##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended September 30, 2005
 Commission File Number 000-13789
 NASTECH PHARMACEUTICAL COMPANY INC.
  Delaware
    
    11-2658569(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 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
  o þ
  Date
    
    Class
    
    Shares OutstandingOctober 24, 2005
    
    Common stock  $0.006 par value
    
    20,651,472




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONITEM 1 - FINANCIAL STATEMENTS (unaudited)Condensed Consolidated Balance Sheets as of December 31, 2004 and September 30, 2005
    
    3Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2004 and September 30, 2005
    
    4Condensed Consolidated Statement of Stockholders Equity and Comprehensive Loss for the nine months ended September 30, 2005
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and September 30, 2005
    
    6Notes to Condensed Consolidated Financial Statements
    
    7ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    14ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    25ITEM 4 - CONTROLS AND PROCEDURES
    
    25PART II  OTHER INFORMATIONITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    26ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    26ITEM 6  EXHIBITS
    
    27SIGNATURES
    
    27EXHIBIT INDEX
    
    28EXHIBIT 10.18EXHIBIT 10.33EXHIBIT 10.34EXHIBIT 10.35EXHIBIT 10.36EXHIBIT 10.37EXHIBIT 10.38EXHIBIT 10.39EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Items 1, 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 SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In Thousands, Except Share and Per Share Data)
 December 31,
    
    
    September 30,2004
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,797
    
    
    $
    15,911Restricted cash
    
    
    9,000
    
    
    
    998Short term investments
    
    
    39,677
    
    
    
    50,204Accounts receivable, net
    
    
    
    
    
    
    582Inventories
    
    
    57
    
    
    
    1,034Prepaid expenses and other current assets
    
    
    674
    
    
    
    1,299Total current assets
    
    
    75,205
    
    
    
    70,028Property and equipment, net
    
    
    5,160
    
    
    
    7,956Security deposits and other assets
    
    
    410
    
    
    
    431Total assets
    
    $
    80,775
    
    
    $
    78,415LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,652
    
    
    $
    2,885Accrued expenses and other liabilities
    
    
    2,533
    
    
    
    2,159Notes payable
    
    
    8,352
    
    
    
    Deferred revenue  current portion
    
    
    2,774
    
    
    
    1,666Capital lease obligations  current portion
    
    
    1,532
    
    
    
    2,193Total current liabilities
    
    
    16,843
    
    
    
    8,903Deferred revenue, net of current portion
    
    
    3,483
    
    
    
    2,967Capital lease obligations, net of current portion
    
    
    1,719
    
    
    
    2,648Other liabilities
    
    
    582
    
    
    
    722Total liabilities
    
    
    22,627
    
    
    
    15,240Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value; 100,000
authorized: no shares issued and outstanding:
    
    
    
    
    
    
    Common stock, $0.006 par value; 50,000,000
authorized: 17,895,976 and 20,637,232 shares
outstanding at December 31, 2004 and September
30, 2005, respectively
    
    
    107
    
    
    
    124Additional paid-in capital
    
    
    142,853
    
    
    
    174,985Deferred compensation
    
    
    (1,358
    )
    
    
    (5,181
    )Accumulated deficit
    
    
    (83,453
    )
    
    
    (106,698
    )Accumulated other comprehensive loss
    
    
    (1
    )
    
    
    (55
    )Total stockholders equity
    
    
    58,148
    
    
    
    63,175Total liabilities and stockholders equity
    
    $
    80,775
    
    
    $
    78,415
  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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Revenues
    
    $
    203
    
    
    $
    1,223
    
    
    $
    396
    
    
    $
    6,155Operating expenses:Cost of product revenue
    
    
    126
    
    
    
    
    
    
    
    190
    
    
    
    Research and development
    
    
    4,919
    
    
    
    8,099
    
    
    
    16,030
    
    
    
    22,559Sales and marketing
    
    
    291
    
    
    
    345
    
    
    
    656
    
    
    
    963General and administrative
    
    
    2,394
    
    
    
    2,019
    
    
    
    6,090
    
    
    
    6,949Total operating expenses
    
    
    7,730
    
    
    
    10,463
    
    
    
    22,966
    
    
    
    30,471Loss from operations
    
    
    (7,527
    )
    
    
    (9,240
    )
    
    
    (22,570
    )
    
    
    (24,316
    )Interest income
    
    
    83
    
    
    
    496
    
    
    
    182
    
    
    
    1,321Interest and other expense, net
    
    
    (111
    )
    
    
    (70
    )
    
    
    (302
    )
    
    
    (250
    )Net loss
    
    $
    (7,555
    )
    
    $
    (8,814
    )
    
    $
    (22,690
    )
    
    $
    (23,245
    )Net loss per
common share  basic and diluted
    
    $
    (0.57
    )
    
    $
    (0.46
    )
    
    $
    (1.83
    )
    
    $
    (1.28
    )Shares used
in computing net loss per share  basic and diluted
    
    
    13,250
    
    
    
    19,009
    
    
    
    12,412
    
    
    
    18,208
  4




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE LOSS
 For the Nine Months Ended September 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
issuance of common
shares in
connection with a
public offering,
net
    
    
    1,725,000
    
    
    
    10
    
    
    
    21,638
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,648Proceeds from the
exercise of options
and warrants
    
    
    652,719
    
    
    
    4
    
    
    
    5,381
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,385Compensation
related to
restricted stock
    
    
    363,537
    
    
    
    3
    
    
    
    5,105
    
    
    
    (4,102
    )
    
    
    
    
    
    
    
    
    
    
    1,006Compensation
related to stock
options
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    287Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,245
    )
    
    
    
    
    
    
    (23,245
    )Change in
unrealized loss on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )
    
    
    (54
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,245
    )
    
    
    (54
    )
    
    
    (23,299
    )Balance September
30, 2005
    
    
    20,637,232
    
    
    $
    124
    
    
    $
    174,985
    
    
    $
    (5,181
    )
    
    $
    (106,698
    )
    
    $
    (55
    )
    
    $
    63,175
  5




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(In Thousands)
 Nine Months EndedSeptember 30,2004
    
    
    2005Operating activities:Net loss
    
    $
    (22,690
    )
    
    $
    (23,245
    )Adjustments to reconcile net loss to net cash used in operating activities:Non-cash compensation related to stock options
    
    
    378
    
    
    
    287Non-cash compensation related to restricted stock
    
    
    252
    
    
    
    1,006Depreciation and amortization of property and equipment
    
    
    1,083
    
    
    
    1,289Net loss on retirements of property and equipment
    
    
    39
    
    
    
    124Changes in assets and liabilities:Accounts receivable, net
    
    
    (5,003
    )
    
    
    (582
    )Inventories
    
    
    121
    
    
    
    (977
    )Prepaid expenses and other assets
    
    
    564
    
    
    
    (646
    )Accounts payable
    
    
    (572
    )
    
    
    1,233Deferred revenue
    
    
    4,996
    
    
    
    (1,624
    )Accrued expenses and other liabilities
    
    
    311
    
    
    
    (234
    )Net cash used in operating activities
    
    
    (20,521
    )
    
    
    (23,369
    )Investing activities:Property and equipment acquisitions
    
    
    (1,597
    )
    
    
    (4,209
    )Purchases of investments
    
    
    (7,865
    )
    
    
    (104,280
    )Maturities of investments
    
    
    10,300
    
    
    
    93,699Net cash provided by (used in) investing activities
    
    
    838
    
    
    
    (14,790
    )Financing activities:Proceeds from notes payable
    
    
    2,227
    
    
    
    Restricted cash released
    
    
    
    
    
    
    8,002Payments on notes payable
    
    
    (146
    )
    
    
    (8,352
    )Borrowings under capital lease obligations
    
    
    1,423
    
    
    
    2,940Payments on capital lease obligations
    
    
    (749
    )
    
    
    (1,350
    )Exercise of stock options
    
    
    1,407
    
    
    
    5,385Public offering of common shares
    
    
    
    
    
    
    21,648Private placement of common shares
    
    
    12,271
    
    
    
    Net cash provided by financing activities
    
    
    16,433
    
    
    
    28,273Net decrease in cash and cash equivalents
    
    
    (3,250
    )
    
    
    (9,886
    )Cash and cash equivalents  beginning of period
    
    
    16,792
    
    
    
    25,797Cash and cash equivalents  end of period
    
    $
    13,542
    
    
    $
    15,911Supplemental disclosures of investing and financing activities:Cash paid for interest
    
    $
    302
    
    
    $
    250Non-cash investing activity:Unrealized loss on available-for-sale securities
    
    
    
    
    
    $
    54
  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
   Principles of Consolidation
  8




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Use of Estimates
  Revenue Recognition
        9




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Income Taxes
  Stock-based Compensation
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk free interest rate
    
    
    3.5
    %
    
    
    4.1
    %
    
    
    3.4
    %
    
    
    4.0
    %Expected stock volatility
    
    
    81
    %
    
    
    77
    %
    
    
    82
    %
    
    
    79
    %Expected option life
    
    5 years
    
    6 years
    
    5 years
    
    6 years
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(in thousands, except per share data)Net loss as reported
    
    $
    (7,555
    )
    
    $
    (8,814
    )
    
    $
    (22,690
    )
    
    $
    (23,245
    )Add: Stock-based employee
compensation included in the reported
net loss
    
    
    335
    
    
    
    536
    
    
    
    630
    
    
    
    1,293Deduct: Stock-based employee
compensation, determined under fair
value-based methods
    
    
    (1,232
    )
    
    
    (1,025
    )
    
    
    (3,596
    )
    
    
    (3,391
    )Pro forma net loss
    
    $
    (8,452
    )
    
    $
    (9,303
    )
    
    $
    (25,656
    )
    
    $
    (25,343
    )Net Loss per shareBasic and diluted  as reported
    
    $
    (0.57
    )
    
    $
    (0.46
    )
    
    $
    (1.83
    )
    
    $
    (1.28
    )Basic and diluted- pro forma
    
    $
    (0.64
    )
    
    $
    (0.49
    )
    
    $
    (2.07
    )
    
    $
    (1.39
    )
 Net Loss per Common Share
  10




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Inventory
  Note 2  Contractual Agreements
 Merck
  Thiakis Limited
 Par Pharmaceutical
 Questcor Pharmaceuticals, Inc.
 11




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Alnylam Pharmaceuticals, Inc.
 Note 3  Stockholders Equity
 Common Stock Offerings 
   SEC Shelf Registration Statements 
 12




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Increase in Authorized Shares 
 Equity Compensation Awards
 Stock Option Plans
     13




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Restricted Stock Awards
 Nine Months EndedSeptember 30,2004
    
    
    2005Unvested restricted shares outstanding, beginning of period
    
    
    0
    
    
    
    145,620Restricted shares issued
    
    
    133,420
    
    
    
    389,052Restricted shares forfeited
    
    
    0
    
    
    
    (25,515
    )Restricted shares lapsed (vested in period)
    
    
    0
    
    
    
    (82,823
    )Unvested restricted shares outstanding, end of period
    
    
    133,420
    
    
    
    426,334Non-cash restricted stock compensation expense, net of
forfeitures
    
    $
    252,000
    
    
    $
    1,006,000
 Note 4  Subsequent Event
 Questcor assignment to QOL Medical, LLC 
 
 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
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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.
   Merck Partnership
    PTH (1-34) Development
 15




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(1-34) (1-34) (1-34)
 (1-34) (1-34) (1-34)
 Par Pharmaceutical Partnership
   Product Portfolio Expansion Strategy
   16




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Critical Accounting Policies and Estimates
  17




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Revenue Recognition
  Stock-Based Compensation
    18




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Income Taxes
  Clinical Trial Expenses
  Results of Operations
 Revenue and cost of revenue
   Research and development
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004

    
    2005

    
    2004
    

    2005Peptide YY
    
    
    36
    %
    
    
    22
    %
    
    
    49
    %
    
    
    16
    %Calcitonin
    
    
    23
    %
    
    
    18
    %
    
    
    17
    %
    
    
    30
    %Tight Junctions and RNAi
    
    
    24
    %
    
    
    29
    %
    
    
    16
    %
    
    
    25
    %PTH(1-34)
    
    
    4
    %
    
    
    17
    %
    
    
    5
    %
    
    
    15
    %
 19




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Apomorphine
    
    
    4
    %
    
    
    
    %
    
    
    5
    %
    
    
    
    %Other R&D projects (1)
    
    
    9
    %
    
    
    14
    %
    
    
    8
    %
    
    
    14
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %(dollars in thousands)Total R&D expense
    
    $
    4,919
    
    
    $
    8,099
    
    
    $
    16,030
    
    
    $
    22,559Dollar increase
    
    
    
    
    
    
    3,180
    
    
    
    
    
    
    
    6,529Percentage increase
    
    
    
    
    
    
    65
    %
    
    
    
    
    
    
    41
    %
 
 (1)
    
     Other R&D projects include, without limitation, our oral abuse-resistant opioid,
feasibility studies and other projects.  
    
    personnel-related expenses increased to $3.4 million from $2.2 million due to increased
personnel in support of our research and development programs;
    
    costs of clinical trials, consulting, outside services and laboratory and manufacturing
supplies increased to $2.6 million from $1.4 million due to a clinical study for calcitonin
and other projects under development;
    
    facilities-related costs increased to $1.2 million from $0.8 million due to rent and
related expenses on additional space leased in the Bothell facility and increased
depreciation and maintenance on equipment; and
    
    administrative costs increased to $0.9 million from $0.5 million due primarily to
patent license fees incurred.
  
    
    personnel-related expenses increased to $9.4 million from $6.5 million due to increased
personnel in support of our research and development programs;
    
    costs of clinical trials, consulting, outside services and laboratory and manufacturing
supplies increased to $8.4 million from $6.1 million due to a clinical study for calcitonin
and more projects under development;
    
    facilities-related costs increased to $3.5 million from $2.5 million due to rent and
related expenses on additional space leased in the Bothell facility and increased
depreciation and maintenance on equipment; and;
    
    administrative costs increased to $1.2 million from $0.9 million due primarily to
patent license fees incurred.
 (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;
    
    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.
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Sales and marketing
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(dollars in thousands)Total sales and marketing expense
    
    $
    291
    
    
    $
    345
    
    
    $
    656
    
    
    $
    963Dollar increase
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    307Percentage increase
    
    
    
    
    
    
    19
    %
    
    
    
    
    
    
    47
    %
  General and administrative
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(dollars in thousands)Total general and administrative expense
    
    $
    2,394
    
    
    $
    2,019
    
    
    $
    6,090
    
    
    $
    6,949Dollar increase (decrease)
    
    
    
    
    
    
    (375
    )
    
    
    
    
    
    
    859Percentage increase
    
    
    
    
    
    
    (16
    %)
    
    
    
    
    
    
    14
    %
  21




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##### Table of Contents



Interest Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(dollars in thousands)Interest income
    
    $
    83
    
    
    $
    496
    
    
    $
    182
    
    
    $
    1,321Average funds available for investment
    
    $
    22,200
    
    
    $
    59,800
    
    
    $
    20,400
    
    
    $
    61,400Average interest rate, annualized
    
    
    1.5
    %
    
    
    3.3
    %
    
    
    1.2
    %
    
    
    2.9
    %
  Interest Expense
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(dollars in thousands)Interest expense (excluding other expense, net)
    
    $
    111
    
    
    $
    75
    
    
    $
    302
    
    
    $
    265Avg. borrowings under capital leases and notes payable
    
    $
    11,400
    
    
    $
    4,300
    
    
    $
    10,400
    
    
    $
    5,400Average interest rate, annualized
    
    
    4
    %
    
    
    7
    %
    
    
    4
    %
    
    
    7
    %
  Liquidity and Capital Resources
 Cash Requirements
  22




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##### Table of Contents



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 believe,
although there can be no assurance, that in the future we will receive additional revenue
from Par Pharmaceutical in the form of milestone payments, product transfer payments for
manufactured product and a profit sharing upon commercialization of generic
calcitonin-salmon intranasal spray.
 23




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##### Table of Contents




    
    In January 2005, we received FDA approval of our Nascobal® nasal spray and we received
a $2 million payment from Questcor in February 2005.
  Nine Months EndedSeptember 30,2004
    
    
    2005(dollars in thousands)Cash used in operating activities
    
    $
    (20,521
    )
    
    $
    (23,369
    )Cash provided by (used in) investing activities
    
    
    838
    
    
    
    (14,790
    )Cash provided by financing activities
    
    
    16,433
    
    
    
    28,273Net decrease in cash and cash equivalents
    
    $
    (3,250
    )
    
    $
    (9,886
    )
    Liquidity
   Contractual Obligations
 24




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##### Table of Contents




    
    At September 30, 2005 we have a zero balance in notes payable compared to
approximately $8.6 million (including accrued interest) at December 31, 2004 due to the
payoff of the note in February 2005;
    
    At September 30, 2005 our operating lease obligations decreased to approximately
$19.8 million (through January 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 through June 2010, partially offset by
approximately $1.3 million in rents paid during the nine months ended September 30,
2005;
    
    Our capital lease obligations increased by approximately $2.2 million to
approximately $5.5 million (including future interest payments) at September 30, 2005
due to approximately $2.9 million in new leases signed offset by payments made during
the nine months ended September 30, 2005; and
    
    Our purchase obligations increased by approximately $3.4 million to approximately
$3.6 million at September 30, 2005 due to purchase order activity (primarily for
calcitonin and PYY) during the nine months ended September 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.
 25




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Warrants.
 
 ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1)
    
    The election of the following eleven (11) 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
    
    
    16,812,873
    
    
    
    565,445Susan B. Bayh
    
    
    17,278,657
    
    
    
    99,661J. Carter Beese, Jr.
    
    
    16,755,739
    
    
    
    622,579Dr. Alexander D. Cross
    
    
    17,283,349
    
    
    
    94,969Dr. Ian R. Ferrier
    
    
    16,708,284
    
    
    
    670,034Myron Z. Holubiak
    
    
    16,785,906
    
    
    
    592,412Leslie D. Michelson
    
    
    16,808,981
    
    
    
    569,337John V. Pollock
    
    
    16,786,506
    
    
    
    591,812Gerald T. Stanewick
    
    
    16,809,475
    
    
    
    568,843Bruce R. Thaw
    
    
    16,816,075
    
    
    
    562,243Devin N. Wenig
    
    
    16,740,351
    
    
    
    637,967
 2)
    
    The appointment of KPMG LLP as our independent registered public accountants for the year
ending December 31, 2005:
 Votes FOR
    
    Votes AGAINST
    
    
    Votes ABSTAINED
    
    
    Broker NON-VOTES17,281,295
    
    
    69,519
    
    
    
    27,504
    
    
    
    0
 3)
    
    The approval of a proposed change to our capital structure increasing the number of
authorized shares of common stock from 25,000,000 to 50,000,000:
 Votes FOR
    
    Votes AGAINST
    
    
    Votes ABSTAINED
    
    
    Broker NON-VOTES16,513,141
    
    
    824,594
    
    
    
    40,583
    
    
    
    0
 4)
    
    The approval of a proposed Restated Certificate of Incorporation of the Company, including
certain changes to modernize, clarify and otherwise make our current Certificate of
Incorporation consistent with our Amended and Restated Bylaws and Delaware law:
 Votes FOR
    
    Votes AGAINST
    
    
    Votes ABSTAINED
    
    
    Broker NON-VOTES9,700,758
    
    
    360,103
    
    
    
    46,535
    
    
    
    7,270,922
 5)
    
    The approval of amendments to our 2004 Stock Incentive Plan, including an increase in the
number of shares authorized by 750,000 shares, from 600,000 shares to 1,350,000 shares:
 Votes FOR
    
    Votes AGAINST
    
    
    Votes ABSTAINED
    
    
    Broker NON-VOTES9,003,741
    
    
    1,001,134
    
    
    
    102,521
    
    
    
    7,270,922
 26




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##### Table of Contents



ITEM 6  EXHIBITS
  
 SIGNATURES
  NASTECH PHARMACEUTICAL COMPANY INC.By:
    
    /s/ Steven C. QuaySteven C. Quay, M.D., Ph.D.Chairman of the Board, President and Chief Executive
OfficerBy:
    
    /s/ Philip C. RankerPhilip C. RankerVP Finance and Interim Chief Financial Officer
 27




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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 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 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
(filed as Exhibit 10.5 to the Companys Quarterly Report on
Form 10-Q for the Quarter ended June 30, 2005 and incorporated herein by reference).10.6
    
    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
 28




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##### Table of Contents



ExhibitNo.
    
    DescriptionMarch
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
    
    Agreement, Release and Waiver dated Sept. 7, 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 September 7, 2005 and incorporated herein by reference).10.11
    
    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).10.12
    
    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).10.13
    
    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).10.14
    
    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).10.15
    
    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).10.16
    
    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).10.17
    
    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).10.18
    
    Amendment No. 2 to Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan. (2)10.19
    
    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).10.20
    
    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).
 29




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##### Table of Contents



ExhibitNo.
    
    Description10.21
    
    Non-Qualified Stock Option Grant Agreement effective July 20, 2005by and between Nastech
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).10.22
    
    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).10.23
    
    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).10.24
    
    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).10.25
    
    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).10.26
    
    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).10.27
    
    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).10.28
    
    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).10.29
    
    Restricted Stock Grant Agreement effective October 5, 2005 by and between Nastech Pharmaceutical
Company Inc. and Dr. Paul H. Johnson, Ph.D. (filed as Exhibit 10.1 to the Companys Current Report
on Form 8-K dated October 5, 2005 and incorporated herein by reference).10.30
    
    Stock Option Agreement effective October 5, 2005 by and between Nastech Pharmaceutical Company
Inc. and Dr. Paul H. Johnson, Ph.D. (filed as Exhibit 10.2 to the Companys Current Report on Form
8-K dated October 5, 2005 and incorporated herein by reference).10.31
    
    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).10.32
    
    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).10.33
    
    Restricted Stock Grant Agreement effective August 11, 2004 by and between Nastech Pharmaceutical
Company Inc. and Mr. Bruce R. York. (2)10.34
    
    Stock Option Agreement dated as of August 25, 2004 between Nastech Pharmaceutical Company Inc.
and Mr. Philip C. Ranker. (2).10.35
    
    Restricted Stock Grant Agreement
effective August 25, 2004 by and between Nastech
Pharmaceutical
 30




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##### Table of Contents



ExhibitNo.
    
    DescriptionCompany Inc. and Mr. Philip C. Ranker. (2)10.36
    
    Restricted Stock Grant Agreement effective July 1, 2005 by and between Nastech Pharmaceutical
Company Inc. and Mr. Philip C. Ranker. (2)10.37
    
    Restricted Stock Grant Agreement effective July 1, 2005 by and between Nastech Pharmaceutical
Company Inc. and Mr. Bruce R. York. (2)10.38
    
    Restricted Stock Grant Agreement effective September 7, 2005 by and between Nastech Pharmaceutical
Company Inc. and Mr. Philip C. Ranker. (2)10.39
    
    Restricted Stock Grant Agreement effective September 7, 2005 by and between Nastech Pharmaceutical
Company Inc. and Mr. Bruce R. York. (2)10.40
    
    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).10.41
    
    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).10.42
    
    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).10.43
    
    Revolving Line of Credit Agreement with Wells Fargo Bank, dated December 19, 2003 (filed as
Exhibit 10.20 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 and
incorporated herein by reference).10.44
    
    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).10.45
    
    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).10.46
    
    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).10.47
    
    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).10.48
    
    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)10.49
    
    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)10.50
    
    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
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##### Table of Contents



ExhibitNo.
    
    Descriptionon Form 8-K dated October 22, 2004 and incorporated herein by reference). (1)10.51
    
    Agreement dated as of September 23, 2005 by and between Nastech Pharmaceutical Company Inc. and
QOL Medical, LLC (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K dated October
17, 2005 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 Interim 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 Interim 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. 32