155
    
    
    
    2,155Short-term investments
    
    
    20,357
    
    
    
    12,687Accounts receivable
    
    
    2,798
    
    
    
    124Inventories
    
    
    2,203
    
    
    
    1,089Prepaid expenses and other current assets
    
    
    1,564
    
    
    
    1,417Total current assets
    
    
    57,558
    
    
    
    58,767Investments in marketable securities
    
    
    
    
    
    
    2,002Property and equipment, net
    
    
    15,444
    
    
    
    15,711Other assets
    
    
    830
    
    
    
    1,939Total assets
    
    $
    73,832
    
    
    $
    78,419LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,437
    
    
    $
    3,379Accrued payroll and employee benefits
    
    
    2,652
    
    
    
    2,969Accrued expenses
    
    
    882
    
    
    
    1,157Capital lease obligations  current portion
    
    
    4,226
    
    
    
    4,992Deferred revenue  current portion
    
    
    2,528
    
    
    
    2,493Total current liabilities
    
    
    14,725
    
    
    
    14,990Capital lease obligations, net of current portion
    
    
    7,457
    
    
    
    6,970Deferred revenue, net of current portion
    
    
    6,138
    
    
    
    4,373Other liabilities
    
    
    2,176
    
    
    
    2,343Total liabilities
    
    
    30,496
    
    
    
    28,676Commitments 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 25,792,519 issued and outstanding as of September 30, 2007
    
    
    185,849
    
    
    
    232,572Accumulated deficit
    
    
    (142,493
    )
    
    
    (182,850
    )Accumulated other comprehensive income (loss)
    
    
    (20
    )
    
    
    21Total stockholders equity
    
    
    43,336
    
    
    
    49,743Total liabilities and stockholders equity
    
    $
    73,832
    
    
    $
    78,419
  3




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##### Table of Contents



NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007(In thousands, except per share data)RevenueLicense and research fees
    
    $
    5,130
    
    
    $
    1,792
    
    
    $
    22,667
    
    
    $
    11,197Government grants
    
    
    383
    
    
    
    105
    
    
    
    383
    
    
    
    307Product revenue
    
    
    32
    
    
    
    
    
    
    
    624
    
    
    
    245Total revenue
    
    
    5,545
    
    
    
    1,897
    
    
    
    23,674
    
    
    
    11,749Operating expenses:Cost of product revenue
    
    
    13
    
    
    
    
    
    
    
    314
    
    
    
    68Research and development
    
    
    10,483
    
    
    
    13,774
    
    
    
    31,050
    
    
    
    39,412Sales and marketing
    
    
    505
    
    
    
    517
    
    
    
    1,335
    
    
    
    1,729General and administrative
    
    
    2,942
    
    
    
    4,573
    
    
    
    9,194
    
    
    
    12,761Total operating expenses
    
    
    13,943
    
    
    
    18,864
    
    
    
    41,893
    
    
    
    53,970Loss from operations
    
    
    (8,398
    )
    
    
    (16,967
    )
    
    
    (18,219
    )
    
    
    (42,221
    )Other income (expense):Interest income
    
    
    751
    
    
    
    817
    
    
    
    2,107
    
    
    
    2,722Interest and other expense
    
    
    (161
    )
    
    
    (300
    )
    
    
    (394
    )
    
    
    (858
    )Total other income
    
    
    590
    
    
    
    517
    
    
    
    1,713
    
    
    
    1,864Loss before cumulative effect of change in accounting principle
    
    
    (7,808
    )
    
    
    (16,450
    )
    
    
    (16,506
    )
    
    
    (40,357
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    291
    
    
    
    Net loss
    
    $
    (7,808
    )
    
    $
    (16,450
    )
    
    $
    (16,215
    )
    
    $
    (40,357
    )Loss per common share  basic and diluted:Loss before cumulative effect of change in accounting principle
    
    $
    (0.36
    )
    
    $
    (0.66
    )
    
    $
    (0.78
    )
    
    $
    (1.62
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    .01
    
    
    
    Net loss per common share  basic and diluted
    
    $
    (0.36
    )
    
    $
    (0.66
    )
    
    $
    (0.77
    )
    
    $
    (1.62
    )Shares used in computing net loss per share  basic and diluted
    
    
    21,408
    
    
    
    25,067
    
    
    
    21,115
    
    
    
    24,844
  4




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF
STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
For the Nine Months Ended September 30, 2007
(Unaudited)
 AccumulatedCommon Stock and Additional
    
    
    
    
    
    
    Other
    
    
    TotalPaid-In Capital
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Stockholders'Shares
    
    
    Amount
    
    
    Deficit
    
    
    Income (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
    
    
    119,974
    
    
    
    1,046
    
    
    
    
    
    
    
    
    
    
    
    1,046Proceeds from the issuance of common shares, net
    
    
    3,250,000
    
    
    
    40,923
    
    
    
    
    
    
    
    
    
    
    
    40,923Compensation related to restricted stock
    
    
    305,421
    
    
    
    2,610
    
    
    
    
    
    
    
    
    
    
    
    2,610Compensation related to stock options
    
    
    
    
    
    
    2,144
    
    
    
    
    
    
    
    
    
    
    
    2,144Net loss
    
    
    
    
    
    
    
    
    
    
    (40,357
    )
    
    
    
    
    
    
    (40,357
    )Unrealized gain on securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    41Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,316
    )Balance September 30, 2007
    
    
    25,792,519
    
    
    $
    232,572
    
    
    $
    (182,850
    )
    
    $
    21
    
    
    $
    49,743
  5




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2007(In thousands)Operating activities:Net loss
    
    $
    (16,215
    )
    
    $
    (40,357
    )Adjustments to reconcile net loss to net cash used in operating activities:Non-cash compensation related to stock options
    
    
    2,064
    
    
    
    2,144Non-cash compensation related to restricted stock
    
    
    1,753
    
    
    
    2,610Depreciation and amortization
    
    
    1,957
    
    
    
    3,244Loss on retirement of property and equipment
    
    
    24
    
    
    
    13Cumulative effect of change in accounting principle
    
    
    (291
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (2,400
    )
    
    
    2,674Inventories
    
    
    (25
    )
    
    
    24Prepaid expenses and other assets
    
    
    444
    
    
    
    128Accounts payable
    
    
    489
    
    
    
    (1,058
    )Deferred revenue
    
    
    3,168
    
    
    
    (1,800
    )Accrued expenses and other liabilities
    
    
    1,054
    
    
    
    759Net cash used in operating activities
    
    
    (7,978
    )
    
    
    (31,619
    )Investing activities:Change in restricted cash
    
    
    (1,157
    )
    
    
    Purchases of property and equipment
    
    
    (8,209
    )
    
    
    (3,524
    )Purchases of investments
    
    
    (61,529
    )
    
    
    (32,747
    )Sales and maturities of investments
    
    
    60,567
    
    
    
    38,456Net cash provided by (used in) investing activities
    
    
    (10,328
    )
    
    
    2,185Financing activities:Borrowings under capital lease obligations
    
    
    6,286
    
    
    
    3,802Payments on capital lease obligations
    
    
    (2,234
    )
    
    
    (3,523
    )Proceeds from exercise of stock options
    
    
    3,056
    
    
    
    1,046Proceeds from exercise of warrants
    
    
    5,510
    
    
    
    Proceeds from the issuance of common shares, net
    
    
    
    
    
    
    40,923Net cash provided by financing activities
    
    
    12,618
    
    
    
    42,248Net increase (decrease) in cash and cash equivalents
    
    
    (5,688
    )
    
    
    12,814Cash and cash equivalents  beginning of period
    
    
    26,769
    
    
    
    28,481Cash and cash equivalents  end of period
    
    $
    21,081
    
    
    $
    41,295Supplemental disclosure:Cash paid for interest
    
    $
    405
    
    
    $
    855
  6




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2007 and 2006 (Unaudited)
 Note 1  Summary of Significant Accounting Policies
 Basis of Preparation
 Principles of Consolidation
 Use of Estimates
 Reclassifications
 Recent Accounting Pronouncements
  7




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Note 2  Inventories
  Note 3  Concentration of Credit Risk and Significant Customers
   Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2007
    
    2006
    
    2007Procter & Gamble
Pharmaceuticals, Inc. (P&G)
    
    
    86
    %
    
    
    35
    %
    
    
    75
    %
    
    
    49
    %QOL Medical, LLC (QOL)
    
    
    2
    %
    
    
    5
    %
    
    
    4
    %
    
    
    22
    %Novo Nordisk A/S (Novo Nordisk)
    
    
    3
    %
    
    
    48
    %
    
    
    2
    %
    
    
    24
    %Merck & Co., Inc. (Merck)
    
    
    0
    %
    
    
    0
    %
    
    
    16
    %
    
    
    0
    %Total
    
    
    91
    %
    
    
    88
    %
    
    
    97
    %
    
    
    95
    %
  Note 4  Net Loss Per Common Share
  As of September 30,2006
    
    2007Stock options outstanding under our various stock option plans
    
    
    2,525
    
    
    
    2,415Unvested restricted stock
    
    
    541
    
    
    
    681Warrants
    
    
    709
    
    
    
    661Total
    
    
    3,775
    
    
    
    3,757
 Note 5  Stockholders equity and comprehensive loss
 Common Stock Offerings
 Comprehensive Loss
 8




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Stockholder Rights Plan
  Note 6  Stock-based compensation
   Three Months ended September 30,
    
    
    Nine Months ended September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Stock-based compensation:Research and development
    
    $
    598
    
    
    $
    908
    
    
    $
    1,576
    
    
    $
    2,234Sales and marketing
    
    
    58
    
    
    
    76
    
    
    
    178
    
    
    
    314General and administrative
    
    
    589
    
    
    
    869
    
    
    
    2,063
    
    
    
    2,206Total stock-based compensation
    
    $
    1,245
    
    
    $
    1,853
    
    
    $
    3,817
    
    
    $
    4,754
 Restricted Stock Awards
 Unvested restricted shares outstanding, January 1, 2007
    
    
    544Restricted shares issued
    
    
    325Restricted shares forfeited
    
    
    (15
    )Restricted shares vested
    
    
    (173
    )Unvested restricted shares outstanding, September 30, 2007
    
    
    681Weighted average grant date fair value per share
    
    $
    13.18
 9




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##### Table of Contents



Stock Options
 WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life
    
    
    Value(in thousands)
    
    
    
    
    
    
    
    
    
    
    (in thousands)Outstanding December 31, 2006
    
    
    2,412
    
    
    $
    13.18Options granted
    
    
    164
    
    
    
    12.44Options exercised
    
    
    (134
    )
    
    
    9.59Options expired
    
    
    (27
    )
    
    
    13.62Outstanding at September 30, 2007
    
    
    2,415
    
    
    $
    13.32
    
    
    5.6 years
    
    $
    2,279Exercisable at September 30, 2007
    
    
    1,909
    
    
    $
    13.15
    
    
    4.9 years
    
    $
    2,121
  Three months ended September 30,
    
    Nine months ended September 30,2006
    
    2007
    
    2006
    
    2007Expected dividend yield
    
    
    *
    
    
    
    *
    
    
    
    0
    %
    
    
    0
    %Risk free interest rate
    
    
    *
    
    
    
    *
    
    
    
    4.8
    %
    
    
    4.7
    %Expected stock volatility
    
    
    *
    
    
    
    *
    
    
    
    69
    %
    
    
    64
    %Expected option life
    
    
    *
    
    
    
    *
    
    
    5.7 years
    
    5.8 yearsWeighted average fair value granted
    
    
    *
    
    
    
    *
    
    
    $
    9.05
    
    
    $
    7.65
 
 *
    
    No options were granted during the three month periods ended September 30, 2006 and 2007   Three months ended September 30,
    

Nine
months ended September 30,2006
    
    2007
    
    2006
    
    2007Intrinsic value of options exercised
    
    $
    180
    
    
    $
    562
    
    
    $
    1,481
    
    
    $
    638Fair value of options that vested
    
    
    1,921
    
    
    
    1,634
    
    
    
    3,800
    
    
    
    2,826Fair value of options that were forfeited
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    Fair value of options that expired
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    270
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Employee Stock Purchase Plan
 Warrants
 Note 7  Contractual Agreements
 Procter & Gamble Pharmaceuticals, Inc.
   Galenea Corporation (Galenea)
 11




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##### Table of Contents



Amylin Pharmaceuticals, Inc. (Amylin) 
   Par Pharmaceutical
   ®
 12




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##### Table of Contents



®
 Questcor Pharmaceuticals, Inc. (Questcor)/QOL ® ® ® ® ®
 ®
 ® ®
  Alnylam Pharmaceuticals, Inc. (Alnylam)  
 Merck Partnership/Continuation of PYY(3-36) Development
  13




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Thiakis Limited (Thiakis)
 Cytyc Corporation (Cytyc) 
 City of Hope
 Government Grants
 Feasibility Agreements
 Note 8  Commitments and Contingencies
 Leases
  Contingencies
 
 14




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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.
     
    
    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, where 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 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
 15




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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 where we believe
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
 ® ®
    Par Pharmaceutical Partnership
  16




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®
 Merck Partnership/Continuation of PYY(3-36) Development
  ®
 17




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##### Table of Contents



Amylin Pharmaceuticals, Inc.
    RNAi Technology and Intellectual Property Acquisitions
  MDRNA, Inc.
 Alnylam.
 Galenea.
 18




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##### Table of Contents



City of Hope.
 Government Grants
 Independent Product Development
  Insulin.
 ® ®
  19




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##### Table of Contents



® ®
 Carbetocin.
  Other Collaborations
 Questcor Pharmaceuticals, Inc./QOL Medical LLC. ® ® ®
 ® ® ®
 ® ®
 Novo Nordisk A/S feasibility agreement.
 Cytyc Corporation.
 Cash Position and Recent Financings
  20




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Critical Accounting Policies and Estimates
  Revenue Recognition
    21




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Research and Development Costs
  22




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Stock-Based Compensation
    Current estimate of- one year
    
    expected term
    
    + one yearEffect of a one year change in estimated expected term:Variable changedEstimated option life
    
    4.8 years
    
    5.8 years
    
    6.8 yearsVariables held constantExercise price
    
    $
    12.44
    
    
    $
    12.44
    
    
    $
    12.44Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk free rate
    
    
    4.7
    %
    
    
    4.7
    %
    
    
    4.7
    %Expected stock volatility
    
    
    64
    %
    
    
    64
    %
    
    
    64
    %Estimated fair value
    
    $
    7.09
    
    
    $
    7.65
    
    
    $
    8.18
  Current estimate of- 10%
    
    volatility
    
    + 10%Effect of a 10% change in estimated volatility:Variable changedExpected stock volatility
    
    
    54
    %
    
    
    64
    %
    
    
    74
    %
 23




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##### Table of Contents



Current estimate of- 10%
    
    volatility
    
    + 10%Variables held constantExercise price
    
    $
    12.44
    
    
    $
    12.44
    
    
    $
    12.44Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk free rate
    
    
    4.7
    %
    
    
    4.7
    %
    
    
    4.7
    %Estimated option life
    
    5.8 years
    
    5.8 years
    
    5.8 yearsEstimated fair value
    
    $
    6.88
    
    
    $
    7.65
    
    
    $
    8.41
    Income Taxes
  Recently Issued Accounting Standards
   24




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##### Table of Contents



Consolidated Results of Operations
 Comparison of Quarterly and Year To Date Results of Operations
  Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Change
    
    September 30,
    
    Change2006
    
    2007
    
    $
    
    %
    
    2006
    
    2007
    
    $
    
    %RevenueLicense and research fees
    
    $
    5,130
    
    
    $
    1,792
    
    
    $
    (3,338
    )
    
    
    (65
    )%
    
    $
    22,667
    
    
    $
    11,197
    
    
    $
    (11,470
    )
    
    
    (51
    )%Government grants
    
    
    383
    
    
    
    105
    
    
    
    (278
    )
    
    
    (73
    )%
    
    
    383
    
    
    
    307
    
    
    
    (76
    )
    
    
    (20
    )%Product revenue
    
    
    32
    
    
    
    
    
    
    
    (32
    )
    
    
    (100
    )%
    
    
    624
    
    
    
    245
    
    
    
    (379
    )
    
    
    (61
    )%Total revenue
    
    
    5,545
    
    
    
    1,897
    
    
    
    (3,648
    )
    
    
    (66
    )%
    
    
    23,674
    
    
    
    11,749
    
    
    
    (11,925
    )
    
    
    (50
    )%Operating expensesCost of product revenue
    
    
    13
    
    
    
    
    
    
    
    (13
    )
    
    
    (100
    )%
    
    
    314
    
    
    
    68
    
    
    
    (246
    )
    
    
    (78
    )%Research and development
    
    
    10,483
    
    
    
    13,774
    
    
    
    3,291
    
    
    
    31
    %
    
    
    31,050
    
    
    
    39,412
    
    
    
    8,362
    
    
    
    27
    %Sales and marketing
    
    
    505
    
    
    
    517
    
    
    
    12
    
    
    
    2
    %
    
    
    1,335
    
    
    
    1,729
    
    
    
    394
    
    
    
    30
    %General and administrative
    
    
    2,942
    
    
    
    4,573
    
    
    
    1,631
    
    
    
    55
    %
    
    
    9,194
    
    
    
    12,761
    
    
    
    3,567
    
    
    
    39
    %Total operating expenses
    
    
    13,943
    
    
    
    18,864
    
    
    
    4,921
    
    
    
    35
    %
    
    
    41,893
    
    
    
    53,970
    
    
    
    12,077
    
    
    
    29
    %Interest income
    
    
    751
    
    
    
    817
    
    
    
    66
    
    
    
    9
    %
    
    
    2,107
    
    
    
    2,722
    
    
    
    615
    
    
    
    29
    %Interest and other expense
    
    
    (161
    )
    
    
    (300
    )
    
    
    (139
    )
    
    
    86
    %
    
    
    (394
    )
    
    
    (858
    )
    
    
    (464
    )Loss before cumulative
effect of change in accounting principle
    
    
    (7,808
    )
    
    
    (16,450
    )
    
    
    (8,642
    )
    
    
    
    
    
    
    (16,506
    )
    
    
    (40,357
    )
    
    
    (23,851
    )Cumulative effect of
change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    291
    
    
    
    
    
    
    
    (291
    )Net loss
    
    $
    (7,808
    )
    
    $
    (16,450
    )
    
    $
    (8,642
    )
    
    
    
    
    
    $
    (16,215
    )
    
    $
    (40,357
    )
    
    $
    (24,142
    )
 25




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##### Table of Contents



Comparison of the Three and Nine Months Ended September 30, 2006 to the Three and Nine Months Ended
September 30, 2007
 Revenue.
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2007
    
    2006
    
    2007P&G
    
    
    86
    %
    
    
    35
    %
    
    
    75
    %
    
    
    49
    %QOL
    
    
    2
    %
    
    
    5
    %
    
    
    4
    %
    
    
    22
    %Novo Nordisk
    
    
    3
    %
    
    
    48
    %
    
    
    2
    %
    
    
    24
    %Merck
    
    
    0
    %
    
    
    0
    %
    
    
    16
    %
    
    
    0
    %Total
    
    
    91
    %
    
    
    88
    %
    
    
    97
    %
    
    
    95
    %
 License and research fees revenue.
 ®
 Government grants revenue.
 Product Revenue. ® ®
 Cost of product revenue. ® ® ®
 Research and Development.
 
    
    Personnel-related expenses increased by 21% and 29% to $5.2 million and $16.0 million in the
three and nine months ended September 30, 2007 compared to $4.3 million and $12.4 million in
the three and nine month periods ended September 30, 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
50% and 80% to approximately $4.8
 26




---



##### Table of Contents



million and $12.8 million in the three and nine months ended September 30, 2007 compared to
approximately $3.2 million and $7.1 million in the three and nine months ended September 30, 2006
due primarily to our increased efforts related to pre-clinical and clinical programs for
PYY(3-36), carbetocin, and insulin.
 
    
    Facilities and equipment costs increased by 25% and 46% to $2.4 million and $7.3 million in
the three and nine months ended September 30, 2007 compared to $2.0 million and $5.0 million
in the three and nine months ended September 30, 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 three and nine months ended
September 30, 2007 was $0.9 million and $2.4 million, compared with $0.6 million and $1.6
million in the three and nine months ended September 30, 2006.
    
    Non-cash stock-based compensation included in R&D expense increased to $0.9 million and $2.2
million in the three and nine months ended September 30, 2007 from approximately $0.6 million
and $1.6 million in the three and nine months ended September 30, 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 September 30,
    
    Nine Months Ended September 30,2006
    
    2007
    
    2006(2)
    
    2007RNAi and TNF-a
    
    
    19
    %
    
    
    18
    %
    
    
    22
    %
    
    
    16
    %Influenza
    
    
    9
    %
    
    
    5
    %
    
    
    8
    %
    
    
    7
    %Subtotal
    
    
    28
    %
    
    
    23
    %
    
    
    30
    %
    
    
    23
    %PTH(1-34)
    
    
    32
    %
    
    
    2
    %
    
    
    30
    %
    
    
    13
    %PYY(3-36)
    
    
    4
    %
    
    
    29
    %
    
    
    4
    %
    
    
    21
    %Insulin
    
    
    10
    %
    
    
    12
    %
    
    
    11
    %
    
    
    11
    %Carbetocin
    
    
    6
    %
    
    
    11
    %
    
    
    3
    %
    
    
    8
    %Calcitonin
    
    
    6
    %
    
    
    2
    %
    
    
    6
    %
    
    
    3
    %Other research and development projects(1)
    
    
    14
    %
    
    
    21
    %
    
    
    16
    %
    
    
    21
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Other research and development projects include our tight junction projects, 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.  27




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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.
 General and administrative.
 
    
    Costs of legal and accounting fees, consulting, corporate insurance and other
administrative costs increased by 69% and 50% to approximately $2.2 million and $6.0 million
in the three and nine months ended September 30, 2007 compared to approximately $1.3 million
and $4.0 million in the three and nine months ended September 30, 2006, due primarily to
increased legal fees in support of our IP patent estate and corporate legal and consulting
expenses incurred related to MDRNA, Inc.
    
    Personnel-related expenses increased by 33% and 41% to $1.2 million and $3.7 million in
the three and nine months ended September 30, 2007 compared to $0.9 million and $2.7 million
in the three and nine months ended September 30, 2006 due primarily to increased headcount
related to administrative activities in support of our R&D efforts.
    
    Non-cash stock-based compensation included in general and administrative expense
increased from approximately $0.6 million and $2.1 million in the three and nine months
ended September 30, 2006 to $0.9 million and $2.2 million in the three and nine months ended
September 30, 2007.
  28




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##### Table of Contents



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. In consideration for our
consent to this assignment and in connection with our entering into an agreement with QOL
that modified certain terms of the Questcor Agreements, we received $2.0 million from
Questcor in October 2005, that is being recognized ratably over the five-year life of the
QOL agreement. QOL also 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. This
payment became due and was received and recognized as revenue in the second quarter of 2007.
  29




---



##### Table of Contents



Liquidity
   Contractual Obligations
  
    
    Our purchase obligations decreased by approximately $2.1 million from approximately $3.6
million at December 31, 2006 to approximately $1.5 million at September 30, 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
  
 30




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##### Table of Contents



ITEM 4  CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
 Internal Control Over Financial Reporting.
 
 PART II  OTHER INFORMATION
 
 ITEM 1A  RISK FACTORS
   
 ITEM 6  EXHIBITS
  31




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##### Table of Contents



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 32




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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 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 September 19,
2007 (filed as Exhibit 3.1 to our Current Report on Form 8-K dated
September 19, 2007, 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).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 our Current Report on Form 8-K dated June 3,
2005 and incorporated herein by reference).
 33




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##### Table of Contents



ExhibitNo.
    
    Description10.10
    
    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).10.29
    
    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)
 34




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##### Table of Contents



ExhibitNo.
    
    Description10.33
    
    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).(1)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 (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).(1)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 (filed as Exhibit 10.42 to our Quarterly Report on Form
10-Q for the quarter ended March 31, 2007 and incorporated herein
by reference).10.43
    
    Nastech Pharmaceutical Company Inc. 2007 Employee Stock Purchase
Plan (filed as Exhibit 10.1 to our Registration Statement on Form
S-8, File No. 333-146183, and incorporated herein by reference).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. 35