##### 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, 2005
 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)
 3450 Monte Villa Parkway, Bothell, WA
    
    98021(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
  þ o
  þ o
  Date
    
    Class
    
    Shares OutstandingJuly 20, 2005
    
    Common stock  $0.006 par value
    
    
    18,821,754




---



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 June 30, 2005
    
    
    3Condensed Consolidated Statements of Operations for the three- and six-month periods ended
June 30, 2004 and June 30, 2005
    
    
    4Condensed Consolidated Statement of Stockholders Equity and Comprehensive Loss for the
six months ended June 30, 2005
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004
and June 30, 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
    
    
    23ITEM 4 - CONTROLS AND PROCEDURES
    
    
    23PART II  OTHER INFORMATIONITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
    
    
    24ITEM 6 - EXHIBITS
    
    
    24SIGNATURES
    
    
    24EXHIBIT INDEX
    
    
    25EXHIBIT 10.5EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Items 1, 3, 4 and 5 of PART II have not been included as they are not applicable
 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1  FINANCIAL STATEMENTS
 NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In Thousands, Except Share and Per Share Data)
 December 31,
    
    June 30,2004
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,797
    
    
    $
    11,078Restricted cash
    
    
    9,000
    
    
    
    998Short term investments
    
    
    39,677
    
    
    
    39,903Accounts receivable, net
    
    
    
    
    
    
    888Inventories
    
    
    57
    
    
    
    313Prepaid expenses and other current assets
    
    
    674
    
    
    
    1,512Total current assets
    
    
    75,205
    
    
    
    54,692Property and equipment, net
    
    
    5,160
    
    
    
    6,751Security deposits and other assets
    
    
    410
    
    
    
    460Total assets
    
    $
    80,775
    
    
    $
    61,903LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,652
    
    
    $
    3,249Accrued expenses and other liabilities
    
    
    2,533
    
    
    
    2,948Notes payable
    
    
    8,352
    
    
    
    Deferred revenue  current portion
    
    
    2,774
    
    
    
    2,326Capital lease obligations  current portion
    
    
    1,532
    
    
    
    1,949Total current liabilities
    
    
    16,843
    
    
    
    10,472Deferred revenue, net of current portion
    
    
    3,483
    
    
    
    2,945Capital lease obligation, net of current portion
    
    
    1,719
    
    
    
    2,157Other liabilities
    
    
    582
    
    
    
    671Total liabilities
    
    
    22,627
    
    
    
    16,245Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 100,000 authorized: no shares issued and
outstanding:
    
    
    
    
    
    
    Common
stock, $0.006 par value; 50,000,000 authorized: 17,895,976 and
18,154,990 shares outstanding at December 31, 2004 and June 30, 2005,
respectively
    
    
    107
    
    
    
    109Additional paid-in capital
    
    
    142,853
    
    
    
    144,882Deferred compensation
    
    
    (1,358
    )
    
    
    (1,429
    )Accumulated deficit
    
    
    (83,453
    )
    
    
    (97,884
    )Accumulated other comprehensive loss
    
    
    (1
    )
    
    
    (20
    )Total stockholders equity
    
    
    58,148
    
    
    
    45,658Total liabilities and stockholders equity
    
    $
    80,775
    
    
    $
    61,903
  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 ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Revenue:Product revenue, net
    
    $
    
    
    
    $
    
    
    
    $
    95
    
    
    $
    License and research fees
    
    
    45
    
    
    
    1,602
    
    
    
    98
    
    
    
    4,932Total revenue
    
    
    45
    
    
    
    1,602
    
    
    
    193
    
    
    
    4,932Operating expenses:Cost of product revenue
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    Research and development
    
    
    5,261
    
    
    
    7,229
    
    
    
    11,111
    
    
    
    14,460Sales and marketing
    
    
    212
    
    
    
    294
    
    
    
    365
    
    
    
    618General and administrative
    
    
    2,012
    
    
    
    2,769
    
    
    
    3,696
    
    
    
    4,930Total operating expenses
    
    
    7,485
    
    
    
    10,292
    
    
    
    15,236
    
    
    
    20,008Loss from operations
    
    
    (7,440
    )
    
    
    (8,690
    )
    
    
    (15,043
    )
    
    
    (15,076
    )Interest income
    
    
    43
    
    
    
    416
    
    
    
    99
    
    
    
    825Interest and other expense, net
    
    
    (94
    )
    
    
    (70
    )
    
    
    (191
    )
    
    
    (180
    )Net loss
    
    $
    (7,491
    )
    
    $
    (8,344
    )
    
    $
    (15,135
    )
    
    $
    (14,431
    )Net loss per common share  basic and diluted
    
    $
    (0.62
    )
    
    $
    (0.47
    )
    
    $
    (1.26
    )
    
    $
    (0.81
    )Shares used in computing net loss per share
- basic and diluted:
    
    
    12,117
    
    
    
    17,852
    
    
    
    12,005
    
    
    
    17,801
  4




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
 For the Six Months Ended June 30, 2005
(Unaudited)
(In Thousands, Except Share Data)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    Other
    
    TotalCommon Stock
    
    Paid-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 and warrants
    
    
    187,691
    
    
    
    1
    
    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,203Compensation related to
restricted stock
    
    
    71,323
    
    
    
    1
    
    
    
    819
    
    
    
    (306
    )
    
    
    
    
    
    
    
    
    
    
    514Compensation related to
stock options
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    243Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,431
    )
    
    
    
    
    
    
    (14,431
    )Change in unrealized loss on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    (19
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,431
    )
    
    
    (19
    )
    
    
    (14,450
    )Balance June 30, 2005
    
    
    18,154,990
    
    
    $
    109
    
    
    $
    144,882
    
    
    $
    (1,429
    )
    
    $
    (97,884
    )
    
    $
    (20
    )
    
    $
    45,658
 .
 5




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(In Thousands)
 Six Months EndedJune 30,2004
    
    2005Operating activities:Net loss
    
    $
    (15,135
    )
    
    $
    (14,431
    )Adjustments to reconcile net loss to net cash used in
operating activities:Non-cash compensation related to stock options
    
    
    252
    
    
    
    243Non-cash compensation related to restricted stock
    
    
    43
    
    
    
    514Depreciation and amortization of property and equipment
    
    
    726
    
    
    
    829Net loss on retirements of property and equipment
    
    
    
    
    
    
    116Changes in assets and liabilities:Accounts receivable
    
    
    74
    
    
    
    (888
    )Inventories
    
    
    73
    
    
    
    (256
    )Prepaid expenses and other assets
    
    
    121
    
    
    
    (888
    )Accounts payable
    
    
    (521
    )
    
    
    1,597Deferred revenue
    
    
    
    
    
    
    (986
    )Accrued expenses and other liabilities
    
    
    106
    
    
    
    504Net cash used in operating activities
    
    
    (14,261
    )
    
    
    (13,646
    )Investing activities:Property and equipment acquisitions
    
    
    (950
    )
    
    
    (2,536
    )Purchases of investments
    
    
    (7,607
    )
    
    
    (72,814
    )Maturities of investments
    
    
    6,200
    
    
    
    72,569Net cash used in investing activities
    
    
    (2,357
    )
    
    
    (2,781
    )Financing activities:Proceeds from notes payable
    
    
    2,227
    
    
    
    Restricted cash released
    
    
    
    
    
    
    8,002Payments on notes payable
    
    
    (146
    )
    
    
    (8,352
    )Borrowings under capital lease obligations
    
    
    1,039
    
    
    
    1,699Payments on capital lease obligations
    
    
    (445
    )
    
    
    (844
    )Exercise of stock options
    
    
    1,159
    
    
    
    1,203Private placement of common shares
    
    
    12,271
    
    
    
    Net cash provided by financing activities
    
    
    16,105
    
    
    
    1,708Net decrease in cash and cash equivalents
    
    
    (513
    )
    
    
    (14,719
    )Cash and cash equivalents  beginning of period
    
    
    16,792
    
    
    
    25,797Cash and cash equivalents  end of period
    
    $
    16,279
    
    
    $
    11,078Supplemental disclosures of investing and financing activities:Cash paid for interest
    
    $
    191
    
    
    $
    191Non-cash investing activity:Change in unrealized loss on available-for-sale securities
    
    
    
    
    
    $
    19
  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
   3-36 (1-34)
   7




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Basis of Preparation
  Reclassifications
  Recent Accounting Pronouncements
 Share-Based Payment
 Principles of Consolidation
  Use of Estimates
  Revenue Recognition
  8




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Revenue Arrangements with Multiple Deliverables
       Income Taxes
  Stock-based compensation
  9




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Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk free interest rate
    
    
    3.7
    %
    
    
    3.9
    %
    
    
    3.4
    %
    
    
    4.0
    %Expected stock volatility
    
    
    0.83
    
    
    
    0.81
    
    
    
    0.82
    
    
    
    0.80Expected option life
    
    5 years
    
    6 years
    
    5 years
    
    6 years
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005(in thousands, except per share data)Net loss as reported
    
    $
    (7,491
    )
    
    $
    (8,344
    )
    
    $
    (15,135
    )
    
    $
    (14,431
    )Add: Stock-based employee
compensation included in the
reported net loss
    
    
    169
    
    
    
    367
    
    
    
    295
    
    
    
    757Deduct: Stock-based employee
compensation, determined under
fair value based methods
    
    
    (1,194
    )
    
    
    (1,252
    )
    
    
    (2,363
    )
    
    
    (2,366
    )Pro forma net loss
    
    $
    (8,516
    )
    
    $
    (9,229
    )
    
    $
    (17,203
    )
    
    $
    (16,040
    )Net Loss per shareBasic and diluted  as reported
    
    $
    (0.62
    )
    
    $
    (0.47
    )
    
    $
    (1.26
    )
    
    $
    (0.81
    )Basic and diluted- pro forma
    
    $
    (0.70
    )
    
    $
    (0.52
    )
    
    $
    (1.43
    )
    
    $
    (0.90
    )
 Net Loss per Common Share
  Note 2  Contractual Agreements
 Merck
  10




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Thiakis Limited
 Par Pharmaceutical
 Questcor Pharmaceuticals, Inc.
    Note 3  Stockholders Equity
 Common Stock Offerings 
  11




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SEC Shelf Registration Statements 
 Increase in Authorized Shares 
 Equity Compensation Awards
 Stock Option Plans
       12




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##### Table of Contents



Restricted Stock Awards
 Note 4  Subsequent Event
 Alnylam Pharmaceuticals, Inc.
 
 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.
 13




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Merck Partnership
    Independent Product Development
 1-34 (1-34) (1-34) (1-34)
 (1-34) (1-34) (1-34)
 14




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Par Pharmaceutical Partnership
   Product Portfolio Expansion Strategy
       15




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Critical Accounting Policies and Estimates
  Revenue Recognition
 Revenue Recognition Revenue Arrangements with
Multiple Deliverables
 Accounting for Stock Issued to
Employees Accounting for Stock-Based Compensation,
  Share-Based Payment
 Income Taxes
  Clinical Trial Expenses
  16




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Results of Operations
 Revenue and cost of revenue
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(dollars in thousands)Product revenue, net
    
    $
    
    
    
    $
    
    
    
    $
    95
    
    
    $
    License and research fees
    
    
    45
    
    
    
    1,602
    
    
    
    98
    
    
    
    4,932Total revenue
    
    $
    45
    
    
    $
    1,602
    
    
    $
    193
    
    
    $
    4,932Dollar increase
    
    
    
    
    
    $
    1,557
    
    
    
    
    
    
    $
    4,739
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(dollars in thousands)Product revenue, net
    
    $
    
    
    
    $
    
    
    
    $
    95
    
    
    $
    Cost of product revenue
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    Cost of product revenue as a % of product revenue
    
    
    
    
    
    
    
    
    
    
    67
    %
    
    
    
  Research and development
  17




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Peptide YY
    
    
    43
    %
    
    
    11
    %
    
    
    53
    %
    
    
    9
    %Calcitonin
    
    
    19
    %
    
    
    33
    %
    
    
    15
    %
    
    
    36
    %Tight Junctions and RNAi
    
    
    16
    %
    
    
    22
    %
    
    
    14
    %
    
    
    21
    %PTH(1-34)
    
    
    10
    %
    
    
    15
    %
    
    
    6
    %
    
    
    14
    %Apomorphine
    
    
    1
    %
    
    
    
    %
    
    
    5
    %
    
    
    
    %Other R&D projects (1)
    
    
    11
    %
    
    
    19
    %
    
    
    7
    %
    
    
    20
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %(dollars in thousands)Total R&D expense
    
    $
    5,261
    
    
    $
    7,229
    
    
    $
    11,111
    
    
    $

    14,460Dollar increase
    
    
    
    
    
    
    1,968
    
    
    
    
    
    
    
    3,349Percentage increase
    
    
    
    
    
    
    37
    %
    
    
    
    
    
    
    30
    %
 
 1.
    
    Other R&D projects include, without limitation, our oral abuse-resistant opioid, feasibility
studies and other projects.





    
    Costs of clinical trials, consulting, outside services and laboratory supplies increased
to $2.9 million from $1.9 million due primarily to the timing of clinical trials performed
for our calcitonin, PYY, PTH(1-34) and RNAi products under development;
    
    personnel-related expenses increased to $3.1 million from $2.2 million due to an
increase in staffing our research and development personnel in support of our research and
development program; and
    
    facilities-related costs increased to $1.0 million from $0.9 million due to rent and
related expenses on additional space leased in the Bothell facility and increased
depreciation and maintenance on equipment.





    
    Costs of clinical trials, consulting, outside services and laboratory supplies increased
to $5.9 million from $4.7 million due primarily to the timing of clinical trials performed
for our calcitonin, PYY, PTH(1-34) and RNAi products under development;
    
    personnel-related expenses increased to $5.9 million from $4.3 million due to an
increase in staffing our research and development personnel in support of our research and
development programs; and
    
    facilities-related costs increased to $2.2 million from $1.7 million due to rent and
related expenses on additional space leased in the Bothell facility and increased
depreciation and maintenance on equipment.


(1-34)
 
    
    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;
 18




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
    
    the duration of patient follow-up that seems appropriate in view of results; and
    
    the number and complexity of safety and efficacy parameters monitored during the study.
   Sales and marketing
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(dollars in thousands)Total sales and marketing expense
    
    $
    212
    
    
    $
    294
    
    
    $
    365
    
    
    $
    618Dollar increase
    
    
    
    
    
    
    82
    
    
    
    
    
    
    
    253Percentage increase
    
    
    
    
    
    
    39
    %
    
    
    
    
    
    
    69
    %
  General and administrative
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(dollars in thousands)Total general and administrative expense
    
    $
    2,012
    
    
    $
    2,769
    
    
    $
    3,696
    
    
    $
    4,930Dollar increase
    
    
    
    
    
    
    757
    
    
    
    
    
    
    
    1,234Percentage increase
    
    
    
    
    
    
    38
    %
    
    
    
    
    
    
    33
    %
  19




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##### Table of Contents



Interest Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(dollars in thousands)Interest income
    
    $
    43
    
    
    $
    416
    
    
    $
    99
    
    
    $
    825Average funds available for investment
    
    $
    19,100
    
    
    $
    54,800
    
    
    $
    20,200
    
    
    $
    60,900Average interest rate
    
    
    0.9
    %
    
    
    3.0
    %
    
    
    1.0
    %
    
    
    2.7
    %
  Interest Expense
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(dollars in thousands)Interest expense (excluding other expense)
    
    $
    94
    
    
    $
    70
    
    
    $
    191
    
    
    $
    180Ave. borrowings under capital leases and notes payable
    
    $
    11,000
    
    
    $
    3,800
    
    
    $
    10,000
    
    
    $
    5,900Average interest rate
    
    
    3.4
    %
    
    
    7.4
    %
    
    
    3.8
    %
    
    
    6.5
    %
     20




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##### Table of Contents



Liquidity and Capital Resources
 Cash Requirements
  Sources and Uses of Cash
      
    
    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
 21




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##### Table of Contents



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.
  Six Months EndedJune 30,2004
    
    2005(dollars in thousands)Cash used in operating activities
    
    $
    (14,261
    )
    
    $
    (13,646
    )Cash used in investing activities
    
    
    (2,357
    )
    
    
    (2,781
    )Cash provided by financing activities
    
    
    16,105
    
    
    
    1,708Net decrease in cash and cash equivalents
    
    $
    (513
    )
    
    $
    (14,719
    )
    Liquidity
   22




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##### Table of Contents



Contractual Obligations
  
    
    At June 30, 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 June 30, 2005 our operating lease obligations
decreased to approximately $20.2
million (through 2016) from approximately $20.4 million at December 31, 2004. This is
due to one facility lease renewal and one new warehouse lease adding approximately
$0.7 million in rental payments from July 2005 through June 2010, partially offset by
approximately $0.9 million in rents paid during the six months ended June 30, 2005;
    
    Our capital lease obligations increased by approximately $1.3 million to
approximately $4.6 million (including interest) at June 30, 2005 due to approximately
$1.7 million in new leases signed offset by payments made during the six months ended
June 30, 2005; and
    
    Our purchase obligations increased by approximately $2.5 million to approximately
$2.7 million at June 30, 2005 due to purchase order activity during the six months
ended June 30, 2005.
 Off-Balance Sheet Arrangements
  
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4  CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
 Internal Control Over Financial Reporting.
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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Warrants.
 
 ITEM 6  EXHIBITS
  
 SIGNATURES
  NASTECH PHARMACEUTICAL COMPANY INC.By:
    
    /s/ Steven C. QuaySteven C. Quay, M.D., Ph.D.Chairman of the Board, President and Chief Executive OfficerBy:
    
    /s/ Gregory L. WeaverGregory L. WeaverChief Financial Officer
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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description2.1
    
    Agreement and Plan of Reorganization,
dated August 8, 2000, among the Company,
Atossa Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of
the Company, and Atossa HealthCare, Inc.
(filed as Exhibit 2.1 to the Companys
Current Report on Form 8-K dated August 8,
2000, and incorporated herein by
reference).2.2
    
    Asset Purchase Agreement, dated September
30, 2002, with Schwarz Pharma, Inc. (filed
as Exhibit 2.1 to the Companys Current
Report on Form 8-K dated September 30, 2002
and incorporated herein by reference).3.1
    
    Restated Certificate of Incorporation of
the Company dated July 20, 2005 (filed as
Exhibit 3.1 to our Current Report on Form
8-K dated July 20, 2005, and incorporated
herein by reference).3.2
    
    Amended and Restated Bylaws of the Company
dated August 11, 2004 (filed as Exhibit
3.10 to our Registration Statement on Form
S-3, File No. 333-119429, and incorporated
herein by reference).4.1
    
    Investment Agreement, dated as of February
1, 2002, by and between the Company and
Pharmacia & Upjohn Company (filed as
Exhibit 4.1 to the Company Current Report
on Form 8-K dated February 1, 2002 and
incorporated herein by reference).4.2
    
    Rights Agreement, dated February 22, 2000,
between the Company and American Stock
Transfer & Trust Company as Rights Agent
(filed as Exhibit 1 to our Current Report
on Form 8-K dated February 22, 2000 and
incorporated herein by reference).4.3
    
    Securities Purchase Agreement dated as of
June 25, 2004 (filed as Exhibit 99.2 to
our Current Report on Form 8-K dated June
25, 2004 and incorporated herein by

reference).4.4
    
    Form of Warrant (filed as Exhibit 99.3 to
the Companys Current Report on Form 8-K
dated June 25, 2004 and incorporated
herein by reference).10.1
    
    Lease Agreement for facilities at 45
Davids Drive, Hauppauge, NY, effective as
of July 1, 2005 (filed as Exhibit 10.30 to
the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2005
and incorporated herein by reference).10.2
    
    Lease Agreement, dated April 23, 2002, with Phase 3
Science Center LLC, Ahwatukee Hills Investors LLC and J.
Alexanders LLC (filed as Exhibit 10.26 to the Companys
Quarterly Report on Form 10-Q for the Quarter Ended 1,
2002 and incorporated herein by reference).10.3
    
    First Amendment dated June 17, 2003, to Lease Agreement
dated April 23, 2002, with Phase 3 Science Center LLC,
Ahwatukee Hills Investors LLC and J. Alexanders LLC
(filed as Exhibit 10.2 to the Companys Quarterly Report
on Form 10-Q for the Quarter ended June 30, 2003 and
incorporated herein by reference).10.4
    
    Second Amendment, dated February 4, 2004, to Lease
Agreement dated April 23, 2002, with Phase 3 Science
Center LLC, Ahwatukee Hills Investors LLC and J.
Alexanders LLC (filed as Exhibit 10.24 to the Companys
Annual Report on Form 10-K for the year ended December 31,
2003 and incorporated herein by reference).10.5
    
    Lease Agreement for facilities at 80 Davids Drive,
Hauppauge, NY, effective as of July 1, 2005. (2)
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##### Table of Contents



ExhibitNo.
    
    Description10.6
    
    Amended and Restated Employment Agreement, dated May 2,
2002, with Dr. Steven C. Quay, M.D., Ph.D. (filed as
Exhibit 10.27 to the Companys Quarterly Report on Form
10-Q for the Quarter Ended March 31, 2002 and incorporated
herein by reference).10.7
    
    Employment Agreement dated June 3, 2005 by and between
Nastech Pharmaceutical Company Inc. and Steven C. Quay,
M.D., Ph.D. (filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K dated June 3, 2005 and
incorporated herein by reference).10.8
    
    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).10.9
    
    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).10.10
    
    Termination and Mutual Release Agreement, dated September
30, 2002, with Schwarz Pharma, Inc. (Filed as Exhibit 10.3
to the Companys Current Report on Form 8-K dated
September 30, 2002 and incorporated herein by reference).10.11
    
    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
    
    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).10.13
    
    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).10.14
    
    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).10.15
    
    Nastech Pharmaceutical Company Inc. 2004 Stock Incentive
Plan (filed as Exhibit 99 to the Companys Registration
Statement on Form S-8, File No. 333-118206, and
incorporated herein by reference).10.16
    
    Amendment No. 1 to Nastech Pharmaceutical Company Inc.
2004 Stock Incentive Plan (filed as Exhibit 10.4 to the
Companys Current Report on Form 8-K dated July 20, 2005
and incorporated herein by reference).10.17
    
    Restricted Stock Grant Agreement effective July 20, 2005
by and between Nastech Pharmaceutical Company Inc. and Dr.
Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K dated July 20, 2005
and incorporated herein by reference).10.18
    
    Incentive Stock Option Grant Agreement effective July 20,
2005 by and between Nastech Pharmaceutical Company Inc.
and Dr. Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.2
to the Companys Current Report on Form 8-K dated July 20,
2005 and incorporated herein by reference).10.19
    
    Non-Qualified Stock Option Grant Agreement effective July
20, 2005 by and between
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##### Table of Contents



ExhibitNo.
    
    DescriptionNastech Pharmaceutical Company
Inc. and Dr. Steven C. Quay, M.D., Ph.D. (filed as Exhibit
10.3 to the Companys Current Report on Form 8-K dated
July 20, 2005 and incorporated herein by reference).10.20
    
    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).10.21
    
    Restricted Stock Grant Agreement effective May 25, 2005 by
and between Nastech Pharmaceutical Company Inc. and Mr.
Gregory L. Weaver (filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K dated May 25, 2005 and
incorporated herein by reference).10.22
    
    Stock Option Agreement dated as of May 25, 2005 between
Nastech Pharmaceutical Company Inc. and Mr. Gregory L.
Weaver (filed as Exhibit 10.2 to the Companys Current
Report on Form 8-K dated May 25, 2005 and incorporated
herein by reference).10.23
    
    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).10.24
    
    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).10.25
    
    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).10.26
    
    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).10.27
    
    Restricted Stock Grant Agreement effective May 25, 2005 by
and between Nastech Pharmaceutical Company Inc. and Mr.
David E. Wormuth (filed as Exhibit 10.3 to the Companys
Current Report on Form 8-K dated May 25, 2005 and
incorporated herein by reference).10.28
    
    Stock Option Agreement dated as of May 25, 2005 between
Nastech Pharmaceutical Company Inc. and Mr. David E.
Wormuth (filed as Exhibit 10.4 to the Companys Current
Report on Form 8-K dated May 25, 2005 and incorporated
herein by reference).10.29
    
    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).10.30
    
    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).10.31
    
    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).10.32
    
    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
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##### Table of Contents



ExhibitNo.
    
    DescriptionDecember 31, 2003 and incorporated herein by reference).10.33
    
    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).10.34
    
    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).10.35
    
    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).10.36
    
    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).10.37
    
    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)10.38
    
    Supply Agreement by and between the Company and Merck &
Co., Inc. effective as of September 24, 2004 (filed as
Exhibit 10.2 to the Companys Current Report on Form 8-K
dated September 24, 2004 and incorporated herein by
reference). (1)10.39
    
    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)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)
 
 (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. 28