##### 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 June 30, 2007
 Commission File Number 000-13789
 NASTECH PHARMACEUTICAL COMPANY INC.
  Delaware
    
    11-2658569(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)3830 Monte Villa Parkway, Bothell, WA
    
    98021(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
  þ o
  o þ o
  o þ
  Date
    
    Class
    
    Shares OutstandingJuly 31, 2007
    
    Common stock  $0.006 par value
    
    25,672,310




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##### 



NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
 TABLE OF CONTENTS
 PART I FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTS (unaudited)Condensed Consolidated Balance Sheets as of December 31, 2006 and June 30, 2007
    
    
    3Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2006 and June 30, 2007
    
    
    4Condensed Consolidated Statement of Stockholders Equity and Comprehensive
Loss for the six months ended June 30, 2007
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended June
30, 2006 and June 30, 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
    
    
    15ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    31ITEM 4  CONTROLS AND PROCEDURES
    
    
    32PART II  OTHER INFORMATION
    
    
    32ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    32ITEM 6  EXHIBITS
    
    
    32SIGNATURES
    
    
    33EXHIBIT INDEX
    
    
    34EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Items 1, 1A, 2, 3 and 5 of PART II have not been included as they are not applicable
 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1  FINANCIAL STATEMENTS
 NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 December 31,
    
    
    June 30,2006
    
    
    2007(In thousands, except share and per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    28,481
    
    
    $
    53,036Restricted cash
    
    
    2,155
    
    
    
    2,155Short-term investments
    
    
    20,357
    
    
    
    12,282Accounts receivable
    
    
    2,798
    
    
    
    360Inventories
    
    
    2,203
    
    
    
    2,200Prepaid expenses and other current assets
    
    
    1,564
    
    
    
    1,756Total current assets
    
    
    57,558
    
    
    
    71,789Investments in marketable securities
    
    
    
    
    
    
    2,906Property and equipment, net
    
    
    15,444
    
    
    
    16,112Other assets
    
    
    830
    
    
    
    849Total assets
    
    $
    73,832
    
    
    $
    91,656LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,437
    
    
    $
    2,543Accrued payroll and employee benefits
    
    
    2,652
    
    
    
    2,604Accrued expenses
    
    
    882
    
    
    
    839Capital lease obligations  current portion
    
    
    4,226
    
    
    
    4,809Deferred revenue  current portion
    
    
    2,528
    
    
    
    2,672Total current liabilities
    
    
    14,725
    
    
    
    13,467Capital lease obligations, net of current portion
    
    
    7,457
    
    
    
    7,539Deferred revenue, net of current portion
    
    
    6,138
    
    
    
    4,957Other liabilities
    
    
    2,176
    
    
    
    2,292Total liabilities
    
    
    30,496
    
    
    
    28,255Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value; 100,000
authorized: no shares issued and outstanding:
    
    
    
    
    
    
    Common stock and additional paid-in capital,
$0.006 par value; 50,000,000
authorized: 22,117,124 shares issued
and outstanding as
of December 31, 2006 and 25,534,375 issued
and outstanding as of June 30, 2007
    
    
    185,849
    
    
    
    229,840Accumulated deficit
    
    
    (142,493
    )
    
    
    (166,400
    )Accumulated other comprehensive loss
    
    
    (20
    )
    
    
    (39
    )Total stockholders equity
    
    
    43,336
    
    
    
    63,401Total liabilities and stockholders equity
    
    $
    73,832
    
    
    $
    91,656
  3




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##### Table of Contents



NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2007
    
    
    2006
    
    
    2007(In thousands, except per share data)RevenueLicense and research fees
    
    $
    11,238
    
    
    $
    4,733
    
    
    $
    17,537
    
    
    $
    9,405Government grants
    
    
    
    
    
    
    102
    
    
    
    
    
    
    
    202Product revenue
    
    
    173
    
    
    
    25
    
    
    
    592
    
    
    
    245Total revenue
    
    
    11,411
    
    
    
    4,860
    
    
    
    18,129
    
    
    
    9,852Operating expenses:Cost of product revenue
    
    
    62
    
    
    
    9
    
    
    
    301
    
    
    
    68Research and development
    
    
    8,766
    
    
    
    12,764
    
    
    
    20,567
    
    
    
    25,638Sales and marketing
    
    
    435
    
    
    
    631
    
    
    
    830
    
    
    
    1,212General and administrative
    
    
    3,301
    
    
    
    4,484
    
    
    
    6,252
    
    
    
    8,188Total operating expenses
    
    
    12,564
    
    
    
    17,888
    
    
    
    27,950
    
    
    
    35,106Loss from operations
    
    
    (1,153
    )
    
    
    (13,028
    )
    
    
    (9,821
    )
    
    
    (25,254
    )Other income (expense):Interest income
    
    
    718
    
    
    
    948
    
    
    
    1,356
    
    
    
    1,905Interest and other expense
    
    
    (125
    )
    
    
    (287
    )
    
    
    (233
    )
    
    
    (558
    )Total other income
    
    
    593
    
    
    
    661
    
    
    
    1,123
    
    
    
    1,347Loss before cumulative effect of change in accounting
principle
    
    
    (560
    )
    
    
    (12,367
    )
    
    
    (8,698
    )
    
    
    (23,907
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    291
    
    
    
    Net loss
    
    $
    (560
    )
    
    $
    (12,367
    )
    
    $
    (8,407
    )
    
    $
    (23,907
    )Loss per common share  basic and diluted:Loss before cumulative effect of change in
accounting principle
    
    $
    (0.03
    )
    
    $
    (0.50
    )
    
    $
    (0.41
    )
    
    $
    (0.97
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    .01
    
    
    
    Net loss per common share  basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.50
    )
    
    $
    (0.40
    )
    
    $
    (0.97
    )Shares used in computing net loss per share  basic
and diluted
    
    
    21,238
    
    
    
    24,910
    
    
    
    20,965
    
    
    
    24,730
  4




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
 For the Six Months Ended June 30, 2007
 (Unaudited)
 AccumulatedCommon Stock and Additional
    
    
    
    
    
    
    Other
    
    
    TotalPaid-In Capital
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Deficit
    
    
    Loss
    
    
    Equity(In thousands, except share data)Balance December 31, 2006
    
    
    22,117,124
    
    
    $
    185,849
    
    
    $
    (142,493
    )
    
    $
    (20
    )
    
    $
    43,336Proceeds from the exercise of
options
    
    
    22,500
    
    
    
    168
    
    
    
    
    
    
    
    
    
    
    
    168Proceeds from the issuance of
common shares, net
    
    
    3,250,000
    
    
    
    40,923
    
    
    
    
    
    
    
    
    
    
    
    40,923Compensation related to
restricted stock
    
    
    144,751
    
    
    
    1,589
    
    
    
    
    
    
    
    
    
    
    
    1,589Compensation related to stock
options
    
    
    
    
    
    
    1,311
    
    
    
    
    
    
    
    
    
    
    
    1,311Net loss
    
    
    
    
    
    
    
    
    
    
    (23,907
    )
    
    
    
    
    
    
    (23,907
    )Unrealized loss on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    (19
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,926
    )Balance June 30, 2007
    
    
    25,534,375
    
    
    $
    229,840
    
    
    $
    (166,400
    )
    
    $
    (39
    )
    
    $
    63,401
  5




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six Months EndedJune 30,2006
    
    
    2007(In thousands)Operating activities:Net loss
    
    $
    (8,407
    )
    
    $
    (23,907
    )Adjustments to reconcile net loss to net cash used in operating activities:Non-cash compensation related to stock options
    
    
    1,366
    
    
    
    1,311Non-cash compensation related to restricted stock
    
    
    1,206
    
    
    
    1,589Depreciation and amortization
    
    
    1,210
    
    
    
    2,097Loss on retirement of property and equipment
    
    
    3
    
    
    
    4Cumulative effect of change in accounting principle
    
    
    (291
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (1,100
    )
    
    
    2,438Inventories
    
    
    (11
    )
    
    
    3Prepaid expenses and other assets
    
    
    79
    
    
    
    (211
    )Accounts payable
    
    
    544
    
    
    
    (1,894
    )Deferred revenue
    
    
    4,238
    
    
    
    (1,037
    )Accrued expenses and other liabilities
    
    
    278
    
    
    
    25Net cash used in operating activities
    
    
    (885
    )
    
    
    (19,582
    )Investing activities:Change in restricted cash
    
    
    (500
    )
    
    
    Purchases of property and equipment
    
    
    (5,011
    )
    
    
    (2,769
    )Purchases of investments
    
    
    (37,443
    )
    
    
    (29,186
    )Sales and maturities of investments
    
    
    34,650
    
    
    
    34,336Net cash provided by (used in) investing activities
    
    
    (8,304
    )
    
    
    2,381Financing activities:Borrowings under capital lease obligations
    
    
    2,355
    
    
    
    2,969Payments on capital lease obligations
    
    
    (1,445
    )
    
    
    (2,304
    )Proceeds from exercise of stock options
    
    
    2,874
    
    
    
    168Proceeds from exercise of warrants
    
    
    5,510
    
    
    
    Proceeds from the issuance of common shares, net
    
    
    
    
    
    
    40,923Net cash provided by financing activities
    
    
    9,294
    
    
    
    41,756Net increase in cash and cash equivalents
    
    
    105
    
    
    
    24,555Cash and cash equivalents  beginning of period
    
    
    26,769
    
    
    
    28,481Cash and cash equivalents  end of period
    
    $
    26,874
    
    
    $
    53,036Supplemental disclosure:Cash paid for interest
    
    $
    244
    
    
    $
    554
  6




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




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Note 2  Inventories
  Note 3  Concentration of Credit Risk and Significant Customers
   Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2007
    
    2006
    
    2007Procter & Gamble Pharmaceuticals, Inc. (P&G)
    
    
    95
    %
    
    
    31
    %
    
    
    71
    %
    
    
    51
    %QOL Medical, LLC (QOL)
    
    
    2
    %
    
    
    43
    %
    
    
    4
    %
    
    
    25
    %Novo Nordisk A/S (Novo Nordisk)
    
    
    1
    %
    
    
    21
    %
    
    
    1
    %
    
    
    20
    %Merck & Co., Inc. (Merck)
    
    
    0
    %
    
    
    0
    %
    
    
    21
    %
    
    
    0
    %Total
    
    
    98
    %
    
    
    95
    %
    
    
    97
    %
    
    
    96
    %
  Note 4  Net Loss Per Common Share
  As of June 30,2006
    
    2007Stock options outstanding under our various stock option plans
    
    
    2,559
    
    
    
    2,527Unvested restricted stock
    
    
    493
    
    
    
    634Warrants
    
    
    709
    
    
    
    661Total
    
    
    3,761
    
    
    
    3,822
 Note 5  Stockholders equity and comprehensive loss
 Common Stock Offerings
 8




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Comprehensive Loss
 Stockholder Rights Plan
  Note 6  Stock-based compensation
   Three Months ended June 30,
    
    
    Six Months ended June 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Stock-based compensation:Research and development
    
    $
    499
    
    
    $
    601
    
    
    $
    978
    
    
    $
    1,326Sales and marketing
    
    
    75
    
    
    
    121
    
    
    
    120
    
    
    
    238General and administrative
    
    
    798
    
    
    
    622
    
    
    
    1,474
    
    
    
    1,336Total stock-based compensation
    
    $
    1,372
    
    
    $
    1,344
    
    
    $
    2,572
    
    
    $
    2,900
 Restricted Stock Awards
 9




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##### Table of Contents



Unvested restricted shares outstanding, January 1, 2007
    
    
    544Restricted shares issued
    
    
    158Restricted shares forfeited
    
    
    (8
    )Restricted shares vested
    
    
    (60
    )Unvested restricted shares outstanding, June 30, 2007
    
    
    634Weighted average grant date fair value per share
    
    $
    13.73
   Stock Options
 WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life
    
    
    Value(in thousands)
    
    
    
    
    
    
    
    
    
    
    (in thousands)Outstanding December 31, 2006
    
    
    2,412
    
    
    $
    13.18Options granted
    
    
    164
    
    
    
    12.44Options exercised
    
    
    (22
    )
    
    
    10.10Options expired
    
    
    (27
    )
    
    
    13.62Outstanding at June 30, 2007
    
    
    2,527
    
    
    $
    13.15
    
    
    5.9 years
    
    $
    920Exercisable at June 30, 2007
    
    
    1,866
    
    
    $
    12.81
    
    
    4.9 years
    
    $
    909
  Three months ended June 30,
    
    Six months ended June 30,2006
    
    2007
    
    2006
    
    2007Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk free interest rate
    
    
    5.0
    %
    
    
    4.7
    %
    
    
    4.8
    %
    
    
    4.7
    %Expected stock volatility
    
    
    68
    %
    
    
    62
    %
    
    
    70
    %
    
    
    64
    %Expected option life
    
    5.5 years
    

    
    5.5 years
    
    
    5.7 years
    
    
    5.8 yearsWeighted average fair value granted
    
    $
    8.42
    
    
    $
    6.83
    
    
    $
    9.05
    
    
    $
    7.65
   10




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Three months ended June 30,
    
    Six months ended June 30,2006
    
    2007
    
    2006
    
    2007Intrinsic value of options exercised
    
    $
    271
    
    
    $
    19
    
    
    $
    1,301
    
    
    $
    76Fair value of options that vested
    
    
    836
    
    
    
    921
    
    
    
    1,879
    
    
    
    1,192Fair value of options that were forfeited
    
    
    
    
    
    
    
    
    
    
    101
    
    
    
    Fair value of options that expired
    
    
    
    
    
    
    270
    
    
    
    
    
    
    
    270
   Employee Stock Purchase Plan
 Warrants
 Note 7  Contractual Agreements
 Procter & Gamble Pharmaceuticals, Inc.
   11




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##### Table of Contents



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




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##### Table of Contents



®
 ®
 Questcor Pharmaceuticals, Inc. (Questcor)/QOL ® ® ® ® ®
 ®
 ® ®
  13




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##### Table of Contents



Alnylam Pharmaceuticals, Inc. (Alnylam)  
 Merck Partnership/Continuation of PYY(3-36) Development
  Government Grants
 Thiakis Limited (Thiakis)
 Cytyc Corporation (Cytyc) 
 City of Hope
 14




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##### Table of Contents



Feasibility Agreements
 Note 8  Commitments and Contingencies
 Leases
  Contingencies
 
 ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
 Statements contained herein that are not historical fact may be forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that are subject to a variety of risks and
uncertainties. There are a number of important factors that could cause actual results to differ
materially from those projected or suggested in any forward-looking statement made by us. These
factors include, but are not limited to: (i) our ability to obtain additional funding; (ii) our
ability to attract and/or maintain manufacturing, research, development and commercialization
partners; (iii) our and/or a partners ability to successfully complete product research and
development, including pre-clinical and clinical studies and commercialization; (iv) our and/or a
partners ability to obtain required governmental approvals, including product and patent
approvals; and (v) our and/or a partners ability to develop and commercialize products that can
compete favorably with those of competitors. In addition, significant fluctuations in quarterly
results may occur as a result of the timing of milestone payments, the recognition of revenue from
milestone payments and other sources not related to product sales to third parties, and the timing
of costs and expenses related to our research and development programs. Additional factors that
would cause actual results to differ materially from those projected or suggested in any
forward-looking statements are contained in our filings with the Securities and Exchange
Commission, including those factors discussed under the captions Forward-Looking Information and
Risk Factors in our most recent Annual Report on Form 10-K , as may be supplemented or amended by
our Quarterly Reports on Form 10-Q , which we urge investors to consider. We undertake no obligation
to publicly release revisions in such forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrences of unanticipated events or
circumstances, except as otherwise required by securities and other applicable laws.
  15




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##### Table of Contents




    
    Applying Our Tight Junction Technology and Other Drug Delivery Methods to Product
Candidates.We focus our research and development efforts on product candidates, including
peptides, large and small molecules and therapeutic siRNA, where our proprietary
technologies may offer clinical advantages, such as improved safety and clinical efficacy,
or increased patient compliance. We also will continue to search for applications of our
tight junction technology to improve other forms of drug delivery, including oral,
pulmonary and intravenous delivery.
    
    Collaborations with Pharmaceutical and Biotechnology Companies.We will continue to
establish strategic collaborations with pharmaceutical and biotechnology companies.
Typically, we collaborate with partners to commercialize our product candidates by
utilizing their late stage clinical development, regulatory, marketing and sales
capabilities. We also assist our collaboration partners in developing more effective drug
delivery methods for their product candidates that have already completed early stage
clinical trials, or are even currently marketed. We generally structure our collaborative
arrangements to receive research and development funding and milestone payments during the
development phase, revenue from manufacturing upon commercialization and patent-based
royalties on future sales of products.
    
    Developing and Commercializing Our Own Product Candidates.In select cases where we
believe it to be strategically advantageous to us, we plan to internally develop,
manufacture and commercialize our products.
    
    Leveraging Our Manufacturing Expertise and Capabilities.We have invested substantial
time, money and intellectual capital in developing our manufacturing facilities and
know-how, which we believe would be difficult for our competitors to replicate in the near
term. These capabilities give us competitive advantages, including the ability to prepare
the chemistry, manufacturing and controls (CMC) section of new drug application (NDA)
filings with the U.S. Food and Drug Administration (FDA) and to maintain a high-level of
quality control in manufacturing product candidates for clinical trials and FDA-approved
products for commercialization. We believe our manufacturing capabilities will meet our
projected capacity needs for the foreseeable future.
  16




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##### Table of Contents



Procter & Gamble Partnership
 ® ®
    Par Pharmaceutical Partnership
   17




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##### Table of Contents



®
 Merck Partnership/Continuation of PYY(3-36) Development
   Amylin Pharmaceuticals, Inc.
   18




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##### Table of Contents



RNAi Technology and Intellectual Property Acquisitions
  Alnylam.
 Galenea.
   19




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##### Table of Contents



City of Hope.
 MD-RNA, Inc.
 Independent Product Development
  Insulin.
 ® ®
   Carbetocin.
  20




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##### Table of Contents



Other Collaborations
 Questcor Pharmaceuticals, Inc./QOL Medical LLC. ® ® ®
 ® ® ®
 ® ®
 Novo Nordisk A/S feasibility agreement.
 Cytyc Corporation.
 Cash Position and Recent Financings
   21




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##### Table of Contents



Critical Accounting Policies and Estimates
  Revenue Recognition
    22




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##### Table of Contents



Research and Development Costs
  23




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##### Table of Contents



Stock-Based Compensation
   Current estimate ofEffect of a one year change in estimated expected term:
    
    - one year
    
    expected term
    
    + one yearEstimated option life
    
    4.5
    years
    
    5.5
    years
    
    6.5
    yearsEstimated fair value
    
    $
    5.92
    
    
    $
    6.45
    
    
    $
    6.92
 Current estimate ofEffect of a 10% change in estimated volatility:
    
    - 10%
    
    volatility
    
    + 10%Volatility
    
    
    54
    %
    
    
    62
    %
    
    
    74
    %Estimated fair value
    
    $
    5.75
    
    
    $
    6.45
    
    
    $
    7.10
  24




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##### Table of Contents



Income Taxes
  Recently Issued Accounting Standards
   Consolidated Results of Operations
 Comparison of Quarterly and Year To Date Results of Operations
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    Change
    
    
    June 30,
    
    
    Change2006
    
    
    2007
    
    
    $
    
    
    %
    
    
    2006
    
    
    2007
    
    
    $
    
    
    %RevenueLicense and research fees
    
    $
    11,238
    
    
    $
    4,733
    
    
    $
    (6,505
    )
    
    
    (58
    )%
    
    $
    17,537
    
    
    $
    9,405
    
    
    $
    (8,132
    )
    
    
    (46
    )%Government grants
    
    
    
    
    
    
    102
    
    
    
    102
    
    
    
    
    
    
    
    
    
    
    
    202
    
    
    
    202Product revenue
    
    
    173
    
    
    
    25
    
    
    
    (148
    )
    
    
    (86
    )%
    
    
    592
    
    
    
    245
    
    
    
    (347
    )
    
    
    (59
    )%Total revenue
    
    
    11,411
    
    
    
    4,860
    
    
    
    (6,551
    )
    
    
    (57
    )%
    
    
    18,129
    
    
    
    9,852
    
    
    
    (8,277
    )
    
    
    (46
    )%
 25




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##### Table of Contents



Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    Change
    
    
    June 30,
    
    
    Change2006
    
    
    2007
    
    
    $
    
    
    %
    
    
    2006
    
    
    2007
    
    
    $
    
    
    %Operating expensesCost of product revenue
    
    
    62
    
    
    
    9
    
    
    
    (53
    )
    
    
    (85
    )%
    
    
    301
    
    
    
    68
    
    
    
    (233
    )
    
    
    (77
    )%Research and development
    
    
    8,766
    
    
    
    12,764
    
    
    
    3,998
    
    
    
    46
    %
    
    
    20,567
    
    
    
    25,638
    
    
    
    5,071
    
    
    
    25
    %Sales and marketing
    
    
    435
    
    
    
    631
    
    
    
    196
    
    
    
    45
    %
    
    
    830
    
    
    
    1,212
    
    
    
    382
    
    
    
    46
    %General and administrative
    
    
    3,301
    
    
    
    4,484
    
    
    
    1,183
    
    
    
    36
    %
    
    
    6,252
    
    
    
    8,188
    
    
    
    1,936
    
    
    
    31
    %Total operating expenses
    
    
    12,564
    
    
    
    17,888
    
    
    
    5,324
    
    
    
    42
    %
    
    
    27,950
    
    
    
    35,106
    
    
    
    7,156
    
    
    
    26
    %Interest income
    
    
    718
    
    
    
    948
    
    
    
    230
    
    
    
    32
    %
    
    
    1,356
    
    
    
    1,905
    
    
    
    549
    
    
    
    40
    %Interest and other expense
    
    
    (125
    )
    
    
    (287
    )
    
    
    (162
    )
    
    
    130
    %
    
    
    (233
    )
    
    
    (558
    )
    
    
    (325
    )
    
    
    139
    %Loss before cumulative
effect of change in
accounting principle
    
    
    (560
    )
    
    
    (12,367
    )
    
    
    (11,807
    )
    
    
    
    
    
    
    (8,698
    )
    
    
    (23,907
    )
    
    
    (15,209
    )Cumulative effect of
change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    291
    
    
    
    
    
    
    
    (291
    )Net loss
    
    $
    (560
    )
    
    $
    (12,367
    )
    
    $
    (11,807
    )
    
    
    
    
    
    $
    (8,407
    )
    
    $
    (23,907
    )
    
    $
    (15,500
    )
 Comparison of the Three and Six Months Ended June 30, 2006 to the Three and Six Months Ended June
30, 2007
 Revenue.
 Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2007
    
    2006
    
    2007P&G
    
    
    95
    %
    
    
    31
    %
    
    
    71
    %
    
    
    51
    %QOL
    
    
    2
    %
    
    
    43
    %
    
    
    4
    %
    
    
    25
    %Novo Nordisk
    
    
    1
    %
    
    
    21
    %
    
    
    1
    %
    
    
    20
    %Merck
    
    
    0
    %
    
    
    0
    %
    
    
    21
    %
    
    
    0
    %Total
    
    
    98
    %
    
    
    95
    %
    
    
    97
    %
    
    
    96
    %
 License and research fees revenue.
 ®
 Government grants revenue.
 Product Revenue. ® ®
 26




---



##### Table of Contents



Cost of product revenue. ® ® ®
 Research and Development.
 
    
    Personnel-related expenses increased by 34% both periods to $5.5 million and $10.7
million in the three and six months ended June 30, 2007 compared to $4.1 million and $8.0
million in the three and six month periods ended June 30, 2006 due to an increase in
headcount in support of our R&D programs.
    
    Costs of clinical trials, consulting, outside services and laboratory supplies
increased by 82% and 105% to approximately $4.0 million and $8.0 million in the three and
six months ended June 30, 2007 compared to approximately $2.2 million and $3.9 million in
the three and six months ended June 30, 2006 due primarily to our increased efforts related
to pre-clinical and clinical programs for PTH(1-34), PYY(3-36), carbetocin, insulin and
RNAi.
    
    Facilities and equipment costs increased by 47% and 58% to $2.5 million and $4.9
million in the three and six months ended June 30, 2007 compared to $1.7 million and $3.1
million in the three and six months ended June 30, 2006 due to rent and related expenses on
additional space leased at the Bothell facility and an increase in depreciation of
equipment resulting from capital expenditures to acquire needed technical capabilities and
to support increased capacity. Depreciation expense included in R&D in the three and six
months ended June 30, 2007 was $0.8 million and $1.5 million, compared with $0.5 million
and $1.0 million in the three and six months ended June 30, 2006.
    
    Non-cash stock-based compensation included in R&D expense increased to $0.6 million and
$1.3 million in the three and six months ended June 30, 2007 from approximately $0.5
million and $1.0 million in the three and six months ended June 30, 2006.
    
    In November 2006, we acquired a license from the Beckman Research Institute/City of
Hope for exclusive and non-exclusive licenses to the Dicer-substrate RNAi IP developed
there. We obtained exclusive rights to five undisclosed targets selected by us, as well as
broad non-exclusive rights to Dicer-substrates directed against all mammalian targets
subject to certain City of Hope limitations that will have no impact on our programs. We
intend to further develop this IP and technology, which should cause a related increase in
R&D expenses.
  27




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2007
    
    2006(2)
    
    2007RNAi and TNF-a
    
    
    20
    %
    
    
    15
    %
    
    
    24
    %
    
    
    15
    %Influenza
    
    
    12
    %
    
    
    9
    %
    
    
    8
    %
    
    
    8
    %Subtotal
    
    
    32
    %
    
    
    24
    %
    
    
    32
    %
    
    
    23
    %PTH(1-34)
    
    
    27
    %
    
    
    6
    %
    
    
    28
    %
    
    
    19
    %PYY(3-36)
    
    
    3
    %
    
    
    26
    %
    
    
    4
    %
    
    
    17
    %Insulin
    
    
    15
    %
    
    
    10
    %
    
    
    11
    %
    
    
    10
    %Carbetocin
    
    
    1
    %
    
    
    7
    %
    
    
    1
    %
    
    
    6
    %Calcitonin
    
    
    4
    %
    
    
    4
    %
    
    
    7
    %
    
    
    4
    %Other research and development projects(1)
    
    
    18
    %
    
    
    23
    %
    
    
    17
    %
    
    
    21
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Other research and development projects include our tight junction projects, excipient
projects, feasibility projects and other projects.(2)
    
    Excludes purchased IPR&D in the field of RNAi related to influenza from Galenea of
approximately $4.1 million in 2006. We believe that presenting R&D expense by project as a
percentage of total R&D project expense without the Galenea transaction allows for better
comparability between periods given the significance of the amount relative to total R&D
project expense.  
    
    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.
 ® ®
 28




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##### Table of Contents



Sales and marketing.
 General and administrative.
 
    
    Costs of legal and accounting fees, consulting, corporate insurance and other
administrative costs increased by 64% and 41% to approximately $2.3 million and $3.8
million in the three and six months ended June 30, 2007 compared to approximately $1.4
million and $2.7 million in the three and six months ended June 30, 2006, due primarily to
increased legal fees in support of our IP patent estate.
    
    Personnel-related expenses increased by 44% in both periods to $1.3 million and $2.6
million in the three and six months ended June 30, 2007 compared to $0.9 million and $1.8
million in the three and six months ended June 30, 2006 due primarily to increased
headcount related to administrative activities in support of our R&D efforts.
    
    Non-cash stock-based compensation included in general and administrative expense
decreased from approximately $0.8 million and $1.5 million in the three and six months
ended June 30, 2006 to $0.6 million and $1.3 million in the three and six months ended June
30, 2007, due to longer average vesting periods in effect during the 2007 periods.
  Interest Income.
 Interest and Other Expense.
 Liquidity and Capital Resources
 Cash Requirements
 29




---



##### Table of Contents



Sources and Uses of Cash
    
    
    Under our collaborative arrangement with P&G, we received an initial cash payment of
$10.0 million in February 2006, which has been recorded as deferred revenue and is being
amortized into revenue over the estimated development period. A $7.0 million milestone
payment received from P&G in second quarter 2006 was recognized in full as revenue in that
period.
    
    Under our collaborative arrangement with Merck for PYY(3-36), we received an initial
cash payment of $5.0 million in October 2004. The $5.0 million initial payment was being
amortized over the estimated development period until the collaboration was terminated in
March 2006, at which time the unamortized balance of the license payment of approximately
$3.7 million was recognized as revenue and we reacquired our rights in the PYY program.
    
    Under our supply agreement with Questcor, in February 2005 we received and recognized a
payment of $2.0 million from Questcor upon FDA approval of an NDA for our
Nascobal® nasal spray product. In October 2005, with our consent, Questcor
assigned all of its rights and obligations under the Questcor Agreements dated June 2003 to
QOL. In consideration for our consent to this assignment and in connection with our
entering into an agreement with QOL that modified certain terms of the Questcor Agreements,
we received $2.0 million from Questcor in October 2005, that is being recognized ratably
over the five-year life of the QOL agreement. QOL also assumed Questcors obligation to pay
us an additional $2.0 million contingent upon issuance of a U.S. patent for the
Nascobal® nasal spray product. This payment became due and was received and
recognized as revenue in June 2007.
   30




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##### Table of Contents



Liquidity
   Contractual Obligations
  
    
    Our purchase obligations decreased by approximately $1.7 million from approximately
$3.6 million at December 31, 2006 to approximately $1.9 million at June 30, 2007 due to the
timing of purchase order activity (primarily for PTH(1-34)) .
  Off-Balance Sheet Arrangements
  
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  31




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##### Table of Contents



ITEM 4  CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
 Internal Control Over Financial Reporting.
 
 PART II  OTHER INFORMATION
 
 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1)
    
    The election of the following ten (10) directors, each to hold office for a term of one
(1) year or until their respective successors have been duly elected or appointed:
 Nominee
    
    Votes FOR
    Votes WITHHELDDr. Steven C. Quay
    
    
    21,482,091
    
    
    
    1,119,502Susan B. Bayh
    
    
    21,464,012
    
    
    
    1,137,581Dr. Alexander D. Cross
    
    
    19,250,795
    
    
    
    3,350,798Dr. Ian R. Ferrier
    
    
    19,090,438
    
    
    
    3,511,155Myron Z. Holubiak
    
    
    21,477,790
    
    
    
    1,123,803Leslie D. Michelson
    
    
    19,253,252
    
    
    
    3,348,341John V. Pollock
    
    
    19,085,382
    
    
    
    3,516,211Gerald T. Stanewick
    
    
    21,465,096
    
    
    
    1,136,497Bruce R. Thaw
    
    
    19,247,895
    
    
    
    3,353,698Devin N. Wenig
    
    
    18,405,808
    
    
    
    4,195,785
 2)
    
    The appointment of KPMG LLP as our independent registered public accountants for the
year ending December 31, 2007:
 Votes FOR
    
    Votes AGAINST
    
    Votes ABSTAINED
    
    Broker NON-VOTES22,436,918
    
    134,079
    
    30,596
    
    0
 3)
    
    The approval of our 2007 Employee Stock Purchase Plan:
 Votes FOR
    
    Votes AGAINST
    
    Votes ABSTAINED
    
    Broker NON-VOTES12,107,193
    
    603,486
    
    58,638
    
    9,832,276
 
 ITEM 6  EXHIBITS
  32




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##### Table of Contents



SIGNATURES
  NASTECH PHARMACEUTICAL COMPANY INC.By:
    
    /s/ Steven C. QuaySteven C. Quay, M.D., Ph.D.Chairman of the Board, President and Chief Executive OfficerBy:
    
    /s/ Philip C. RankerPhilip C. RankerChief Financial Officer
 
 33




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description2.1
    
    Agreement and Plan of Reorganization, dated August 8, 2000,
among the Company, Atossa Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of the Company, and
Atossa HealthCare, Inc. (filed as Exhibit 2.1 to our Current
Report on Form 8-K dated August 8, 2000, and incorporated
herein by reference).2.2
    
    Asset Purchase Agreement, dated September 30, 2002, with
Schwarz Pharma, Inc. (filed as Exhibit 2.1 to our Current
Report on Form 8-K dated September 30, 2002 and incorporated
herein by reference).3.1
    
    Restated Certificate of Incorporation of the Company dated
July 20, 2005 (filed as Exhibit 3.1 to our Current Report on
Form 8-K dated July 20, 2005, and incorporated herein by
reference).3.2
    
    Amended and Restated Bylaws of the Company dated August 11,
2004 (filed as Exhibit 3.10 to our Registration Statement on
Form S-3, File No. 333-119429, and incorporated herein by
reference).4.1
    
    Investment Agreement, dated as of February 1, 2002, by and
between the Company and Pharmacia & Upjohn Company (filed as
Exhibit 4.1 to the Company Current Report on Form 8-K dated
February 1, 2002 and incorporated herein by reference).4.2
    
    Rights Agreement, dated February 22, 2000, between the
Company and American Stock Transfer & Trust Company as Rights
Agent (filed as Exhibit 1 to our Current Report on Form 8-K
dated February 22, 2000 and incorporated herein by
reference).4.3
    
    Amendment No. 1 to Rights Agreement dated as of January 17,
2007 by and between the Company and American Stock Transfer &
Trust Company (filed as Exhibit 4.1 to our Current Report on
Form 8-K dated January 19, 2007 and incorporated herein by
reference).4.4
    
    Securities Purchase Agreement dated as of June 25, 2004
(filed as Exhibit 99.2 to our Current Report on Form 8-K
dated June 25, 2004 and incorporated herein by reference).4.5
    
    Form of Warrant (filed as Exhibit 99.3 to our Current Report
on Form 8-K dated June 25, 2004 and incorporated herein by
reference).4.6
    
    Certificate of Designation, Rights and Preferences of Series
A Junior Participating Preferred Stock dated January 17, 2007
(filed as Exhibit 3.1 to our Current Report on Form 8-K dated
January 19, 2007 and incorporated herein by reference).10.1
    
    Lease Agreement for facilities at 45 Davids Drive, Hauppauge,
NY, effective as of July 1, 2005 (filed as Exhibit 10.30 to
our Quarterly Report on Form 10-Q for the quarter ended March
31, 2005 and incorporated herein by reference).10.2
    
    Lease Agreement, dated April 23, 2002, with Phase 3 Science
Center LLC, Ahwatukee Hills Investors LLC and J. Alexanders
LLC (filed as Exhibit 10.26 to our Quarterly Report on Form
10-Q for the Quarter Ended March 31, 2002 and incorporated
herein by reference).10.3
    
    First Amendment, dated June 17, 2003, to Lease Agreement
dated April 23, 2002, with Phase 3 Science Center LLC,
Ahwatukee Hills Investors LLC and J. Alexanders LLC (filed
as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the
Quarter ended June 30, 2003 and incorporated herein by
reference).10.4
    
    Second Amendment, dated February 4, 2004, to Lease Agreement
dated April 23, 2002, with Phase 3 Science Center LLC,
Ahwatukee Hills Investors LLC and J. Alexanders LLC (filed
as Exhibit 10.24 to our Annual Report on Form 10-K for the
year ended December 31, 2003 and incorporated herein by
reference).10.5
    
    Lease Agreement for facilities at 80 Davids Drive, Hauppauge,
NY, effective as of July 1, 2005 (filed as Exhibit 10.5 to
our Quarterly Report on Form 10-Q for the Quarter Ended June
30, 2005 and incorporated herein by reference).10.6
    
    Lease Agreement for facilities at 3830 Monte Villa Parkway,
Bothell, WA, with Ditty Properties Limited Partnership,
effective as of March 1, 2006 (filed as Exhibit 10.1 to
Amendment No. 1 to our Current Report on Form 8-K/A dated
March 1, 2006 and filed on July 26, 2006 and incorporated
herein by reference).(1)
 34




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##### Table of Contents



ExhibitNo.
    
    Description10.7
    
    First Amendment, dated July 17, 2006, to Lease Agreement
dated March 1, 2006 with Ditty Properties Limited Partnership
for facilities at 3830 Monte Villa Parkway, Bothell, WA
(filed as Exhibit 10.7 to our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2006 and incorporated herein
by reference).10.8
    
    Amended and Restated Employment Agreement, dated May 2, 2002,
with Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.27 to
our Quarterly Report on Form 10-Q for the Quarter Ended March
31, 2002 and incorporated herein by reference).10.9
    
    Employment Agreement dated June 3, 2005 by and between
Nastech Pharmaceutical Company Inc. and Steven C. Quay, M.D.,
Ph.D. (filed as Exhibit 10.1 to our Current Report on Form
8-K dated June 3, 2005 and incorporated herein by reference).10.10
    
    Amended and Restated Employment Agreement dated December 16,
2005 by and between Nastech Pharmaceutical Company Inc. and
Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.1 to our
Current Report on Form 8-K dated December 16, 2005 and
incorporated herein by reference).10.11
    
    Employment Agreement effective as of January 1, 2006 by and
between Nastech Pharmaceutical Company Inc. and Philip C.
Ranker (filed as Exhibit 10.1 to our Current Report on Form
8-K dated January 1, 2006 and incorporated herein by
reference).10.12
    
    Employment Agreement effective as of August 17, 2006 by and
between Nastech Pharmaceutical Company Inc. and Gordon C.
Brandt, M.D. (filed as Exhibit 10.1 to our Current Report on
Form 8-K dated August 17, 2006 and incorporated herein by
reference).10.13
    
    Employment Agreement effective as of September 15, 2006 by
and between Nastech Pharmaceutical Company Inc. and Timothy
M. Duffy (filed as Exhibit 10.1 to our Current Report on Form
8-K dated September 15, 2006 and incorporated herein by
reference).10.14
    
    Termination and Mutual Release Agreement, dated September 30,
2002, with Schwarz Pharma, Inc. (Filed as Exhibit 10.3 to our
Current Report on Form 8-K dated September 30, 2002 and
incorporated herein by reference).10.15
    
    Divestiture Agreement, dated January 24, 2003, with Pharmacia
& Upjohn Company (filed as Exhibit 10.1 to our Current Report
on Form 8-K dated January 24, 2003 and incorporated herein by
reference).10.16
    
    Nastech Pharmaceutical Company Inc. 1990 Stock Option Plan
(filed as Exhibit 4.2 to our Registration Statement on Form
S-8, File No. 333-28785, and incorporated herein by
reference).10.17
    
    Amended and Restated Nastech Pharmaceutical Company Inc. 2000
Nonqualified Stock Option Plan (filed as Exhibit 4.4 to our
Registration Statement on Form S-8, File No. 333-49514, and
incorporated herein by reference).10.18
    
    Amendment No. 1 to the Amended and Restated Nastech
Pharmaceutical Company Inc. 2000 Nonqualified Stock Option
Plan. (Filed as Exhibit 10.18 to our Annual Report on Form
10-K for the year ended December 31, 2005 and incorporated
herein by reference).10.19
    
    Amendment No. 2 to the Amended and Restated Nastech
Pharmaceutical Company Inc. 2000 Nonqualified Stock Option
Plan. (Filed as Exhibit 10.19 to our Annual Report on Form
10-K for the year ended December 31, 2006 and incorporated
herein by reference).10.20
    
    Nastech Pharmaceutical Company Inc. 2002 Stock Option Plan
(filed as Exhibit 10.28 to our Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2002 and incorporated herein
by reference).10.21
    
    Amendment No. 1 to the Nastech Pharmaceutical Company Inc.
2002 Stock Option Plan. (filed as Exhibit 10.20 to our Annual
Report on Form 10-K for the year ended December 31, 2005 and
incorporated herein by reference).10.22
    
    Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan
(filed as Exhibit 99 to our Registration Statement on Form
S-8, File No. 333-118206, and incorporated herein by
reference).10.23
    
    Amendment No. 1 to Nastech Pharmaceutical Company Inc. 2004
Stock Incentive Plan (filed as Exhibit 10.4 to our Current
Report on Form 8-K dated July 20, 2005 and incorporated
herein by reference).
 35




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##### Table of Contents



ExhibitNo.
    
    Description10.24
    
    Amendment No. 2 to Nastech Pharmaceutical Company Inc. 2004
Stock Incentive Plan (filed as Exhibit 10.18 to our Quarterly
Report on Form 10-Q for the Quarter Ended September 30, 2005
and incorporated herein by reference).10.25
    
    Amendment No. 3 to Nastech Pharmaceutical Company Inc. 2004
Stock Incentive Plan. (filed as Exhibit 10.24 to our Annual
Report on Form 10-K for the year ended December 31, 2005 and
incorporated herein by reference).10.26
    
    Amendment No. 4 to Nastech Pharmaceutical Company Inc. 2004
Stock Incentive Plan. (filed as Exhibit 10.5 to our
Registration Statement on Form S-8, File No. 333-135724, and
incorporated herein by reference).10.27
    
    Amendment No. 5 to Nastech Pharmaceutical Company Inc. 2004
Stock Incentive Plan. (Filed as Exhibit 10.27 to our Annual
Report on Form 10-K for the year ended December 31, 2006 and
incorporated herein by reference).10.28
    
    Asset Purchase Agreement dated June 16, 2003, by and between
the Company and Questcor Pharmaceuticals, Inc. (filed as
Exhibit 2.1 to our Current Report on Form 8-K dated June 17,
2003 and incorporated herein by reference).10.29
    
    Form of Purchase Agreement (filed as Exhibit 99.2 to our
Current Report on Form 8-K dated September 4, 2003 and
incorporated herein by reference).10.30
    
    Form of Warrant (filed as Exhibit 99.3 to our Current Report
on Form 8-K dated September 4, 2003, and incorporated herein
by reference).10.31
    
    Exclusive Development, Commercialization and License
Agreement by and between Merck & Co., Inc. and the Company
effective as of September 24, 2004 (filed as Exhibit 10.1 to
our Current Report on Form 8-K dated September 24, 2004 and
incorporated herein by reference).(1)10.32
    
    Supply Agreement by and between the Company and Merck & Co.,
Inc. effective as of September 24, 2004 (filed as Exhibit
10.2 to our Current Report on Form 8-K dated September 24,
2004 and incorporated herein by reference).(1)10.33
    
    License and Supply Agreement by and between Par
Pharmaceutical, Inc. and Nastech Pharmaceutical Company Inc.
effective as of October 22, 2004 (filed as Exhibit 10.1 to
our Current Report on Form 8-K dated October 22, 2004 and
incorporated herein by reference).(1)10.34
    
    Agreement dated as of September 23, 2005 by and between
Nastech Pharmaceutical Company Inc. and QOL Medical, LLC.
(filed as Exhibit 10.1 to Amendment No. 1 to our Current
Report on Form 8-K/A dated October 17, 2005 and filed on July
26, 2006 and incorporated herein by reference).(1)10.35
    
    Product Development and License Agreement by and between
Nastech Pharmaceutical Company Inc. and Procter & Gamble
Pharmaceuticals, Inc. dated January 27, 2006 (filed as
Exhibit 10.1 to our Current Report on Form 8-K dated January
27, 2006 and incorporated herein by reference).(1)10.36
    
    First Amendment dated as of December 4, 2006 to Product
Development and License Agreement by and between Nastech and
Procter & Gamble Pharmaceuticals, Inc (filed as Exhibit 10.46
to our Annual Report on Form 10-K dated March 7, 2007 and
incorporated herein by reference).(1)10.37
    
    Supply Agreement by and between the Company and Procter &
Gamble Pharmaceuticals, Inc. dated June 2, 2006 (filed as
Exhibit 10.1 to our Current Report on Form 8-K dated June 2,
2006 and incorporated herein by reference).(1)10.38
    
    Development and License Agreement by and between Nastech
Pharmaceutical Company Inc. and Amylin Pharmaceuticals, Inc.
dated June 23, 2006.(1) (filed as exhibit 10.66 to our
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006 and incorporated herein by reference).10.39
    
    Employment Agreement effective as of November 1, 2006 by and
between the Company and Paul H. Johnson, Ph.D. (filed as
Exhibit 10.1 to our Current Report on Form 8-K dated November
1, 2006 and incorporated herein by reference).10.40
    
    Form of Restricted Stock Grant Agreement (filed as Exhibit
10.1 to our Current Report on Form 8-K, dated February 6,
2007 and incorporated herein by reference).
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##### Table of Contents



ExhibitNo.
    
    Description10.41
    
    Form of Stock Option Agreement (filed as Exhibit 10.2 to our
Current Report on Form 8-K, dated February 6, 2007 and
incorporated herein by reference).10.42
    
    Form of Omnibus Amendment to Certain Grant Agreements, dated
May 4, 2007 (filed as Exhibit 10.42 to our Quarterly Report
on Form 10-Q for the quarter ended March 31, 2007 and
incorporated herein by reference).31.1
    
    Certification of our Chairman of the Board, President and
Chief Executive Officer pursuant to Rules 13a14 and 15d-14
under the Securities Exchange Act of 1934, as amended.(2)31.2
    
    Certification of our Chief Financial Officer pursuant to
Rules 13a14 and 15d-14 under the Securities Exchange Act of
1934, as amended.(2)32.1
    
    Certification of our Chairman of the Board, President and
Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.(2)32.2
    
    Certification of our Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.(2)
 
 (1)
    
    Portions of this exhibit have been omitted pursuant to a request for confidential treatment
under Rule 24b-2 of the Securities Exchange Act of 1934, amended, and the omitted material has
been separately filed with the Securities and Exchange Commission.(2)
    
    Filed Herewith. 37