##### 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, 2005 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.)
 3450 Monte Villa Parkway, Bothell, WA
(Address of principal executive offices)
    
    98021
(Zip Code)
 Registrants telephone number, including area code:(425) 908-3600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: Date
    
    Class
    
    Shares OutstandingApril 30, 2005
    
    Common stock - $0.006 par value
    
    
    17,970,874




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONITEM
1  FINANCIAL STATEMENTS (unaudited)Condensed Consolidated Balance Sheets as of December 31, 2004 and March 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the three month periods ended
March 31, 2004 and March 31, 2005
    
    
    4Condensed Consolidated Statement of Stockholders Equity and Comprehensive Loss for the
three months ended March 31, 2005
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004
and March 31, 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    13ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
    
    
    22ITEM 4  CONTROLS AND PROCEDURES
    
    
    22PART II  OTHER INFORMATIONITEM 6  EXHIBITS
    
    
    23SIGNATURES
    
    
    24EXHIBIT INDEX
    
    
    25EXHIBIT 10.30EXHIBIT 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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PART I  FINANCIAL INFORMATION 
 ITEM 1  FINANCIAL STATEMENTS NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands, Except Share and Per Share Data)
 December 31,
    
    
    March 31,2004
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,797
    
    
    $
    18,521Restricted cash
    
    
    9,000
    
    
    
    999Short term investments
    
    
    39,677
    
    
    
    37,583Accounts receivable, net
    
    
    
    
    
    
    825Inventories
    
    
    57
    
    
    
    155Prepaid expenses and other current assets
    
    
    674
    
    
    
    766Total current assets
    
    
    75,205
    
    
    
    58,849Long term investments
    
    
    
    
    
    
    1,502Property and equipment, net
    
    
    5,160
    
    
    
    6,113Security deposits and other assets
    
    
    410
    
    
    
    427Total assets
    
    $
    80,775
    
    
    $
    66,891LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,652
    
    
    $
    2,735Accrued expenses and other liabilities
    
    
    2,533
    
    
    
    1,796Notes payable
    
    
    8,352
    
    
    
    Deferred
revenue - current portion
    
    
    2,774
    
    
    
    2,722Capital
lease obligations - current portion
    
    
    1,532
    
    
    
    1,685Total current liabilities
    
    
    16,843
    
    
    
    8,938Deferred revenue, net of current portion
    
    
    3,483
    
    
    
    3,180Capital lease obligation, net of current portion
    
    
    1,719
    
    
    
    1,726Other liabilities
    
    
    582
    
    
    
    626Total liabilities
    
    
    22,627
    
    
    
    14,470Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 100,000 authorized: no shares issued and
outstanding:
    
    
    
    
    
    
    Common stock, $0.006 par value; 25,000,000 authorized: 17,895,976 and
17,931,164 shares outstanding at December 31, 2004 and March 31, 2005,
respectively
    
    
    107
    
    
    
    108Additional paid-in capital
    
    
    142,853
    
    
    
    143,247Deferred compensation
    
    
    (1,358
    )
    
    
    (1,357
    )Accumulated deficit
    
    
    (83,453
    )
    
    
    (89,540
    )Accumulated other comprehensive loss
    
    
    (1
    )
    
    
    (37
    )Total stockholders equity
    
    
    58,148
    
    
    
    52,421Total liabilities and stockholders equity
    
    $
    80,775
    
    
    $
    66,891
 See accompanying notes to consolidated financial statements. 3




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
 Three months endedMarch 31,2004
    
    
    2005Revenue:Product revenue, net
    
    $
    95
    
    
    $
    License and research fees
    
    
    53
    
    
    
    3,330Total revenue
    
    
    148
    
    
    
    3,330Operating expenses:Cost of product revenue
    
    
    64
    
    
    
    Research and development
    
    
    5,850
    
    
    
    7,231Sales and marketing
    
    
    153
    
    
    
    324General and administrative
    
    
    1,684
    
    
    
    2,161Total operating expenses
    
    
    7,751
    
    
    
    9,716Loss from operations
    
    
    (7,603
    )
    
    
    (6,386
    )Interest income
    
    
    56
    
    
    
    409Interest and other expense
    
    
    (97
    )
    
    
    (110
    )Net loss
    
    $
    (7,644
    )
    
    $
    (6,087
    )Net loss per
common share - basic and diluted
    
    $
    (0.64
    )
    
    $
    (0.34
    )Shares used
in computing net loss per share  basic and diluted:
    
    
    11,893
    
    
    
    17,751
 See accompanying notes to consolidated financial statements. 4




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
For the Three Months Ended March 31, 2005
(Unaudited)
(In Thousands, Except Share Data)
 Common StockAccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalPaid-in
    
    
    Deferred
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Deficit
    
    
    Loss
    
    
    EquityBalance December 31, 2004
    
    
    17,895,976
    
    
    $
    107
    
    
    $
    142,853
    
    
    $
    (1,358
    )
    
    $
    (83,453
    )
    
    $
    (1
    )
    
    $
    58,148Proceeds from the exercise
of options
    
    
    667
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Compensation related to
restricted stock
    
    
    34,521
    
    
    
    1
    
    
    
    380
    
    
    
    (117
    )
    
    
    
    
    
    
    
    
    
    
    264Compensation related to
stock options
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    126Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,087
    )
    
    
    
    
    
    
    (6,087
    )Unrealized loss on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    (36
    )Comprehensive loss
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    (6,087
    )
    
    
    (36
    )
    
    
    (6,123
    )Balance March 31, 2005
    
    
    17,931,164
    
    
    $
    108
    
    
    $

    143,247
    
    
    $
    (1,357
    )
    
    $
    (89,540
    )
    
    $
    (37
    )
    
    $
    52,421
 See accompanying notes to consolidated financial statements. 5




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
 Three Months EndedMarch 31,2004
    
    
    2005Operating activities:Net loss
    
    $
    (7,644
    )
    
    $
    (6,087
    )Adjustments to reconcile net loss to net cash used in
operating activities:Non-cash compensation related to stock options
    
    
    126
    
    
    
    126Non-cash compensation related to restricted stock
    
    
    
    
    
    
    264Depreciation and amortization of property and equipment
    
    
    280
    
    
    
    396Gain on sale of property and equipment
    
    
    
    
    
    
    2Changes in assets and liabilities:Accounts and other receivables
    
    
    (30
    )
    
    
    (825
    )Inventories
    
    
    105
    
    
    
    (98
    )Prepaid expenses and other assets
    
    
    (243
    )
    
    
    (109
    )Accounts payable
    
    
    (540
    )
    
    
    1,083Deferred revenue
    
    
    
    
    
    
    (355
    )Accrued expenses and other liabilities
    
    
    (59
    )
    
    
    (693
    )Net cash used in operating activities
    
    
    (8,005
    )
    
    
    (6,296
    )Investing activities:Property and equipment acquisitions, net
    
    
    (603
    )
    
    
    (1,351
    )Purchases of investments
    
    
    (2,742
    )
    
    
    (5,074
    )Maturities of investments
    
    
    3,000
    
    
    
    5,630Net cash used in investing activities
    
    
    (345
    )
    
    
    (795
    )Financing activities:Proceeds from notes payable
    
    
    2,227
    
    
    
    Restricted cash released
    
    
    
    
    
    
    8,001Payments on notes payable
    
    
    (146
    )
    
    
    (8,352
    )Borrowings under capital lease obligations
    
    
    333
    
    
    
    506Payments on capital lease obligations
    
    
    (199
    )
    
    
    (346
    )Exercise of stock options
    
    
    528
    
    
    
    6Net cash provided by (used in) financing activities
    
    
    2,743
    
    
    
    (185
    )Net decrease in cash and cash equivalents
    
    
    (5,607
    )
    
    
    (7,276
    )Cash and
cash equivalents  beginning of period
    
    
    16,792
    
    
    
    25,797Cash and
cash equivalents  end of period
    
    $
    11,185
    
    
    $
    18,521Non-cash investing activity:Change in unrealized loss on available-for-sale securities
    
    
    
    
    
    $
    (36
    )Supplemental disclosures of investing and financing activities:Cash paid for interest
    
    $
    97
    
    
    $
    120
 See accompanying notes to consolidated financial statements. 6




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1  Business and Summary of Significant Accounting Policies Business Nastech Pharmaceutical Company Inc., (Nastech or the Company) is a pharmaceutical company
focusing on development and commercialization of innovative products based on proprietary molecular
biology-based intranasal drug delivery technology for delivering both small and large molecule
drugs. Using this technology, the Company creates or utilizes novel formulation components or
excipients that can transiently manipulate or open tight junctions between cells in various
tissues and thereby allow therapeutic drugs to reach the blood stream. Tight junctions are
cell-to-cell connections in various tissues of the body, including epithelial and endothelial
layers of the intranasal mucosa, the gastrointestinal tract, and the blood brain barrier. They
function to provide barrier integrity and to regulate the transport and passage of molecules across
these natural boundaries. This technology is the foundation of the Companys intranasal drug
delivery platform, although some of the Companys product candidates utilize this expertise outside
this area. Generally, the Company seeks to apply its technology to compounds that the Company
licenses to, or acquires from, collaborators or other third parties. The Company believes its intranasal drug delivery technology offers advantages over injectable
routes for the administration of large molecules such as peptides and proteins. These advantages
may include improved safety and clinical efficacy and increased patient compliance due to the
elimination of injection site pain and avoidance of injection site irritation. In addition, the
Company believes its intranasal drug delivery technology offers advantages over oral administration
by providing for faster absorption into the bloodstream, reduced side effects and improved
effectiveness by avoiding problems relating to gastrointestinal and liver metabolism. The Company
is utilizing its technologies to develop commercial products, initially with collaboration
partners. In select cases, the Company also plans to internally develop, manufacture and
commercialize its products. The Company and its collaborative partners are developing a diverse portfolio of product
candidates for multiple therapeutic areas including obesity, osteoporosis, breakthrough cancer
pain, multiple sclerosis and erectile dysfunction. The Companys lead product candidate, Peptide
YY3-36 (PYY) for obesity, is in Phase I clinical trials and is being developed with
its collaboration partner, Merck & Co. Inc. (Merck). Additionally, the Company is developing two
product candidates for the treatment of osteoporosis. Parathyroid Hormone (PTH(1-34))
is in Phase I clinical trials, and the Company has filed an abbreviated new drug application
(ANDA) for its generic calcitonin-salmon intranasal spray which the Company is developing with
its collaboration partner Par Pharmaceutical, Inc. (Par Pharmaceutical). As of March 31, 2005,
the Company has 42 patents issued and 169 patent applications filed to protect its proprietary
technologies. As of March 31, 2005, the Company has an accumulated deficit of approximately $89.6 million
and expects additional operating losses in the foreseeable future as it continues its research and
development activities. The Company has funded its operating losses primarily through the sale of
common stock in the public markets and private placements and also through revenues provided by its
collaborative partners. The Company currently has two effective shelf registration statements with
a total of approximately $33 million remaining available pursuant to which the Company may issue
and sell common stock, warrants and debt securities, subject to market conditions and the Companys
capital needs. At March 31, 2005, the Company has cash, cash equivalents and investments of
approximately $58.6 million, including $1.0 million in restricted cash. The Company faces certain risks and uncertainties regarding its ability to generate positive
operating cash flow and profits. These risks include, but are not limited to, its ability to
obtain additional capital, protect its patents and property rights, overcome uncertainties
regarding its technologies, competition and technological change, obtain government approval for
products and attract and retain key officers and employees. For a more thorough discussion of
risks and uncertainties facing the Company, investors should also read and carefully consider the
risk factors beginning on page 19 of the Companys Annual Report on Form 10-K/A for the year ended
December 31, 2004. 7




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Basis of Preparation The accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial
information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and note disclosures required by accounting
principles generally accepted in the United States for complete financial statements. The
accompanying unaudited financial information should be read in conjunction with the audited
financial statements, including the notes thereto, as of and for the year ended December 31, 2004,
included in the Companys 2004 Annual Report on Form 10-K/A filed with the Securities and Exchange
Commission (the SEC). The information furnished in this report reflects all adjustments
(consisting of normal recurring adjustments), which are, in the opinion of management, necessary
for a fair presentation of the Companys financial position, results of operations and cash flows
for each period presented. The results of operations for the interim period ended March 31, 2005
are not necessarily indicative of the results for the year ending December 31, 2005 or for any
future period. Reclassifications Certain reclassifications have been made to the 2004 information to conform to the current
period presentation. Recent Accounting Pronouncements In December 2004, the FASB released its revised standard, SFAS No. 123R (SFAS 123R),
Share-Based Payment. SFAS 123R requires that a public entity measure the cost of equity based
service awards based on the grant-date fair value of the award. That cost will be recognized over
the period during which an employee is required to provide service in exchange for the award or the
vesting period. A public entity will initially measure the cost of liability based service awards
based on its current fair value and the fair value of that award will be remeasured subsequently at
each reporting date through the settlement date. Changes in fair value during the requisite service
period will be recognized as compensation cost over that period. In April 2005 the SEC released
Staff Accounting Bulletin No. 107 providing additional guidance on the adoption of SFAS 123R. In
April 2005 the SEC amended its previously adopted rule to modify compliance dates for SFAS 123R,
requiring adoption for fiscal years beginning after June 15, 2005. The Company is evaluating SFAS
123R and believes it will likely result in recognition of additional non-cash stock-based
compensation expense and, accordingly, would increase net loss in amounts which likely will be
considered material. Principles of Consolidation The consolidated financial statements include the financial statements of Nastech
Pharmaceutical Company Inc. and its wholly-owned subsidiary, Atossa HealthCare Inc. (collectively,
the Company). All inter-company balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires the Companys management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and reported amounts of
revenues and expenses during the reporting periods. Actual results could differ from those
estimates. Revenue Recognition Most of the Companys revenues are generated from research and licensing arrangements. These
research and licensing arrangements may include upfront non-refundable payments, development
milestone payments, revenue from product manufacturing, payments for research and development
services performed and product sales royalties or revenue. The Companys revenue recognition
policies are based on the requirements of Staff Accounting 8




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Bulletin No. 104 Revenue Recognition, and, for contracts with multiple deliverables, the Company
determines the appropriateness of separate units of accounting and allocates arrangement
consideration based on the fair value of the elements under guidance from Emerging Issues Task
Force Issue 00-21 (EITF 00-21), Revenue Arrangements with Multiple Deliverables. Under EITF
00-21, revenue arrangements with multiple deliverables are divided into separate units, if certain
criteria are met, of accounting such as product development and contract manufacturing. Revenue is
allocated to these units based upon relative fair values with revenue recognition criteria
considered separately for each unit. Nonrefundable upfront technology license fees, for product candidates where we are providing
continuing services related to product development, are deferred and recognized as revenue over the
development period or as the Company provides the services required under the agreement. The
ability to estimate total development effort and costs can vary significantly for each product
candidate due to the inherent complexities and uncertainties of drug development. Milestones, in the form of additional license fees, typically represent nonrefundable payments
to be received in conjunction with the achievement of a specific event identified in the contract,
such as initiation or completion of specified clinical development activities. The Company believes
that a milestone represents the culmination of a distinct earnings process when it is not
associated with ongoing research, development or other performance on the Companys part. The
Company recognizes such milestones as revenue when they become due and collection is reasonably
assured. When a milestone does not represent the culmination of a distinct earnings process,
revenue is recognized in manner similar to that of an upfront technology license fee. The timing and amount of revenue that the Company recognizes from licenses of technology,
either from upfront fees or milestones where the Company is providing continuing services related
to product development, is dependent upon on the Companys estimates of filing dates or development
costs. As product candidates move through the development process, it is necessary to revise these
estimates to consider changes to the product development cycle, such as changes in the clinical
development plan, regulatory requirements, or various other factors, many of which may be outside
of the Companys control. The impact on revenue of changes in the Companys estimates and the
timing thereof, is recognized prospectively, over the remaining estimated product development
period. Royalty revenue is generally recognized at the time of product sale by the licensee. Revenue from research and development services performed is generally received for services
performed under collaboration agreements, and is recognized at the time the services are performed.
Payments received in excess of amounts earned are recorded as deferred revenue. Product sales revenue is recognized at the time the manufactured goods are shipped to the
purchaser and title has transferred. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. The Company continues to record a valuation allowance in the full amount of
deferred tax assets since realization of such tax benefits is not considered to be more likely than
not. Stock-based compensation The Company accounts for stock-based compensation using the intrinsic value method in
accordance with APB No. 25, Accounting for Stock Issued to Employees. The Company follows the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) and
recent pronouncements, which require the 9




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disclosure of pro forma net income and earnings per share as if the fair value-based method
was utilized in measuring compensation expense. The per share weighted average fair value of stock options granted during the three months
ended March 31, 2004, and 2005 was $5.06, and $7.36, on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: Three months endedMarch 31,2004
    
    
    
    2005Expected dividend yield
    
    
    
    0
    %
    
    
    
    0
    %Risk free interest rate
    
    
    
    3.0
    %
    
    
    
    3.9
    %Expected stock volatility
    
    
    
    0.82
    
    
    
    
    0.79Expected option life
    
    
    5 years
    
    
    6 years
 Had compensation cost been determined based on the fair value at the grant date for stock
options under SFAS No. 123, net loss would have been reported as the pro forma amounts indicated
below: Three months endedMarch 31,2004
    
    
    
    2005(in thousands, except per share data)Net loss as reported
    
    
    $
    (7,644
    )
    
    
    $
    (6,087
    )Add: Stock-based employee
compensation included in the
reported net loss
    
    
    
    126
    
    
    
    
    390Deduct: Stock-based employee
compensation, determined under fair
value based methods
    
    
    
    (1,183
    )
    
    
    
    (1,114
    )Pro forma net loss
    
    
    $
    (8,701
    )
    
    
    $
    (6,811
    )Net Loss per shareBasic and diluted  as reported
    
    
    $
    (0.64
    )
    
    
    $
    (0.34
    )Basic and diluted   pro forma
    
    
    $
    (0.73
    )
    
    
    $
    (0.38
    )
 Net Loss per Common Share Basic and diluted net loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding during the periods. Outstanding employee
stock options, restricted stock and warrants totaled approximately 4.1 million and 4.4 million
shares at March 31, 2004 and 2005, respectively. The effect of employee stock options, unvested
restricted stock and warrants at March 31, 2004 and 2005 was not included in the net loss per share
calculation for the interim periods then ended as the effect would have been anti-dilutive. Note 2  Significant Contractual Agreements MerckIn September 2004, the Company entered into an Exclusive Development,
Commercialization and License Agreement and a separate Supply Agreement (collectively, the
Agreements) with Merck, for the global development and commercialization of PYY Nasal Spray, the
Companys Phase I product for the treatment of obesity. The Agreements provide that Merck will
assume primary responsibility for conducting and funding clinical and non-clinical studies and
regulatory approval, while the Company will be responsible for all manufacturing of PYY-related
product. Merck will lead and fund commercialization, subject to the Companys exercise of an
option to co-promote the product in the United States. Under the Agreements, the Company received an initial cash payment of $5 million in 2004. The
$5 million initial payment is being amortized over the estimated development period, a portion of
which is recorded as deferred revenue in the accompanying balance sheet. If certain development
and approval milestones are achieved, the Company will be eligible to receive up to an additional
$131 million from Merck. If certain sales-related milestones are achieved, the Company would be
eligible to receive up to an additional $210 million from Merck subject to certain other
conditions. In addition to the $5 million license fee, and the other items discussed above, Merck
will 10




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pay the Company for manufacturing-related development activities and will purchase all
clinical supply and finished product upon commercialization from the Company. The Company will
also receive royalties on product sales. Thiakis Limited In September 2004, the Company announced it acquired exclusive worldwide
rights to the Imperial College Innovations and Oregon Health & Science University PYY patent
applications in the field of intranasal delivery of PYY and the use of glucagons-like peptide-1
(GLP-1) used in conjunction with PYY for the treatment of obesity, diabetes and other metabolic
conditions. Under the agreement, Nastech made an equity investment in and paid an initial license
fee to Thiakis, Ltd. (Thiakis). The equity investment and initial license fee were expensed as
research and development expenses by the Company in 2004. Under the agreement, Thiakis is entitled
to receive an annual fee, additional milestone fees, patent-based royalties, and additional equity
investments based upon future progress of the intellectual property and product development
processes. Par PharmaceuticalIn October 2004, the Company entered into a license and supply agreement
with Par Pharmaceutical for the exclusive U.S. distribution and marketing rights to its generic
calcitonin-salmon nasal spray. Under the terms of the agreement with Par Pharmaceutical, the
Company will manufacture and supply finished generic calcitonin-salmon nasal spray product to Par
Pharmaceutical, while Par Pharmaceutical will distribute the product in the US. The financial
terms of the agreement include milestone payments, product transfer payments for manufactured
product and a profit sharing following commercialization. The Company filed its ANDA with the FDA
in December 2003, which was accepted in February 2004. Questcor Pharmaceuticals, Inc. In June 2003, the Company completed the sale of certain
assets relating to its Nascobal® brand products, including the Nascobal® (Cyanocobalamin USP)
nasal gel, to Questcor Pharmaceuticals, Inc. (Questcor). The Company filed a New Drug
Application (NDA) of a nasal spray product configuration of Nascobal® in 2003 and will continue
to prosecute the pending U.S. patents for the Nascobal® nasal spray product on behalf of
Questcor. The Company recognized a gain of approximately $4.2 million on the sale of the assets
in 2003. The gain was calculated as $14 million in non-contingent proceeds, less the net book
value of the assets of $8.1 million, less costs and fees. Under the terms of the Asset Purchase Agreement, between the Company and Questcor, Questcor
paid the Company $9 million at closing, $3 million in September 2003 and approximately $2.2 million
in December 2003. Questcor has also agreed to make payments of: (i) $2 million contingent upon
FDA approval of a New Drug Application for the Nascobal® nasal spray product; and (ii) $2 million
contingent upon issuance of a U.S. patent for the Nascobal® nasal spray product. FDA approval
for the Nascobal® nasal spray product was granted in January 2005, and the $2 million payment was
received from Questcor in February 2005 and recognized as revenue in the three months ended March
31, 2005. In connection with the sale, Questcor and the Company entered into an agreement (the Security
Agreement) pursuant to which Questcor granted the Company a collateral interest in all the assets
related to the Nascobal® (Cyanocobalamin USP) nasal gel acquired by Questcor. Under the terms of a supply agreement between the parties, subject to certain limitations, the
Company is obligated to manufacture and supply all of Questcors requirements and Questcor is
obligated to purchase from the Company all of its requirements, for the Nascobal® nasal gel and,
upon FDA approval, the Nascobal® nasal spray. Note 3  Notes Payable In 2003, the Company entered into a cash-secured Revolving Line of Credit with Wells Fargo
Bank to allow for borrowings up to $9.0 million through December 31, 2004. In 2004, the Revolving
Line of Credit was amended to incorporate a Letter of Credit Subfeature (the Subfeature). Under
the Subfeature, approximately $648,000 of the facility was reserved for issuance of a standby
letter of credit agreement to the Companys landlord for its Bothell, Washington operations under
the terms of its facility lease. In October 2004 the Company renewed and increased the Revolving
Line of Credit (the Credit Agreement) to allow for borrowings up to $11.5 million through
December 31, 2005, and the Subfeature was increased to $1.0 million. In February 2005, the Letter
of Credit issued to the Companys landlord was increased to approximately $998,000 under the terms
of its facility lease. 11




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In February 2005, the Company paid off all outstanding Credit Agreement borrowings of
$8,352,000 and the agreement was cancelled. As a result of the loan payoff, the Companys
restricted cash balance decreased by $8.0 million. Note 4  Stockholders Equity Common Stock Offerings In June 2004, the Company completed the sale of 1,136,364 shares of
its common stock, and warrants to purchase up to 511,364 shares of common stock at an exercise
price of $14.40 per share, pursuant to its $30 million effective shelf registration statement. The
offering resulted in gross proceeds of approximately $12.5 million to the Company prior to the
deduction of fees and commissions of $229,000. The warrants vested on December 25, 2004, and are
exercisable until June 25, 2009. At March 31, 2005, no warrants issued in connection with this
private placement have been exercised. In December 2004, the Company completed the public offering of 4,250,000 shares of its common
stock at a public offering price of $13.50 per share pursuant to its $80 million effective shelf
registration statement. The offering resulted in gross proceeds of approximately $57.4 million to
the Company, prior to the deduction of fees and commissions of $4.5 million. SEC
Shelf Registration Statements The Company currently has two effective shelf registration
statements on Form S-3. On December 18, 2003, the Company filed a shelf registration statement with
the SEC, which was declared effective by the SEC on January 14, 2004, pursuant to which it may
issue common stock or warrants, up to an aggregate of $30 million. At March 31, 2005, the amount
remaining available on this shelf registration statement was approximately $10.1 million. On
September 30, 2004 the Company filed another shelf registration statement with the SEC, which was
declared effective by the SEC on October 8, 2004, pursuant to which it may issue common stock,
warrants or debt securities, up to an aggregate of $80 million. At March 31, 2005, the amount
remaining available on this shelf registration statement was approximately $22.6 million. These
shelf registration statements enable the Company to raise capital from the offering of securities
covered by the shelf registration statements, as well as any combination thereof, from time to time
and through one or more methods of distribution, subject to market conditions and cash needs. Equity Compensation Awards. Stock Option Plans. In June 2004, the Company established the 2004 Stock Incentive Plan (the
2004 Plan) under which a total of 600,000 shares have been reserved for issuance. As of March
31, 2005, 180,141 shares of restricted common stock have been issued under the 2004 Plan which vest
between one and three years. In 2002, the Company established the 2002 Stock Option Plan, pursuant to which options to
purchase an aggregate of 1,367,334 shares of common stock were outstanding and 32,666 authorized
shares were available for future issuance as of March 31, 2005. In 2000, the Company established the 2000 Nonqualified Stock Option Plan, pursuant to which
options to purchase an aggregate of 644,200 shares of common stock were outstanding and 146,656
authorized shares were available for future issuance as of March 31, 2005. In 1990, the Company established the 1990 Stock Option Plan, pursuant to which options to
purchase an aggregate of 260,500 shares of common stock were outstanding and no shares were
available for future issuance as of March 31, 2005. In addition, in 2002 the Company approved and ratified the issuance of 561,719 stock options
outside the plans to certain executive officers in connection with the commencement of their
employment with the Company. The Company has filed separate registration statements on Form S-8
registering awards under each of the Companys equity compensation plans and the 561,719 options
awarded outside the plans. At March 31, 2005, options to purchase 471,719 shares remained
outstanding related to these awards. Restricted Stock Awards. Pursuant to certain restricted stock awards granted pursuant to the
Companys 2004 Plan, the Company has issued shares of restricted common stock to certain employees
and members of the board of 12




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directors. Non-cash compensation expense is being recognized on a straight-line basis over
the applicable vesting periods of one to three years of the restricted shares based on the fair
value of such restricted common stock on the grant date. During the three-month period ended March
31, 2005, approximately 41,000 shares of restricted stock were granted and issued and approximately
7,000 unvested shares of restricted stock were forfeited. In connection with these restricted
stock grants, the Company recorded approximately $450,000 as deferred compensation and
approximately $260,000 as stock compensation expense during the three-month period ended March 31,
2005. No shares of restricted stock were issued during the three-month period ended March 31,
2004. 
 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/A, 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. We are a pharmaceutical company focusing on development and commercialization of innovative
products based on proprietary molecular biology-based intranasal drug delivery technology for
delivering both small and large molecule drugs. Using this technology, we create or utilize novel
formulation components or excipients that can transiently manipulate or open tight junctions
between cells in various tissues and thereby allow therapeutic drugs to reach the blood stream.
Tight junctions are cell-to-cell connections in various tissues of the body, including epithelial
and endothelial layers of the intranasal mucosa, the gastrointestinal tract, and the blood brain
barrier. They function to provide barrier integrity and to regulate the transport and passage of
molecules across these natural boundaries. This technology is the foundation of our intranasal drug
delivery platform, although some of our product candidates utilize our expertise outside this area.
Generally, we seek to apply our technology to compounds that we license to, or acquire from,
collaborators or other third parties. We believe our intranasal drug delivery technology offers advantages over injectable routes
for the administration of large molecules such as peptides and proteins. These advantages may
include improved safety and clinical efficacy and increased patient compliance due to the
elimination of injection site pain and avoidance of injection site irritation. In addition, we
believe our intranasal drug delivery technology offers advantages over oral administration by
providing for faster absorption into the bloodstream, reduced side effects and improved
effectiveness by avoiding problems relating to gastrointestinal and liver metabolism. We are
utilizing our technologies to develop commercial products, initially with collaboration partners.
In select cases, we also plan to internally develop, manufacture and commercialize our products. We and our collaborative partners are developing a diverse portfolio of product candidates for
multiple therapeutic areas including obesity, osteoporosis, breakthrough cancer pain, multiple
sclerosis and erectile dysfunction. Our lead product candidate, PYY for obesity, is in Phase I
clinical trials and is being developed with 13




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our collaboration partner, Merck. Additionally, we are developing two product candidates for
the treatment of osteoporosis. PTH(1-34) is in Phase I clinical trials, and we have
filed an ANDA for our generic calcitonin-salmon intranasal spray which we are developing with our
collaboration partner Par Pharmaceutical. As of March 31, 2005, we have 42 patents issued and 169
patent applications filed to protect our proprietary technologies. As of March 31, 2005, we had an accumulated deficit of $89.6 million and expect additional
operating losses in the foreseeable future as we continue our research and development activities.
Our development efforts and the future revenues from sales of these products are expected to
generate contract research revenues, milestone payments, license fees, royalties and manufactured
product sales for us. As of March 31, 2005, we had approximately $58.6 million in cash, cash
equivalents and investments including $1.0 million in restricted cash. We believe that our current
cash position provides us with adequate working capital for at least the next 12 months or longer,
depending upon the degree to which we exploit our various current opportunities that are in the
pipeline and the success of our collaborative arrangements. In addition, we are planning to enter
into various collaborations to accelerate our R&D programs, and to the extent these collaborations
do not occur, we may be required to reduce our research and development activities or raise
additional funds from new investors or in the public markets. In June 2004, we completed the sale of 1,136,364 shares of our common stock, and warrants to
purchase up to 511,364 shares of common stock at an exercise price of $14.40 per share, pursuant to
our $30 million shelf registration statement that was declared effective by the SEC on January 14,
2004. The offering resulted in gross proceeds of approximately $12.5 million to us prior to the
deduction of fees and commissions of $229,000. The warrants vested on December 25, 2004, and are
exercisable until June 25, 2009. At March 31, 2005, the amount remaining available on this shelf
registration statement was approximately $10.1 million. In December 2004, we completed the public offering of 4,250,000 shares of our common stock at
a public offering price of $13.50 per share pursuant to our $80 million shelf registration
statement that was declared effective by the SEC on October 8, 2004. The offering resulted in gross
proceeds of approximately $57.4 million to us, prior to the deduction of fees and commissions of
$4.5 million. At March 31, 2005, the amount remaining available on this shelf registration
statement was approximately $22.6 million. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. As such, we are required to make certain
estimates, judgments and assumptions that we believe are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenue and
expenses during the periods presented. Actual results could differ significantly from those
estimates under different assumptions and conditions. We believe that the following discussion
addresses our most critical accounting estimates which are those that are most important to the
portrayal of our financial condition and results of operations and which require our most difficult
and subjective judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. We also have other policies that we consider key accounting
policies; however, these policies do not meet the definition of critical accounting estimates,
because they do not generally require us to make estimates or judgments which are difficult or
subjective.  Revenue Recognition Most of our revenues are generated from research and licensing arrangements. These research
and licensing arrangements may include upfront non-refundable payments, development milestone
payments, revenue from product manufacturing, payments for research and development services
performed and product sales royalties or revenue. Our revenue recognition policies are based on
the requirements of SEC Staff Accounting Bulletin No. 104 Revenue Recognition, and, for contracts
with multiple deliverables, we allocate arrangement consideration based on the fair value of the
elements under guidance from Emerging Issues Task Force Issue 00-21 (EITF 00-21), Revenue
Arrangements with Multiple Deliverables. Under EITF 00-21, revenue arrangements with multiple
deliverables may be divided into separate units of accounting such as product development and
contract manufacturing. Revenue is allocated to these units based upon relative fair values with
revenue recognition criteria considered separately for each unit. 14




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Nonrefundable upfront technology license fees, for product candidates where we are providing
continuing services related to product development, are deferred and recognized as revenue over the
development period or as we provide the services required under the agreement. The ability to
estimate total development effort and costs can vary significantly for each product candidate due
to the inherent complexities and uncertainties of drug development. If we cannot estimate the costs
to complete development, but can estimate an expected NDA filing date, we will recognize license
fee revenue ratably through the NDA filing date. If we are unable to reasonably estimate either
total costs to complete development or an expected NDA filing date (performance period), we will
defer revenue recognition until one of those estimates can be made or the project is discontinued. Milestones, in the form of additional license fees, typically represent nonrefundable payments
to be received in conjunction with the achievement of a specific event identified in the contract,
such as initiation or completion of specified clinical development activities. We believe that a
milestone represents the culmination of a distinct earnings process when it is not associated with
ongoing research, development or other performance on our part. We recognize such milestones as
revenue when they become due and collection is reasonably assured. When a milestone does not
represent the culmination of a distinct earnings process, we recognize revenue in manner similar to
that of an upfront technology license fee. The timing and amount of revenue that we recognize from licenses of technology, either
from upfront fees or milestones where we are providing continuing services related to product
development, is dependent upon our estimates of filing dates or development costs. As product
candidates move through the development process, it is necessary to revise these estimates to
consider changes to the product development cycle, such as changes in the clinical development
plan, regulatory requirements, or various other factors, many of which may be outside of our
control. The impact on revenue of changes in our estimates and the timing thereof, is recognized
prospectively, over the remaining estimated product development period. Royalty revenue is generally recognized at the time of product sale by the licensee. Revenue from research and development services performed is generally received for services
performed under collaboration agreements, and is recognized at the time the services are performed.
Payments received in excess of amounts earned are recorded as deferred revenue. Product sales revenue is recognized at the time the manufactured goods are shipped to the
purchaser and title has transferred  Stock-based compensation We apply Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees, and related interpretations in accounting for our stock-based employee compensation
plans, rather than the alternative fair value accounting method provided for under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,(SFAS 123). In
the Notes to Consolidated Financial Statements, we provide pro-forma disclosures in accordance with
SFAS 123 and related pronouncements. Under APB 25, compensation expense is recorded on the date of
grant of an option to an employee or member of the Board only if the fair market value of the
underlying stock at the time of grant exceeds the exercise price.
In addition, we have granted options to certain outside consultants, which are required to be
measured at fair value and recognized as compensation expense in our Consolidated Statements of
Operations. We apply the Black-Scholes option-pricing model for estimating the fair value of
options, which involves a number of judgments and variables including estimates of the life of the
options and expected volatility which are subject to significant change. A change in the fair
value estimate could have a significant effect on the amount of compensation expense calculated. In June 2004, our 2004 Stock Incentive Plan was approved by our shareholders and,
subsequently, restricted stock grants have been issued to certain directors and employees. Non-cash
compensation expense is being recognized over the applicable vesting periods of one to three years
of the restricted shares. 15




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In December 2004, the FASB released its revised standard, SFAS No. 123R (SFAS 123R),
Share-Based Payment. SFAS 123R requires that a public entity measure the cost of equity based
service awards based on the grant-date fair value of the award. That cost will be recognized over
the period during which an employee is required to provide service in exchange for the award or the
vesting period. A public entity will initially measure the cost of liability based service awards
based on its current fair value and the fair value of that award will be remeasured subsequently at
each reporting date through the settlement date. Changes in fair value during the requisite service
period will be recognized as compensation cost over that period. In April 2005 the SEC released
Staff Accounting Bulletin No. 107 providing additional guidance on the adoption of SFAS 123R. In
April 2005 the SEC amended its previously adopted rule to modify the compliance dates for SFAS
123R, requiring adoption for fiscal years beginning after June 15, 2005. We are evaluating SFAS
123R and believe it will likely result in recognition of additional non-cash stock-based
compensation expense and, accordingly, would increase net loss in amounts which likely will be
considered material.  Income Taxes A critical estimate is the full valuation allowance for deferred taxes that was recorded based
on the uncertainty that such tax benefits will be realized in future periods. To the extent we
achieve profitability such deferred tax allowance would be reversed at that time.  Clinical Trial Expenses Clinical trial expenses, which are included in research and development expenses, represent
obligations resulting from our contracts with various clinical research organizations in connection
with conducting clinical trials for our product candidates. We recognize expenses for these
contracted activities based on a variety of factors, including actual and estimated labor hours,
clinical site initiation activities, patient enrollment rates, estimates of external costs and
other activity-based factors. We believe that this method best approximates the efforts expended on
a clinical trial with the expenses we record. We adjust our rate of clinical expense recognition if
actual results differ from our estimates. Results of Operations Revenue and cost of revenue The following table sets forth revenue information: Three
Months EndedMarch 31,2004
    
    
    
    2005(dollars in thousands)Product revenue, net
    
    
    $
    95
    
    
    
    $
    License and research fees
    
    
    
    53
    
    
    
    
    3,330Total revenue
    
    
    $
    148
    
    
    
    $
    3,330Dollar increase
    
    
    
    
    
    
    
    $
    3,182
 License and research fees were significantly higher for the three months ended March 31, 2005
as compared to the same period in 2004, due primarily to a $2.0 million milestone payment received
from Questcor and to the recognition of current period research and development fees and deferred
license fees received in 2004 from Merck and Par Pharmaceutical over the estimated remaining
development periods. The following table sets forth information on product revenue, cost of product revenue and
cost of product revenue as a percentage of product revenue: 16




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Three Months EndedMarch 31,2004
    
    
    2005(dollars in thousands)Product revenue, net
    
    
    $
    95
    
    
    
    $
    Cost of product revenue
    
    
    
    64
    
    
    
    
    Cost of product revenue as a % of product revenue
    
    
    
    67
    %
    
    
    
    
 Product revenue consists of sales of Nascobal® nasal gel to Questcor. During the interim
period ended March 31, 2004, we earned product revenue under the supply agreement. During the
interim period ended March 31, 2005, we did not produce or ship any Nascobal® nasal gel. In the
future, including during 2005 interim periods, we expect to receive continued product revenue under
the supply agreement. Research and development Research and development expense consists primarily of salaries and other personnel-related
expenses, costs of clinical trials, consulting and other outside service, laboratory supplies,
facilities costs, FDA filing fees and other costs. Research and development expense by project as a
percentage of total research and development project expense, and total research and development
expense, are as follows: Three Months EndedMarch 31,2004
    
    
    2005Peptide YY
    
    
    
    60
    %
    
    
    
    9
    %Calcitonin
    
    
    
    12
    %
    
    
    
    31
    %Tight Junctions and RNAi
    
    
    
    13
    %
    
    
    
    17
    %PTH
    
    
    
    2
    %
    
    
    
    10
    %Apomorphine
    
    
    
    7
    %
    
    
    
    
    %Other R&D projects (1)
    
    
    
    6
    %
    
    
    
    33
    %100
    %
    
    
    
    100
    %(dollars in thousands)Total R&D expense
    
    
    $
    5,850
    
    
    
    $
    7,231Dollar increase
    
    
    
    
    
    
    
    
    1,381Percentage increase
    
    
    
    
    
    
    
    
    24
    %
   1.
    
    Other R&D projects include, without
limitation, our oral abuse-resistant opioid, feasibility studies and other projects. The increase in the three-month period ended March 31, 2005 over the same period in 2004
resulted primarily from the following costs:  
    Costs of clinical trials, consulting, outside services and laboratory supplies increased
to $2.9 million from $2.8 million due primarily to the timing of clinical trials performed
for our calcitonin, PYY, PTH and RNAi products under development.
    Personnel-related expenses increased to $2.8 million from $2.1 million due to an
increase in staffing our research and development personnel in support of our research and
development programs.
    Facilities-related costs increased to $1.2 million from $0.7 million due to rent and
related expenses on additional space leased in the Bothell facility and increased
depreciation and maintenance on equipment. We expect a continued increase in research and development expense in the foreseeable future
as we continue to expand our research and development activities. These expenditures are subject to
uncertainties in timing and cost to completion. We test compounds in numerous preclinical studies
for safety, toxicology and efficacy. We then conduct early stage clinical trials for each drug
candidate. If we are not able to engage a collaboration partner prior to the commencement of later
stage clinical trials, or if we decide to pursue a strategy of maintaining commercialization rights
to a program, we may fund these trials ourselves. As we obtain results from trials, we may elect to
discontinue or delay clinical trials for certain products in order to focus our resources on more
promising 17




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products. Completion of clinical trials by us and our collaboration partners may take
several years or more, but the length of time varies substantially according to the type,
complexity, novelty and intended use of a drug candidate. The cost of clinical trials may vary significantly over the life of a project as a result of
differences arising during clinical development, including:  
    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. Except for our Nascobal® nasal spray, which received FDA approval in January 2005, none of
our other current product candidates has received FDA or foreign regulatory marketing approval. In
order to achieve marketing approval, the FDA or foreign regulatory agencies must conclude that our
and our collaboration partners clinical data establishes the safety and efficacy of our drug
candidates. Furthermore, our strategy includes entering into collaborations with third parties to
participate in the development and commercialization of our products. In the event that the
collaboration partner has control over the development process for a product, the estimated
completion date would largely be under control of such partner. We cannot forecast with any degree
of certainty how such collaboration arrangements will affect our development plans or capital
requirements. As a result of the uncertainties discussed above, we are often unable to determine the
duration and completion costs of our research and development projects or when and to what extent
we will receive cash inflows from the commercialization and sale of a product. Sales and marketing Sales and marketing expense consists primarily of salaries and other personnel-related
expenses, costs of using a contract sales organization and a contract distributor for Nascobal®
nasal gel, consulting, sales materials, trade shows and advertising. Total sales and marketing
expense and dollar and percentage changes are as follows: Three Months EndedMarch 31,2004
    
    
    
    2005(dollars in thousands)Total sales and marketing expense
    
    
    $
    153
    
    
    
    $
    324Dollar increase
    
    
    
    
    
    
    
    
    171Percentage increase
    
    
    
    
    
    
    
    
    112
    %
 The increase in the three-month period ended March 31, 2005 over the same period in 2004
resulted primarily from increased business development personnel costs and increases in spending on
market research. We expect sales and marketing costs, which includes business development staff
and activities, to continue to increase in the foreseeable future to support activities associated
with partnering our other drug candidates. General and administrative General and administrative expense consists primarily of salaries and other personnel-related
expenses to support our research and development activities, amortization of non-cash deferred
stock option and restricted stock compensation, professional fees such as accounting and legal,
corporate insurance and facilities costs. Total general and administrative expense and dollar and
percentage changes are as follows: Three Months EndedMarch 31,2004
    
    
    
    2005(dollars in thousands)Total general and administrative expense
    
    
    $
    1,684
    
    
    
    $
    2,161Dollar increase
    
    
    
    
    
    
    
    
    477Percentage increase
    
    
    
    
    
    
    
    
    28
    %
 18




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The increase in the three-month period ended March 31, 2005 over the same period in 2004 was
due primarily to increased compensation related expenses due to the hiring of additional personnel
supporting R&D and compliance activities, legal and accounting fees, corporate insurance, non-cash
stock compensation expense related to restricted stock grants and other administrative costs. We
expect general and administrative expenses to remain stable or to increase in the foreseeable
future, depending on the growth of our research and development and other corporate activities. Interest Income We earn interest income on our invested cash and investments. The following table sets forth
information on interest income, average funds available for investment and average interest rate
earned: Three Months EndedMarch 31,2004
    
    
    
    2005(dollars in thousands)Interest income
    
    
    $
    56
    
    
    
    $
    409Average funds available for investment
    
    
    $
    20,600
    
    
    
    $
    66,000Average interest rate
    
    
    
    1.1
    %
    
    
    
    2.4
    %
 The increase in interest income in the three-month period ended March 31, 2005 over the same
period in 2004 was due to higher average interest rates earned due to increasing prevailing market
interest rates, combined with higher average balances available for investment. Interest Expense We incur interest expense on our capital leases and our notes payable. The following table
sets forth information on interest expense, average borrowings and average interest rate incurred: Three Months EndedMarch 31,2004
    
    
    
    2005(dollars in thousands)Interest expense
    
    
    $
    97
    
    
    
    $
    120Ave.
borrowings under capital leases and notes payable
    
    
    $
    9,200
    
    
    
    $
    7,400Average interest rate
    
    
    
    4.2
    %
    
    
    
    6.5
    %
 The increase in interest expense in the three-month period ended March 31, 2005 over the same
period in 2004 was due to an increase in the average interest rate as prevailing interest rates
increased, combined with a shift in the borrowing mix from cash-secured bank debt to asset lease
financing. In the three-month period ended March 31, 2005, average borrowings under the Wells
Fargo note were approximately $4 million at approximately 3.3% interest, and average borrowings
under the GE Capital leases were approximately $3.2 million at interest rates ranging from
approximately 8.3% to 10%. In the three-month period ended March 31, 2004, average borrowings
under the Wells Fargo note were approximately $6.7 million at approximately 1.9% interest, and
average borrowings under the GE Capital leases were approximately $2.5 million at interest rates
ranging from approximately 8.3% to 10%. In June 2003, we entered into a note payable with Wells Fargo bank at a rate of LIBOR plus
0.75%. As of December 31, 2004, the balance on the note payable with Wells Fargo was $8,352,000
and the interest rate was approximately 3.3% per annum. In February 2005 the Wells Fargo note was
paid off in full and cancelled. The outstanding balance at March 31, 2005 is zero. 19




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Liquidity and Capital Resources Cash Requirements Our capital requirements consist primarily of the need for working capital, including funding
research and development activities and capital expenditures for the purchase of equipment. From
time to time, we may also require capital for investments involving acquisitions and strategic
relationships. We have an accumulated deficit of approximately $89.6 million as of March 31, 2005
and expect additional operating losses in the foreseeable future as we continue to expand our
research and development activities. In addition, we are planning to enter into various
collaborations in furtherance of our research and development programs, and we may be required to
reduce our research and development activities or raise additional funds from new investors or in
the public markets. Sources and Uses of Cash We have financed our operations primarily through the sale of common stock and warrants
through private placements and in the public markets, revenues received from our collaboration
partners, equipment financing facilities and notes payable. In December 2003, we filed a shelf registration statement with the SEC, which was declared
effective by the SEC in January 2004, pursuant to which we may issue common stock or warrants, up
to an aggregate of $30 million. In September 2004 we filed another shelf registration statement
with the SEC, which was declared effective by the SEC in October 2004, pursuant to which we may
issue common stock, warrants or debt securities, up to an aggregate of $80 million. These shelf
registration statements enable us to raise capital from the offering of securities covered by the
shelf registration statements, as well as any combination thereof, from time to time and through
one or more methods of distribution, subject to market conditions and our cash needs. In June 2004, we completed the sale of 1,136,364 shares of our common stock, and warrants to
purchase up to 511,364 shares of common stock at an exercise price of $14.40 per share, pursuant to
our $30 million effective shelf registration statement. The offering resulted in gross proceeds of
approximately $12.5 million to us prior to the deduction of fees and commissions of $229,000. The
warrants vested on December 25, 2004, and are exercisable until June 25, 2009. At March 31, 2005,
the amount remaining available on this shelf registration statement was approximately $10.1
million. In December 2004, we completed the public offering of 4,250,000 shares of our common stock at
a public offering price of $13.50 per share pursuant to our $80 million effective shelf
registration statement. The offering resulted in gross proceeds of approximately $57.4 million to
us, prior to the deduction of fees and commissions of $4.5 million. At March 31, 2005, the amount
remaining available on this shelf registration statement was approximately $22.6 million. Our research and development efforts and collaborative arrangements with our partners enable
us to generate contract research revenues, milestone payments, license fees, royalties and
manufactured product sales for us.  
    Under our collaborative arrangement with Merck, we received an initial cash payment of
$5 million in October 2004. The $5 million initial payment is being amortized over the
estimated development period. We are also eligible to receive milestone payments upon
achievement of specified product development goals or sales targets. If certain development
and approval milestones are achieved, we will be eligible to receive up to $131 million
from Merck. If certain sales related milestones are achieved, we will be eligible to
receive up to an additional $210 million from Merck, subject to certain other conditions.
Merck will also pay us for manufacturing-related development activities and will purchase
from us clinical supply and finished product. We will also receive royalties on product
sales based on certain sales-related thresholds.
    Under our collaborative arrangement with Par Pharmaceutical, we received an initial cash
payment which is being amortized over the estimated development period. We expect in the
future to receive additional revenue from Par Pharmaceutical in the form of milestone
payments, product transfer payments for 20




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manufactured product and a profit sharing upon
commercialization of generic calcitonin-salmon intranasal spray.  
    In January 2005, we received FDA approval of our Nascobal® nasal spray and we received
a $2 million payment from Questcor in February 2005. Total sources and uses of cash for the three-month periods ending March 31, 2004 and 2005 are as
follows: Three Months EndedMarch 31,2004
    
    
    
    2005(dollars in thousands)Cash used in operating activities
    
    
    $
    (8,005
    )
    
    
    $
    (6,296
    )Cash used in investing activities
    
    
    
    (345
    )
    
    
    
    (795
    )Cash provided by (used in) financing activities
    
    
    
    2,743
    
    
    
    
    (185
    )Net decrease in cash and cash equivalents
    
    
    $
    (5,607
    )
    
    
    $
    (7,276
    )
 Our operating activities used cash of $6.3 million in the first three months of 2005 compared
to $8.0 million in the first three months of 2004. Cash used in operating activities relates
primarily to funding net losses, adjusted by changes in balance sheet account balances and
partially offset by non-cash charges related to depreciation and amortization of property and
equipment and stock compensation. We expect to use cash for operating activities in the
foreseeable future as we continue our research and development activities. Our investing activities used cash of $0.8 million in the first three months of 2005, compared
to $0.3 million in the first three months of 2004. Changes in cash from investing activities are
due primarily to purchases of short-term investments net of maturities and investments in property
and equipment. We expect to continue to invest in our research and development infrastructure,
including the purchase of equipment to support our research and development activities. Our financing activities used cash of $0.2 million in the first three months of 2005, compared
to providing cash of $2.7 million in the first three months of 2004. Cash provided in the 2004
period primarily related to an increase in borrowing of $2.2 million. During the three months
ended March 31, 2005, we repaid approximately $8.4 million on our Revolving Line of Credit and drew
down approximately $0.5 million on a capital lease facility. As a result of the loan payoff, our
restricted cash balance decreased by $8.0 million.  Liquidity We had a working capital (current assets minus current liabilities) surplus of $49.9 million
as of March 31, 2005 and $58.4 million as of December 31, 2004. As of March 31, 2005, we had
approximately $58.6 million in cash, cash-equivalents and investments, including $1.0 million in
restricted cash. We believe, although there can be no assurance, that our current cash position
provides us with adequate working capital for at least the next 12 months or longer, depending upon
the degree to which we exploit our various current opportunities that are in the pipeline and the
success of our collaborative arrangements. This belief is based, in part, on the assumption that
we have completed and are planning to enter into various collaborations to accelerate our research
and development programs which will provide us with additional financing. To the extent these
collaborations do not proceed as planned, we may be required to reduce our research and development
activities or, if necessary and possible, raise additional capital from new investors or in the
public markets. As of February 22, 2005, we had unused capital lease credit lines of approximately $3.5
million out of total available credit lines of approximately $4.0 million. Our loan balance of
approximately $8.4 million at December 31, 2004 was paid in full and cancelled on February 18,
2005. Our available capital lease line of $4.0 million expires December 31, 2005 and is available
for use in financing equipment and leasehold assets. 21




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Contractual Obligations Our contractual obligations have changed during the three months ended March 31, 2005 as
follows.  
    At March 31, 2005 we have a zero balance in notes payable compared to approximately
$8.6 million (including interest) at December 31, 2004 due to the payoff of the note
in February 2005;
    At March 31, 2005 our operating lease obligations increased to approximately $20.6
million (through 2016) from approximately $20.4 million at December 31, 2004. This is
due to a lease renewal adding approximately $0.6 million in rental payments from July
2005 through June 2010, partially offset by approximately $0.4 million in rents paid
during the three months ended March 31, 2005;
    Our capital lease obligations increased by approximately $0.2 million to
approximately $3.8 million (including interest) at March 31, 2005 due to approximately
$0.5 million in new leases signed offset by payments made during the three months
ended March 31, 2005; and
    Our purchase obligations increased by approximately $1.5 million to approximately
$1.7 million at March 31, 2005 due to purchase order activity during the three months
ended March 31, 2005. Off-Balance Sheet Arrangements As of March 31, 2005, we did not have any significant off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K. 
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market rate risk for changes in interest rates relates primarily to our
investment of cash in excess of near term requirements. We have a prescribed methodology whereby
we invest our excess cash in debt instruments of U.S. government agencies and high quality
corporate issuers (Standard & Poors A rating and higher or Moodys Investors Service A2 rating
and higher). To mitigate market risk, securities have a maturity date within 18 months, no
category of issue can exceed 50% of the portfolio, and holdings of any one issuer excluding the
U.S. government do not exceed 20% of the portfolio. Periodically, the portfolio is reviewed and
adjusted if the credit rating of a security held has deteriorated. Because of the relatively short
maturities of our investments, we do not expect interest rate fluctuations to materially affect the
aggregate value of our financial assets. We do not utilize derivative financial instruments. 
 ITEM 4  CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. As of the end of the period covered by this
Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and
with the participation of senior management, including the Companys Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of its disclosure
controls and procedures. Based upon that evaluation, the Companys Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and procedures are
effective for gathering, analyzing and disclosing the information that the Company is required to
disclose in reports filed under the Securities Exchange Act of 1934, as amended. (b) Internal Control Over Financial Reporting.There have been no changes in the Companys
internal controls over financial reporting or in other factors during the fiscal quarter ended
March 31, 2005, that materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting subsequent to the date the Company carried out
its most recent evaluation. 22




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PART II  OTHER INFORMATION 
 ITEM 6  EXHIBITS The exhibits required by this item are set forth in the Exhibit Index attached hereto. 23




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, duly authorized, in
Bothell, State of Washington, on May 9, 2005. 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/ Gregory L. WeaverGregory L. WeaverChief Financial Officer
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EXHIBIT INDEX ExhibitNo.
    
    Description1.1
    
    Underwriting Agreement dated December 8,
2004, by and among Nastech Pharmaceutical
Company Inc. and Citigroup Global Markets
Inc., Needham & Company, Inc., WR
Hambrecht + Co., LLC and Delafield
Hambrecht, Inc. for themselves and as
representatives of the underwriters.
(filed as Exhibit 1.1 to the Companys
Annual Report on Form 10-K for the year
ended December 31, 2004 filed with the
Securities and Exchange Commission on
March 8, 2005, and incorporated herein by
reference).2.1
    
    Agreement and Plan of Reorganization,
dated August 8, 2000, among the Company,
Atossa Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of
the Company, and Atossa HealthCare, Inc.
(filed as Exhibit 2.1 to the Companys
Current Report on Form 8-K dated August 8,
2000, and incorporated herein by
reference).2.2
    
    Asset Purchase Agreement, dated September
30, 2002, with Schwarz Pharma, Inc. (filed
as Exhibit 2.1 to the Companys Current
Report on Form 8-K dated September 30, 2002
and incorporated herein by reference).3.1
    
    Certificate of Incorporation of the
Company dated September 20, 1983 (filed as
Exhibit 3.1 to our Registration Statement
on Form S-3, File No. 333-119429, and
incorporated herein by reference).3.2
    
    Certificate of Amendment to the
Certificate of Incorporation of the
Company dated November 30, 1989 (filed as
Exhibit 3.2 to our Registration Statement
on Form S-3, File No. 333-119429, and
incorporated herein by reference).3.3
    
    Certificate of Amendment to the
Certificate of Incorporation of the
Company dated November 8, 1993 (filed as
Exhibit 3.3 to our Registration Statement
on Form S-3, File No. 333-119429, and
incorporated herein by reference).3.4
    
    Certificate of Amendment to the
Certificate of Incorporation of the
Company dated December 30, 1996 (filed as
Exhibit 3.4 to our Registration Statement
on Form S-3, File No. 333-119429, and
incorporated herein by reference).3.5
    
    Certificate of Amendment to the
Certificate of Incorporation of the
Company dated August 15, 1999 (filed as
Exhibit 3.5 to our Registration Statement
on Form S-3, File No. 333-119429, and
incorporated herein by reference).3.6
    
    Certificate of Designation of Rights,
Terms and Preferences of Series A Junior
Participating Preferred Stock of the
Company dated March 2, 2000 (filed as
Exhibit A to our Current Report on Form
8-K dated February 22, 2000 and
incorporated herein by reference).3.7
    
    Certificate of Correction to a Certificate
of Amendment to the Certificate of
Incorporation of the Company dated July
28, 2004 (filed as Exhibit 3.7 to our
Registration Statement on Form S-3, File
No. 333-119429, and incorporated herein by
reference).3.8
    
    Certificate of Correction to a Certificate
of Amendment to the Certificate of
Incorporation of the Company dated July
28, 2004 (filed as Exhibit 3.8 to our
Registration Statement on Form S-3, File
No. 333-119429, and incorporated herein by
reference).3.9
    
    Certificate of Correction to a Certificate
of Amendment to the Certificate of
Incorporation of the Company dated July
28, 2004 (filed as Exhibit 3.9 to our
Registration Statement on Form S-3, File
No. 333-119429, and incorporated herein by
reference).
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##### Table of Contents



ExhibitNo.
    
    Description3.10
    
    Amended and Restated Bylaws of the Company
dated August 11, 2004 (filed as Exhibit
3.10 to our Registration Statement on Form
S-3, File No. 333-119429, and incorporated
herein by reference).4.1
    
    Investment Agreement, dated as of February
1, 2002, by and between the Company and
Pharmacia & Upjohn Company (filed as
Exhibit 4.1 to the Company Current Report
on Form 8-K dated February 1, 2002 and
incorporated herein by reference).4.2
    
    Rights Agreement, dated February 22, 2000,
between the Company and American Stock
Transfer & Trust Company as Rights Agent
(filed as Exhibit 1 to our Current Report
on Form 8-K dated February 22, 2000 and
incorporated herein by reference).4.3
    
    Securities Purchase Agreement dated as of
June 25, 2004 (filed as Exhibit 99.2 to
our Current Report on Form 8-K dated June
25, 2004 and incorporated herein by
reference).4.4
    
    Form of Warrant (filed as Exhibit 99.3 to
the Companys Current Report on Form 8-K
dated June 25, 2004 and incorporated
herein by reference).10.1
    
    Lease for facilities at 45 Davids Drive,
Hauppauge, NY (filed as Exhibit 10B to the
Companys Annual Report on Form 10-KSB for
the year ended June 30, 1995 and
incorporated herein by reference).10.2
    
    Lease Agreement, dated April 23, 2002, with Phase 3
Science Center LLC, Ahwatukee Hills Investors LLC and J.
Alexanders LLC (filed as Exhibit 10.26 to the Companys
Quarterly Report on Form 10-Q for the Quarter Ended 1,
2002 and incorporated herein by reference).10.3
    
    Amended and Restated Employment Agreement, dated May 2,
2002, with Steve C. Quay, M.D., Ph.D. (filed as Exhibit
10.27 to the Companys Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 2002 and incorporated herein
by reference).10.4
    
    Employment Agreement with Gregory L. Weaver, dated April
30, 2002 (filed as Exhibit 10.29 to the Companys
Quarterly Report on Form 10-Q for the Quarter Ended June
30, 2002 and incorporated herein by reference).10.5
    
    Change-in-Control Severance Agreement with Gregory L.
Weaver, dated July 31, 2002 (filed as Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the Quarter
Ended September 30, 2002 and incorporated herein by
reference).10.6
    
    Nastech Pharmaceutical Company Inc. 1990 Stock Option Plan
(filed as Exhibit 4.2 to the Companys Registration
Statement on Form S-8, File No. 333-28785, and
incorporated herein by reference).10.7
    
    Amended and Restated Nastech Pharmaceutical Company Inc.
2000 Nonqualified Stock Option Plan (filed as Exhibit 4.4
to the Companys Registration Statement on Form S-8, File
No. 333-49514, and incorporated herein by reference).10.8
    
    Nastech Pharmaceutical Company Inc. 2002 Stock Option Plan
(filed as Exhibit 10.28 to the Companys Quarterly Report
on Form 10-Q for the Quarter Ended June 30, 2002 and
incorporated herein by reference).10.9
    
    Nastech Pharmaceutical Company Inc. 2004 Incentive Stock
Plan (filed as Exhibit 99 to the Companys Registration
Statement on Form S-8, File No. 333-118206, and
incorporated herein by reference).10.10
    
    Termination and Mutual Release Agreement, dated September
30, 2002, with Schwarz
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##### Table of Contents



ExhibitNo.
    
    DescriptionPharma, Inc. (Filed as Exhibit 10.3
to the Companys Current Report on Form 8-K dated
September 30, 2002 and incorporated herein by reference).10.11
    
    Divestiture Agreement, dated January 24, 2003, with
Pharmacia & Upjohn Company (filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K dated January 24,
2003 and incorporated herein by reference).10.12
    
    Stock option agreement with Gregory L. Weaver (filed as
Exhibit 10.25 to the Companys Annual Report on Form 10-K
for the year ended December 31, 2002 and incorporated
herein by reference).10.13
    
    Asset Purchase Agreement, dated June 16, 2003, by and
between the Company and Questcor Pharmaceuticals, Inc.
(filed as Exhibit 2.1 to the Companys Current Report on
Form 8-K dated June 17, 2003 and incorporated herein by
reference).10.14
    
    First Amendment dated June 17, 2003, to Lease Agreement
dated April 23, 2002, with Phase 3 Science Center LLC,
Ahwatukee Hills Investors LLC and J. Alexanders LLC
(filed as Exhibit 10.2 to the Companys Quarterly Report
on Form 10-Q for the Quarter ended June 30, 2003 and
incorporated herein by reference).10.15
    
    Form of Purchase Agreement (filed as Exhibit 99.2 to the
Companys Current Report on Form 8-K dated September 4,
2003 and incorporated herein by reference).10.16
    
    Form of Warrant (filed as Exhibit 99.3 to the Companys
Current Report on Form 8-K dated September 4, 2003, and
incorporated herein by reference).10.17
    
    Revolving Line of Credit Agreement with Wells Fargo Bank,
dated December 19, 2003 (filed as Exhibit 10.20 to the
Companys Annual Report on Form 10-K for the year ended
December 31, 2003 and incorporated herein by reference).10.18
    
    Addendum to Promissory Note with Wells Fargo Bank, dated
January 20, 2004 (filed as Exhibit 10.21 to the Companys
Annual Report on Form 10-K for the year ended December 31,
2003 and incorporated herein by reference).10.19
    
    Security Agreement Securities Account with Wells Fargo
Bank, dated December 19, 2003 (filed as Exhibit 10.22 to
the Companys Annual Report on Form 10-K for the year
ended December 31, 2003 and incorporated herein by
reference).10.20
    
    Addendum to Security Agreement: Securities Account with
Wells Fargo Bank, dated December 19, 2003 (filed as
Exhibit 10.23 to the Companys Annual Report on Form 10-K
for the year ended December 31, 2003 and incorporated
herein by reference).10.21
    
    Second Amendment, dated February 4, 2004, to Lease
Agreement dated April 23, 2002, with Phase 3 Science
Center LLC, Ahwatukee Hills Investors LLC and J.
Alexanders LLC (filed as Exhibit 10.24 to the Companys
Annual Report on Form 10-K for the year ended December 31,
2003 and incorporated herein by reference).10.22
    
    Exclusive Development, Commercialization and License
Agreement by and between Merck & Co., Inc. and the Company
effective as of September 24, 2004 (filed as Exhibit 10.1
to the Companys Current Report on Form 8-K dated
September 24, 2004 and incorporated herein by reference).
(1)10.23
    
    Supply Agreement by and between the Company and Merck &
Co., Inc. effective as of September 24, 2004 (filed as
Exhibit 10.2 to the Companys Current Report on Form 8-K
dated September 24, 2004 and incorporated herein by
reference). (1)
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##### Table of Contents



ExhibitNo.
    
    Description10.24
    
    Revolving Line of Credit Agreement with Wells Fargo Bank,
dated October 20, 2004 (filed as Exhibit 10.29 to the
Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004 and incorporated herein by
reference).10.25
    
    License and Supply Agreement by and between Par
Pharmaceutical, Inc. and Nastech Pharmaceutical Company
Inc. effective as of October 22, 2004 (filed as Exhibit
10.1 to the Companys Current Report on Form 8-K dated
October 22, 2004 and incorporated herein by reference).
(1)10.26
    
    Restricted Stock Grant Agreement effective January 21,
2005 by and between Nastech Pharmaceutical Company Inc.
and Mr. Gordon Brandt, M.D. (filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K dated January 21,
2005 and incorporated herein by reference).10.27
    
    Stock Option Agreement dated as of January 21, 2005
between Nastech Pharmaceutical Company Inc. and Mr. Gordon
Brandt, M.D. (filed as Exhibit 10.2 to the Companys
Current Report on Form 8-K dated January 21, 2005 and
incorporated herein by reference).10.28
    
    Restricted Stock Grant Agreement effective January 21,
2005 by and between Nastech Pharmaceutical Company Inc.
and Mr. Paul H. Johnson, Ph.D. (filed as Exhibit 10.3 to
the Companys Current Report on Form 8-K dated January 21,
2005 and incorporated herein by reference).10.29
    
    Stock Option Agreement dated as of January 21, 2005
between Nastech Pharmaceutical Company Inc. and Mr. Paul
H. Johnson, Ph.D. (filed as Exhibit 10.4 to the Companys
Current Report on Form 8-K dated January 21, 2005 and
incorporated herein by reference).10.30
    
    Lease Agreement for facilities at 45 Davids Drive,
Hauppauge, NY, effective as of July 1, 2005. (2)31.1
    
    Certification of the Companys Chairman of the Board,
President and Chief Executive Officer pursuant to Rules
13a-14 and 15d-14 under the Securities Exchange Act of
1934, as amended. (2)31.2
    
    Certification of the Companys Chief Financial Officer
pursuant to Rules 13a-14 and 15d-14 under the Securities
Exchange Act of 1934, as amended. (2)32.1
    
    Certification of the Companys Chairman of the Board,
President and Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (2)32.2
    
    Certification of the Companys Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (2)
    (2) Filed Herewith. 28