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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission
File Number 000-23467
 PENWEST PHARMACEUTICALS CO.
  Washington
(State or other jurisdiction of
incorporation or organization)
    
    91-1513032
(I.R.S. Employer
Identification No.)39 Old Ridgebury Road
Suite 11
Danbury, Connecticut
(Address of principal Executive Offices)
    
    06810-5120
(Zip Code)
     
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 o þ
  þ o
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   Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-accelerated Filer o
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  DOCUMENTS INCORPORATED BY REFERENCE




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PENWEST PHARMACEUTICALS CO.
INDEX TO FORM 10-K
 PagePART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    14Item 1B. Unresolved Staff Comments
    
    
    24Item 2. Properties
    
    
    24Item 3. Legal Proceedings
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Executive Officers of the Registrant
    
    
    24PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    26Item 6. Selected Financial Data
    
    
    27Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 8. Financial Statements and Supplementary Data
    
    
    39Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
    
    
    40Item 9A. Controls and Procedures
    
    
    40Item 9B Other Information
    
    
    43PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    43Item 11. Executive Compensation
    
    
    43Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
    
    
    43Item 13. Certain Relationships and Related Transactions
    
    
    43Item 14. Principal Accounting Fees and Services
    
    
    43PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    43Signatures
    
    
    45EX-10.28 Form of Executive Retention AgreementEX-10.29 Summary Description of Officer Bonus ProgramEX-23 Consent of Ernst & Young LLPEX-31 Section 302 Certification of CEO and CFOEX-32 Section 906 Certification of CEO and CFO




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PART I
 
 ITEM 1: BUSINESS
 Overview
  Oxymorphone ER.
  Additional Product Candidates.
 
    
    Nalbuphine ER(PW4142). We are developing nalbuphine ER, a controlled release
formulation of nalbuphine hydrochloride, for the treatment of pain. Nalbuphine ER, which
we are developing using our Geminex dual drug delivery technology, is designed to be taken
as a tablet twice daily. We expect that nalbuphine ER, if approved, would compete in the
moderate pain market with products such as tramadol, codeine and Demerol. We have completed
a Phase I pharmacokinetic study of nalbuphine ER that confirmed that our formulation
achieved the targeted blood levels and a Phase IIa trial in which nalbuphine ER positively
reduced mean pain intensity in a dose-dependent manner over the 12-hour study period when
compared to placebo. We are currently conducting market research, which we believe will
allow us to determine the appropriate pain population in which to conduct further clinical
studies. We plan to meet with the FDA to discuss the regulatory approval pathway for
nalbuphine ER in the first half of 2006 and to commence a Phase IIb study in the
appropriate patient population by the end of 2006.
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
    
    Torsemide ER(PW2132). We are developing torsemide ER, a loop diuretic, for the
management of chronic edema, a condition involving excess fluid accumulation, resulting
from congestive heart failure, or CHF. Torsemide ER, a controlled release formulation of
torsemide developed using our Geminex dual drug delivery technology, is designed to be
taken as a tablet once daily. We expect that torsemide ER, if approved, would compete with
furosemide and other loop diuretics. We are developing this product using a 505(b)(2)
regulatory strategy referencing torsemide. We have completed Phase I pharmacokinetic
studies of torsemide ER that confirmed that our formulation achieved the targeted plasma
profiles and completed a Phase IIa study that confirmed the proof of concept that torsemide
ER would cause prolonged urinary sodium excretion in CHF patients. We are discussing with
the FDA the possibility that only one pivotal safety and efficacy
trial would be necessary for approval of
torsemide ER based on the FDAs
previous finding that torsemide is safe and effective. We are currently conducting market research on torsemide ER in order to
determine whether we should expand the scope of this pivotal study in order to obtain
additional data that would be beneficial to marketing torsemide ER. Based on the scope of
the expected additional clinical trials and the market research, we
plan to determine whether
to continue development of torsemide ER on our own or whether to seek a collaborator to
complete the development work and market the product.
    
    Venlafaxine ER (PW4112).We are developing venlafaxine ER, using
our TIMERx technology, as a once daily tablet for the treatment of depression. We are
developing this product using a 505(b)(2) regulatory strategy referencing Wyeths Effexor
XR. We expect that venlafaxine ER, if approved, would compete in a
segment of the market for
antidepressants, which includes Effexor XR. We have completed Phase I pharmacokinetic
studies that confirmed that our formulation achieved the targeted blood levels. We are
currently in discussions with the FDA to determine the design of the final trials required
for the development of this product. We believe the FDA will only require three additional
Phase I pharmacokinetic trials that could be conducted in 2006. If the trials are
successful, we expect that we will submit the NDA to the FDA in early 2007.
  Our Strategies
  
    
    Focus on products that address disorders of the nervous system.We are focusing on
products that address disorders of the nervous system because we believe many of the
currently approved products for the treatment of nervous system disorders can be enhanced by
drug delivery technologies. In addition, we believe the market for treating nervous
system disorders is an attractive market because many of these disorders are chronic in
nature and are largely treated by specialist physicians that can be addressed with a
relatively small sales force. We also plan to selectively develop product candidates for
diseases outside of the nervous system if we believe a product reformulated with our
technology could address an unmet medical need and have a substantial market value.
    
    Reformulate existing drugs using proprietary drug delivery technologies.We are
seeking to expand our development pipeline with product candidates
that we are developing by
reformulating existing drugs utilizing proprietary drug delivery technologies. When
appropriate, we intend to utilize a 505(b)(2) regulatory strategy to seek approval for our
reformulations of existing drugs. Section 505(b)(2) applications may rely on the FDAs
previous findings for the safety and effectiveness of the listed drug as well as information
obtained by the 505(b)(2) applicant needed to support the modification of the listed drug.
As a result, the development of a drug using the 505(b)(2) regulatory process is generally
less costly and time consuming than the full NDA process because the trials that need to be
conducted are generally more limited.
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
    
    Develop product candidates that have the potential for at least five years of exclusivity
in the marketplace.We intend to focus on developing or acquiring product candidates for
which we or our collaborators could have at least five years of exclusivity in the
marketplace. This protection could arise from meeting certain criteria for market
exclusivity with the FDA, for example on new chemical entities or
orphan drugs, or from exclusivity in the market place derived from
intellectual property protection.
    
    Continue to leverage and expand our proprietary drug delivery technologies.We believe
that we have significant expertise in drug formulation and in oral drug delivery
technologies. Our proprietary drug delivery technologies, TIMERx extended release, Geminex
dual delivery, SyncroDose site specific delivery and the gastroretentive system, are
applicable to a wide range of drugs with different physical and chemical properties
including water soluble and insoluble drugs, as well as high dose and low dose drugs. Using
these technologies, we can formulate drugs with precise release profiles. In selecting
product candidates for development, we intend to continue to focus on opportunities in which
our drug delivery technologies, or drug delivery technologies that we can access, can
provide benefits to patients and result in branded, proprietary products. We also intend to
continue to develop our core technologies, as well as to seek to develop, in-license or
acquire new technologies as may be required for our product development candidates.
    
    Commercialize product candidates independently and in collaboration with third parties.
We currently do not have any sales and marketing infrastructure. Our marketed products and
oxymorphone ER are or would be marketed by our collaborators. In the future, we expect that
we will independently seek regulatory approval for most of our product candidates. By
retaining the rights to these products through the time that they are approved, we believe
that we can retain more of the value of such products if they are
approved. In addition, we may decide
to retain marketing rights, or co-promotion rights, to some of our products for the treatment of nervous system
disorders and build a small specialty sales force to market these products. In cases where
we decide to form collaborations, we believe that retaining the rights to these products
through approval will put us in a better position to negotiate the terms of a collaboration
for the marketing and sale of these products. For those products that we selectively develop
for the treatment of diseases outside of the nervous system, we plan to seek a collaborator
during the development of the product.
 Drug Delivery Technologies
  TIMERx
   3




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Geminex
  SyncroDose
  Gastroretentive
  Products
 Approved Products
  
    
    Nifedipine XL, a generic version of Pfizer, Inc.s Procardia XL for the treatment of
hypertension and angina that we developed with Mylan Pharmaceuticals Inc., is approved for
sale in the United States. Mylan, which has the marketing rights for Nifedipine XL, is not
marketing Nifedipine XL as a result of its acquisition from Pfizer of the right to market
generic versions of three strengths of Procardia XL.
    
    Cystrin CR, an extended release version of oxybutynin for the treatment of urge urinary
incontinence, is approved for sale in Finland and has been licensed
to Schering Oy.
    
    Slofedipine XL, an extended release version of nifedipine for the treatment of angina, is
approved for sale in the United Kingdom and Italy and has been
licensed to Sanofi-Aventis S.A.
    
    Cronodipin, an extended release version of nifedipine for the treatment of angina, is
approved for sale in Brazil and has been licensed to Merck S.A.
Industries Quimicas.
 Products in Our Pipeline
  PRODUCT
    
    THERAPEUTIC
    
    COLLABORATORFDA ReviewOxymorphone ER
    
    Moderate to Severe Pain
    
    Endo Pharmaceuticals Inc.Clinical DevelopmentNalbuphine ER (PW4142)
    
    Moderate Pain
    
    Internal DevelopmentTorsemide ER (PW2132)
    
    Edema/Chronic Heart Failure
    
    Internal DevelopmentVenlafaxine ER (PW4112)
    
    Depression
    
    Internal DevelopmentFormulation and Phase 1 BiostudiesPW4110
    
    Epilepsy
    
    Internal DevelopmentPW4135
    
    Epilepsy
    
    Internal DevelopmentPW4150
    
    Epilepsy
    
    Internal DevelopmentPW4155
    
    Pain
    
    Internal DevelopmentPW4153
    
    Parkinsons Disease
    
    Internal DevelopmentPW4158
    
    Parkinsons Disease
    
    Internal Development
 Oxymorphone ER
     4




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in vitro in vitro
 Nalbuphine ER (
    Torsemide ER (PW2132)
  5




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Venlafaxine ER (PW4112)
  in vitro
 6




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Additional Product Opportunities
  Collaborative Agreements
   Revenue Sharing Collaborative Agreements
 Endo Pharmaceuticals Inc.
   7




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Technology Licensing Collaborative Agreements
 Mylan Pharmaceuticals Inc.
   Research and Development
  8




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Manufacturing
    Marketing and Distribution
   Patents and Proprietary Rights
  9




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Patents and Protection of Proprietary Information
    
    
    any of our future processes or products will be patentable;
    
    any pending or additional patents will be issued in any or all appropriate jurisdictions;
    
    our processes or products will not infringe upon the patents of third parties; or
    
    we will have the resources to defend against charges of infringement by, or protect our
own patent rights against, third parties.
    10




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Trademarks
  Government Regulation
   Full NDAs:
    11




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5 05(b)(2) NDAs:
  ANDAs:
  Other FDA Requirements:
  12




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Competition
   
    
    the safety and efficacy of our products;
    
    the relative speed with which we can develop products;
    
    generic competition for any product that we develop;
    
    our ability to protect the intellectual property surrounding our products;
    
    our ability to differentiate our products; and
    
    external factors affecting pricing.
  Employees
  Information Available on the Internet
  13




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ITEM 1A  RISK FACTORS
 Investing in our common stock involves a high degree of risk, and you should carefully
consider the risks and uncertainties described below in addition to the other information included
or incorporated by reference in this annual report. If any of the following risks actually occurs,
our business, financial condition or results of operations would likely suffer, possibly
materially. In that case, the trading price of our common stock could fall.
 We have not been profitable and expect to continue to incur substantial losses
    
    
    the successful commercialization of oxymorphone ER;
    
    royalties from Mylans sale of Pfizers 30 mg generic version of Procardia XL;
    
    the level of our investment in research and development activities; and
    
    the successful development and commercialization of product candidates other than oxymorphone ER.
 We may require additional funding, which may be difficult to obtain
   
    
    whether oxymorphone ER is approved on a timely basis, or at all;
    
    the costs and timing of adding additional products or technologies;
    
    whether we resume our participation in the funding of the development and marketing of
oxymorphone ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular with respect to oxymorphone ER;
    
    the structure and terms of any future collaborative or development agreements;
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
    
    the progress of our collaborative and independent development projects, funding
obligations with respect to the projects, and the related costs to us of clinical studies
for our product candidates;
    
    royalties received from Mylan;
    
    the prosecution, defense and enforcement of potential patent claims and other
intellectual property rights; and
    
    the level of our investments in capital expenditures.
   We depend heavily on the success of our lead product candidate, oxymorphone ER, and if the NDA
for oxymorphone ER is not approved on a timely basis or at all, it would have a material adverse
effect on our business, financial condition and results of operations
  15




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If oxymorphone ER or one of our other product candidates is approved by the FDA, it may not be
widely accepted by physicians, patients, third-party payors, or the medical community in general
  
    
    the safety and efficacy of oxymorphone ER as compared to competitive products;
    
    the advantages and disadvantages of oxymorphone ER compared to alternative therapies;
    
    Endos ability to educate the medical community about the safety and effectiveness of oxymorphone ER;
    
    the strength of marketing distribution support;
    
    Endos ability to manufacture and maintain suitable inventory for sale on an ongoing basis;
    
    the cost-effectiveness of the product and the ability to receive third party reimbursement;
    
    the reimbursement policies of government and third party payors; and
    
    the market price of oxymorphone ER.
  We are dependent on our collaborator Endo to conduct clinical trials of, obtain regulatory
approvals for, and manufacture, market, and sell oxymorphone ER, and are and in the future expect
to be dependent on other collaborators with respect to conducting clinical trials of, obtaining
regulatory approvals for, and manufacturing, marketing, and selling additional products
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
    
    Our collaborators may be pursuing alternative technologies or developing alternative
products, either on their own or in collaboration with others, that may be competitive to
the product on which we are collaborating, which could affect our collaborators commitment
to our collaboration.
    
    Our collaborators may reduce marketing or sales efforts, or discontinue marketing or
sales of our products. This would reduce our revenues received on the products.
    
    Our collaborators may terminate their collaborations with us. This could make it
difficult for us to attract new collaborators or adversely affect perception of us in the
business and financial communities.
    
    Our collaborators may pursue higher priority programs or change the focus of their
development programs, which could affect the collaborators commitment to us. Pharmaceutical
and biotechnology companies historically have re-evaluated their priorities from time to
time, including following mergers and consolidations, which have been common in recent years
in these industries.
 We face significant competition, which may result in others discovering, developing or
commercializing products before or more successfully than we do
  
    
    significantly greater financial, technical and human resources than we have and may be
better equipped to develop, manufacture and commercialize products;
    
    more extensive experience than we have in conducting preclinical studies and clinical
trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical
products;
    
    competing products that have already received regulatory approval or are in late-stage development; and
    
    collaborative arrangements in our target markets with leading companies and research institutions.
   17




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If our clinical trials are not successful or take longer to complete than we expect, we may not be
able to develop and commercialize our products
      18




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
    
    be delayed in obtaining marketing approval for our products;
    
    not be able to obtain marketing approval for our products; or
    
    obtain approval for indications that are not as broad as intended.
  Our drug delivery technologies rely on the ability to control the release of the active drug
ingredient and our business would be harmed if it was determined that there were circumstances
under which the active ingredient from one of our extended release products would be released
rapidly into the blood stream
  in vitro in vitro
 in vitro
 We are subject to extensive government regulation including the requirement of approval before
our products may be marketed. Even if we obtain marketing approval, our products will be subject
to ongoing regulatory review
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Oxymorphone ER contains a narcotic ingredient. As a result of reports of misuse or abuse of
prescription narcotics, the sale of oxymorphone ER may be subject to new regulations, including
the development and implementation of risk management programs which may prove difficult or
expensive to comply with, and we and Endo may face lawsuits
  Our controlled release products that are generic versions of approved products that are covered
by one or more patents may be subject to litigation, which could delay FDA approval and
commercial launch of our products
  Our success depends on our protecting our patents and patented rights
  20




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We may become involved in patent litigation or other intellectual property proceedings relating
to our products or processes, which could result in liability for damages or stop our development
and commercialization efforts
  
    
    We or our collaborators may initiate litigation or other proceedings against third
parties to enforce our patent rights.
    
    We or our collaborators may initiate litigation or other proceedings against third
parties to seek to invalidate the patents held by such third parties or to obtain a judgment
that our products or processes do not infringe such third parties patents.
    
    If our competitors file patent applications that claim technology also claimed by us, we
or our collaborators may participate in interference or opposition proceedings to determine
the priority of invention.
    
    If third parties initiate litigation claiming that our processes or products infringe
their patent or other intellectual property rights, we and our collaborators will need to
defend against such proceedings.
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We have only limited manufacturing capabilities and will be dependent on third party
manufacturers
    
    
    we or our collaborators may not be able to meet commercial demands for our products on a timely basis;
    
    we may not be able to initiate or continue clinical trials of products that are under development; and
    
    we may be delayed in submitting applications for regulatory approvals of our products.
   We are dependent upon a limited number of suppliers for the gums used in our TIMERx material
  22




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If we or our collaborators fail to obtain an adequate level of reimbursement by third party
payors for our products, we may not be able to successfully commercialize controlled release
products
     We will be exposed to product liability claims and may not be able to obtain adequate product
liability insurance
   The market price of our common stock may be volatile
  23




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Specific provisions of our Shareholder Rights Plan, Certificate of Incorporation and Bylaws and
of Washington law make a takeover of Penwest or a change in control or management of Penwest
more difficult
  
 ITEM 1B: UNRESOLVED STAFF COMMENTS
  
 ITEM 2: PROPERTIES
    
 ITEM 3: LEGAL PROCEEDINGS
  
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 EXECUTIVE OFFICERS OF THE REGISTRANT
  NAME
    
    AGE
    
    TITLE
    
    DATESJennifer L. Good
    
    
    41
    
    
    President and Chief Operating Officer
    
    2005  currentSenior Vice President, Finance and Chief Financial Officer
    
    1997  2005Anand R. Baichwal, Ph.D.
    
    
    51
    
    
    Senior Vice President, Licensing and Chief Scientific Officer
    
    2006  currentSenior Vice President, Research & New Technology Development
and Chief Scientific Officer
    
    1997  2006Alan F. Joslyn, Ph.D.
    
    
    47
    
    
    Senior Vice President, Research & Development
    
    2004  currentVice President, Internal Medicine, Johnson & Johnson
Pharmaceutical Research & Development
    
    2002  2004Vice President, Global Drug Development, Janssen Research
Foundation
    
    2000  2001
 24




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NAME
    
    AGE
    
    TITLE
    
    DATESTheodor Rozsa, J.D.,
MB.A.
    
    
    54
    
    
    Senior Vice President, Business Development
    
    2005  currentPresident and Chief Executive Officer of Rose Laboratories,
a privately owned manufacturer of generic pharmaceuticals
    
    1998  2005Thomas Sciascia, M.D.
    
    
    52
    
    
    Senior Vice President and Chief Medical Officer
    
    2001  current
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PART II
 
 ITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
  HIGH
    
    
    LOWPERIOD 2005Quarter Ended March 31
    
    $
    12.91
    
    
    $
    9.75Quarter Ended June 30
    
    $
    13.80
    
    
    $
    10.29Quarter Ended September 30
    
    $
    17.59
    
    
    $
    10.20Quarter Ended December 31
    
    $
    20.00
    
    
    $
    15.02PERIOD 2004Quarter Ended March 31
    
    $
    19.40
    
    
    $
    13.80Quarter Ended June 30
    
    $
    18.20
    
    
    $
    10.00Quarter Ended September 30
    
    $
    13.90
    
    
    $
    8.88Quarter Ended December 31
    
    $
    13.17
    
    
    $
    8.94
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##### Table of Contents



ITEM 6: SELECTED FINANCIAL DATA
  YEAR ENDED DECEMBER 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)STATEMENT OF OPERATIONS
DATA:Revenues
    
    $
    6,213
    
    
    $
    5,108
    
    
    $
    4,678
    
    
    $
    5,537
    
    
    $
    5,796Cost of revenues
    
    
    39
    
    
    
    104
    
    
    
    169
    
    
    
    170
    
    
    
    243Gross profit
    
    
    6,174
    
    
    
    5,004
    
    
    
    4,509
    
    
    
    5,367
    
    
    
    5,553Selling, general and
administrative
    
    
    13,247
    
    
    
    9,485
    
    
    
    10,361
    
    
    
    7,568
    
    
    
    6,358Research and product
development
    
    
    17,797
    
    
    
    20,205
    
    
    
    20,590
    
    
    
    16,955
    
    
    
    16,190Loss from continuing
operations before cumulative
effect of change in
accounting principle
    
    
    (22,898
    )
    
    
    (23,785
    )
    
    
    (26,006
    )
    
    
    (19,028
    )
    
    
    (16,814
    )Earnings from discontinued
operations, net of income
tax expense
    
    
    
    
    
    
    
    
    
    
    177
    
    
    
    1,929
    
    
    
    833Gain on sale of discontinued
operations
    
    
    
    
    
    
    
    
    
    
    9,894
    
    
    
    
    
    
    
    Total discontinued operations
    
    
    
    
    
    
    
    
    
    
    10,071
    
    
    
    1,929
    
    
    
    833Net loss
    
    $
    (22,898
    )
    
    $
    (23,785
    )
    
    $
    (15,935
    )
    
    $
    (17,099
    )
    
    $
    (15,981
    )Basic and diluted loss per
share:Continuing operations
    
    $
    (1.05
    )
    
    $
    (1.28
    )
    
    $
    (1.56
    )
    
    $
    (1.23
    )
    
    $
    (1.21
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.60
    
    
    
    0.12
    
    
    
    0.06Net loss per share
    
    $
    (1.05
    )
    
    $
    (1.28
    )
    
    $
    (0.96
    )
    
    $
    (1.11
    )
    
    $
    (1.15
    )Weighted average shares of
common stock outstanding
    
    
    21,711
    
    
    
    18,627
    
    
    
    16,678
    
    
    
    15,462
    
    
    
    13,905
 DECEMBER 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(IN THOUSANDS)BALANCE SHEET DATA:Cash and cash equivalents
    
    $
    15,917
    
    
    $
    14,249
    
    
    $
    8,241
    
    
    $
    1,629
    
    
    $
    11,529Marketable securities
    
    
    39,377
    
    
    
    60,121
    
    
    
    55,652
    
    
    
    2,057
    
    
    
    9,609Working capital
    
    
    53,912
    
    
    
    71,946
    
    
    
    60,697
    
    
    
    26,355
    
    
    
    27,059Total assets
    
    
    67,021
    
    
    
    87,522
    
    
    
    78,503
    
    
    
    50,220
    
    
    
    59,613Long term
obligations-deferred
compensation
    
    
    2,977
    
    
    
    3,314
    
    
    
    3,104
    
    
    
    2,889
    
    
    
    2,711Accumulated deficit
    
    
    (141,116
    )
    
    
    (118,218
    )
    
    
    (94,433
    )
    
    
    (78,025
    )
    
    
    (60,926
    )Shareholders equity
    
    $
    60,411
    
    
    $
    78,801
    
    
    $
    67,696
    
    
    $
    31,423
    
    
    $
    45,624
 27




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
    
    
    the successful commercialization of oxymorphone ER;
    
    royalties from Mylans sales of Pfizers 30 mg generic version of Procardia XL;
    
    the level of our investment in research and development activities; and
    
    the successful development and commercialization of product candidates other than
oxymorphone ER in our portfolio.
  28




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Critical Accounting Policies and Estimates
  29




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##### Table of Contents



Revenue Recognition
 Royalties and Licensing Fees
    Product Sales
  Research and Development Expenses
   30




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##### Table of Contents



Deferred Taxes  Valuation Allowance
  Impairment of Long-Lived Assets
  Results of Operations for Years Ended December 31, 2005, 2004 and 2003
 Revenues
 Percentage
    
    
    
    
    
    
    PercentageIncrease
    
    
    
    
    
    
    Increase(Decrease)
    
    
    
    
    
    
    (Decrease)2005
    
    
    from 2004
    
    
    2004
    
    
    from 2003
    
    
    2003(in thousands, except percentages)Royalty and Licensing Fees
    
    $
    6,213
    
    
    
    27
    %
    
    $
    4,882
    
    
    
    16
    %
    
    $
    4,223Product Sales
    
    
    
    
    
    
    (100
    )%
    
    
    226
    
    
    
    (50
    )%
    
    
    455Total Revenues
    
    $
    6,213
    
    
    
    22
    %
    
    $
    5,108
    
    
    
    9
    %
    
    $
    4,678
   31




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##### Table of Contents



Selling, General and Administrative Expense
   Research and Product Development Expenses
   Percentage
    
    
    
    
    
    
    PercentageIncrease
    
    
    
    
    
    
    Increase(Decrease) from
    
    
    
    
    
    
    (Decrease) from2005
    
    
    2004
    
    
    2004
    
    
    2003
    
    
    2003(in thousands, except percentages)Oxymorphone ER
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    (100
    )%
    
    $
    1,947PW2101
    
    
    1,817
    
    
    
    (80
    )%
    
    
    9,228
    
    
    
    (2
    )%
    
    
    9,443Nalbuphine ER
    
    
    1,184
    
    
    
    451
    %
    
    
    215
    
    
    
    216
    %
    
    
    68Torsemide ER
    
    
    1,043
    
    
    
    181
    %
    
    
    371
    
    
    
    960
    %
    
    
    35Venlafaxine ER
    
    
    921
    
    
    
    232
    %
    
    
    277
    
    
    
    1,159
    %
    
    
    22Phase I Products and Internal Costs
    
    
    11,154
    
    
    
    53
    %
    
    
    7,296
    
    
    
    8
    %
    
    
    6,731Research and New Technology
Development
    
    
    1,678
    
    
    
    (40
    )%
    
    
    2,818
    
    
    
    20
    %
    
    
    2,344Total Research and Product
Development Expense
    
    $
    17,797
    
    
    
    (12
    )%
    
    $
    20,205
    
    
    
    (2
    )%
    
    $
    20,590
  
    
    Oxymorphone ER These expenses reflect our direct external expenses relating to the
development of oxymorphone ER. These expenses consist primarily of payments to third
parties, including payments to Endo for our share of development costs under our
collaboration agreement with Endo. We did not have
 32




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##### Table of Contents



any research and development expenses related to oxymorphone ER in 2005 or 2004 and have not
incurred any research and development expenses related to oxymorphone ER since April 17,
2003 when we discontinued our funding of the development of oxymorphone ER. Research and
development expenses in 2003 related to the costs of clinical trials of oxymorphone ER. We
do not expect to incur any additional research and development expenses relating to
oxymorphone ER unless we resume our participation in the funding of the expenses of
oxymorphone ER. We anticipate that we may resume funding upon the drugs approval by the
FDA.
 
    
    PW2101 These expenses reflect our direct external expenses relating to the
development of PW2101. These expenses consist primarily of payments to third parties in
connection with clinical trials of PW2101, the manufacturing of PW2101, including our
development work related to the qualification of an alternative manufacturing site, and the
preparation of the NDA for PW2101. These expenses approximated 10% of our research and development
expenses for 2005. Our PW2101 expenses were
lower than in 2004 and 2003 primarily because our research and development expenses in 2004
and 2003 included costs associated with the pivotal clinical trials of PW2101, which were
completed in early 2005. We received a nonapprovable letter on this drug in 2005, and we
discontinued development work on PW2101 in the second quarter of 2005. Expenses for 2005
included a write-down of $118,000 relating to the impairment of patents covering PW2101
that we determined no longer had value. We do not expect to incur additional research and
development expenses with respect to PW2101 in future periods.
    
    Nalbuphine ER These expenses reflect our direct external expenses relating to the
development of nalbuphine ER. These expenses consist primarily of payments to third
parties in connection with clinical trials of nalbuphine ER and approximated 7% of our
research and development expenses in 2005. The expenses for this compound have increased
in 2005 from 2004 and 2003 levels, as the drug has advanced from Phase I through Phase IIa
clinical trials. In 2006, we expect our research and product development expenses relating
to nalbuphine ER to increase as we manufacture clinical supplies for and commence a Phase IIb
trial.
    
    Torsemide ER These expenses reflect our direct external expenses relating to the
development of torsemide ER. These expenses consist primarily of payments to third parties
in connection with clinical trials of torsemide ER and approximated 6% of our research and
development expenses in 2005. The expenses for this compound increased in 2005 from 2004
and 2003 levels, as the drug has advanced from Phase I into Phase IIa clinical trials. In
2006, we expect to determine whether to continue development of this product on our own or
whether to seek a collaborator to complete the development work. If we continue
development of torsemide ER on our own, we expect our research and product development
expenses relating to toresemide ER to increase as we manufacture registration batches and
commence the pivotal trial.
    
    Venlafaxine ER These expenses reflect our direct external expenses relating to the
development of venlafaxine ER. These expenses consist primarily of payments to third
parties in connection with the manufacture of venlafaxine ER, including the costs of the
active drug and approximated 5% of our research and development expenses in 2005. The expenses for this
compound have increased in 2005 from 2004 and 2003 levels as the drug has advanced from
Phase I clinical trials into full clinical development. In 2006, we expect our research
and product development expenses relating to venlafaxine ER to increase as we complete the
manufacturing of registration batches and conduct the pivotal studies, which we believe
will consist of three additional Phase I studies.
    
    Phase I Products and Internal Costs These expenses primarily reflect our expenses
such as salaries and benefits of our product development personnel, including our
formulation, clinical and regulatory groups, and other costs primarily related to our
laboratory facilities that are not allocated to specific programs. These expenses also
reflect both our direct external expenses and our allocated internal expenses relating to
the development of Phase I product candidates. Our direct external expenses primarily
reflect payments to
 33




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third parties for the drug active and proof-of-principle biostudies conducted on our Phase I
products. These costs increased in 2005 over 2004, and in 2004 over 2003, primarily as a
result of an increase in the number of Phase I product candidates in our pipeline, an
increase in external costs incurred in connection with proof-of-principle biostudies for
these Phase I product candidates, increased costs associated with an increase in the number
of employees engaged in our product development efforts and $497,000 in write-offs of
inventory, primarily related to a change in specifications for TIMERx in the second quarter
of 2005. We continually evaluate the Phase I product candidates we are developing, and may
terminate or accelerate development of product candidates based on study results, product
development risk, commercial opportunity, perceived time to market and other factors.
 
    
    Research and New Technology Development  These expenses reflect both our direct
external expenses and our allocated internal expenses relating to the development of new
drug delivery technologies. These direct external expenses consist primarily of payments
to third parties in connection with outside laboratory and consulting fees. Our internal
expenses primarily include salaries and benefits of our research and new technology
development group, and other costs such as depreciation on purchased equipment, and the
amortization or any write-downs of patent costs, other than product patent write-offs
charged directly to a product development project. These expenses decreased in 2005 from
2004, primarily due to lower personnel costs associated with redeploying personnel that
were previously performing research and new technology development activities, to the
development of Phase I candidates, as well as a $410,000 write-down recorded in the second
quarter of 2004 related to the impairment of certain patents covering our inhalation
technology we determined to no longer have value, with no similar charge recorded in 2005.
These expenses increased in 2004 over 2003 primarily due to the $410,000 write-down noted
above, as well as our continued focus on the expansion of the applications of our TIMERx
technology, and legal expenses and amortization associated with our intellectual property.
  Tax Rates
  Liquidity and Capital Resources
 Sources of Liquidity
   34




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Cash Flows
   35




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##### Table of Contents



Funding Requirements
   
    
    whether oxymorphone ER is approved on a timely basis, or at all;
    
    the costs and timing of adding product candidates or technologies;
    
    whether we resume our participation in the funding of the development and marketing of oxymorphone ER;
    
    the timing and amount of payments received under collaborative agreements, including in particular with respect to
oxymorphone ER;
    
    the structure and terms of any future collaborative or development agreements;
    
    the progress of our collaborative and independent development projects, funding obligations with respect to the projects,
and the related costs to us of clinical studies for our products;
    
    royalties received from Mylan;
    
    the prosecution, defense and enforcement of potential patent claims and other intellectual property rights; and
    
    the level of capital expenditures.
    36




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Contractual Obligations
  Less than
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating Leases
    
    $
    704
    
    
    $
    671
    
    
    $
    33
    
    
    $
    
    
    
    $
    Purchase Obligations
    
    
    1,155
    
    
    
    1,116
    
    
    
    39
    
    
    
    
    
    
    
    Deferred Compensation, including current portion
    
    
    3,268
    
    
    
    291
    
    
    
    582
    
    
    
    582
    
    
    
    1,813Total
    
    $
    5,127
    
    
    $
    2,078
    
    
    $
    654
    
    
    $
    582
    
    
    $
    1,813
  
    
    We have a Supplemental Executive Retirement Plan, or SERP, a nonqualified plan
which covers our former Chairman and Chief Executive Officer, Tod R. Hamachek. Under the
SERP, effective in May 2005, we became obligated to pay Mr. Hamachek approximately $12,600
per month over the lives of Mr. Hamachek and his spouse.
    
    We also have a Deferred Compensation Plan, or DCP, a nonqualified plan which covers Mr.
Hamachek. Under the DCP, effective in May 2005, we became obligated to pay Mr. Hamachek
approximately $140,000 per year, including interest, in ten annual installments.
  Net Operating Loss Carryforwards
  Market Risk and Risk Management Policies
  37




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Recent Accounting Pronouncements
    38




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Forward Looking Statements
  
 ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  39




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##### Table of Contents



ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 (a) Evaluation of Disclosure Controls and Procedures.
 (b) Changes in Internal Control Over Financial Reporting.
 (c) Reports on Internal Control Over Financial Reporting
 Managements Annual Report on Internal Control Over Financial Reporting
  
    
    Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;
    
    Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
    
    Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
  40




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##### Table of Contents



/s/ Jennifer L. Good
    
    March 6, 2006Jennifer L. GoodPresident and Chief Operating Officer
 41




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     .
   
 42




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##### Table of Contents



ITEM 9B. OTHER INFORMATION
  PART III
 
 ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
   
 ITEM 11: EXECUTIVE COMPENSATION
  
 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  
 PART IV
 
 ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    (1) Financial Statements and Financial Statement ScheduleThe following documents are filed as Appendix A hereto and are included as part of this Annual
Report on Form 10-K.The consolidated balance sheets as of December 31, 2005 and 2004 and the related statements of
operations, cash flows and shareholders equity for each of the three years in the period ended
December 31, 2005.Schedule II  Valuation and Qualifying Accounts
 43




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All other schedules for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are omitted because they are not applicable or because the
information is presented in the financial statements or notes thereto.(2) ExhibitsThe list of Exhibits filed as part of this Annual Report on Form 10-K are set forth on the
Exhibit Index immediately preceding such exhibits, and is incorporated herein by reference.
This list includes a subset containing each management contract, compensatory plan, or
arrangement required to be filed as an exhibit to this report.
 44




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##### Table of Contents



SIGNATURES
  Penwest Pharmaceuticals Co.Date: March 13, 2006
    
    /s/ Jennifer L. GoodJennifer L. Good, President and
Chief Operating Officer
  Date: March 13, 2006
    
    /s/ Jennifer L. GoodJennifer L. Good, President and
Chief Operating Officer
(Principal Executive Officer)
(Principal Financial and Accounting Officer)Date: March 13, 2006
    
    /s/ Paul E. FreimanPaul E. Freiman, Chairman of the BoardDate: March 13, 2006
    
    /s/ Peter F. DrakePeter F. Drake, Ph.D., DirectorDate: March 13, 2006
    
    /s/ Rolf H. HenelRolf H. Henel, DirectorDate: March 13, 2006
    
    /s/ Robert J. HennesseyRobert J. Hennessey, DirectorDate: March 13, 2006
    
    /s/ John N. StaniforthJohn N. Staniforth, Ph.D., DirectorDate: March 13, 2006
    
    /s/ Anne M. VanLentAnne M. VanLent, Director
 45




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##### 



APPENDIX A
 PENWEST PHARMACEUTICALS CO.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
 PageConsolidated Financial StatementsReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Operations
    
    
    F-4Consolidated Statements of Shareholders Equity
    
    
    F-5Consolidated Statements of Cash Flows
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Schedule II  Valuation and Qualifying Accounts
    
    
    S-1




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Report of Independent Registered Public Accounting Firm
 
       
 F-2




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PENWEST PHARMACEUTICALS CO.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 DECEMBER 31,2005
    
    
    2004(see Note 2 - Basis ofPresentation)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,917
    
    
    $
    14,249Marketable securities
    
    
    39,377
    
    
    
    60,121Trade accounts receivable
    
    
    942
    
    
    
    1,126Inventories
    
    
    140
    
    
    
    643Prepaid expenses and other current assets
    
    
    1,112
    
    
    
    1,143Total current assets
    
    
    57,488
    
    
    
    77,282Fixed assets, net
    
    
    2,990
    
    
    
    3,674Patents, net
    
    
    3,383
    
    
    
    3,504Cash surrender value of life insurance policy
    
    
    3,160
    
    
    
    3,062Total assets
    
    $
    67,021
    
    
    $
    87,522LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,064
    
    
    $
    2,396Accrued expenses
    
    
    1,722
    
    
    
    1,966Accrued development costs
    
    
    499
    
    
    
    974Deferred compensation  current portion
    
    
    291
    
    
    
    Total current liabilities
    
    
    3,576
    
    
    
    5,336Deferred revenue
    
    
    57
    
    
    
    71Deferred compensation
    
    
    2,977
    
    
    
    3,314Total liabilities
    
    
    6,610
    
    
    
    8,721Shareholders equity:Preferred stock, par value $.001, authorized 1,000,000 shares, none outstanding
    
    
    
    
    
    
    Common stock, par value $.001, authorized 60,000,000 shares, issued and
outstanding 21,889,940 shares at December 31, 2005 and 21,692,730 shares at
December 31, 2004
    
    
    22
    
    
    
    22Additional paid in capital
    
    
    201,659
    
    
    
    197,097Accumulated deficit
    
    
    (141,116
    )
    
    
    (118,218
    )Accumulated other comprehensive loss
    
    
    (154
    )
    
    
    (100
    )Total shareholders equity
    
    
    60,411
    
    
    
    78,801Total liabilities and shareholders equity
    
    $
    67,021
    
    
    $
    87,522
  F-3
    Table of Contents   PENWEST PHARMACEUTICALS CO.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 YEAR ENDED DECEMBER 31,2005
    
    
    2004
    
    
    2003(see Note 2 - Basis of Presentation)RevenuesRoyalties and licensing fees
    
    $
    6,213
    
    
    $
    4,882
    
    
    $
    4,223Product sales
    
    
    
    
    
    
    226
    
    
    
    455Total revenues
    
    
    6,213
    
    
    
    5,108
    
    
    
    4,678Cost of revenues
    
    
    39
    
    
    
    104
    
    
    
    169Gross profit
    
    
    6,174
    
    
    
    5,004
    
    
    
    4,509Operating expensesSelling, general and administrative
    
    
    13,247
    
    
    
    9,485
    
    
    
    10,361Research and product development
    
    
    17,797
    
    
    
    20,205
    
    
    
    20,590Total operating expenses
    
    
    31,044
    
    
    
    29,690
    
    
    
    30,951Operating loss from continuing operations
    
    
    (24,870
    )
    
    
    (24,686
    )
    
    
    (26,442
    )Investment income
    
    
    1,974
    
    
    
    906
    
    
    
    476Interest expense
    
    
    
    
    
    
    
    
    
    
    34Loss from continuing operations before income tax expense
    
    
    (22,896
    )
    
    
    (23,780
    )
    
    
    (26,000
    )Income tax expense
    
    
    2
    
    
    
    5
    
    
    
    6Loss from continuing operations
    
    
    (22,898
    )
    
    
    (23,785
    )
    
    
    (26,006
    )Earnings from discontinued operations, net of income tax
expense of $26 for 2003
    
    
    
    
    
    
    
    
    
    
    177Gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    9,894Total discontinued operations
    
    
    
    
    
    
    
    
    
    
    10,071Net loss
    
    $
    (22,898
    )
    
    $
    (23,785
    )
    
    $
    (15,935
    )Basic and diluted (loss) earnings per common share:Continuing operations
    
    $
    (1.05
    )
    
    $
    (1.28
    )
    
    $
    (1.56
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.60Net loss
    
    $
    (1.05
    )
    
    $
    (1.28
    )
    
    $
    (0.96
    )Weighted average shares of common stock outstanding
    
    
    21,711
    
    
    
    18,627
    
    
    
    16,678
  F-4




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PENWEST PHARMACEUTICALS CO.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (in thousands)
 ACCUMULATEDADDITIONAL
    
    
    
    
    
    
    OTHERCOMMON STOCK
    
    
    PAID-IN
    
    
    ACCUMULATED
    
    
    COMPREHENSIVESHARES
    
    
    AMOUNT
    
    
    CAPITAL
    
    
    DEFICIT
    
    
    (LOSS) INCOME
    
    
    TOTALBalances, December 31, 2002
    
    
    15,506
    
    
    $
    16
    
    
    $
    110,000
    
    
    $
    (78,025
    )
    
    $
    (568
    )
    
    $
    31,423Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,935
    )
    
    
    
    
    
    
    (15,935
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110
    
    
    
    110Accumulated foreign
currency translation
adjustments of
discontinued operations
sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (473
    )
    
    
    473
    
    
    
    Changes in unrealized
gain on marketable
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    28Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,797
    )Issuance of common
stock pursuant to an
equity financing, net
    
    
    2,508
    
    
    
    2
    
    
    
    49,302
    
    
    
    
    
    
    
    
    
    
    
    49,304Issuance of common
stock pursuant to stock
compensation plans
    
    
    400
    
    
    
    
    
    
    
    2,662
    
    
    
    
    
    
    
    
    
    
    
    2,662Issuance of common
stock pursuant to Stock
Purchase Plan
    
    
    9
    
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    104Balances, December 31, 2003
    
    
    18,423
    
    
    
    18
    
    
    
    162,068
    
    
    
    (94,433
    )
    
    
    43
    
    
    
    67,696Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,785
    )
    
    
    
    
    
    
    (23,785
    )Changes in unrealized
gain/loss on marketable
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (143
    )
    
    
    (143
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,928
    )Issuance of common
stock pursuant to an
equity financing, net
    
    
    3,125
    
    
    
    4
    
    
    
    32,795
    
    
    
    
    
    
    
    
    
    
    
    32,799Issuance of common
stock pursuant to stock
compensation plans
    
    
    130
    
    
    
    
    
    
    
    2,081
    
    
    
    
    
    
    
    
    
    
    
    2,081Issuance of common
stock pursuant to Stock
Purchase Plan
    
    
    15
    
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    153Balances, December 31, 2004
    
    
    21,693
    
    
    
    22
    
    
    
    197,097
    
    
    
    (118,218
    )
    
    
    (100
    )
    
    
    78,801Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,898
    )
    
    
    
    
    
    
    (22,898
    )Changes in unrealized
loss on marketable
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )
    
    
    (54
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,952
    )Issuance of common
stock pursuant to stock
compensation plans
    
    
    183
    
    
    
    
    
    
    
    2,027
    
    
    
    
    
    
    
    
    
    
    
    2,027Stock compensation
charge in connection
with modification of
stock options
    
    
    
    
    
    
    
    
    
    
    2,398
    
    
    
    
    
    
    
    
    
    
    
    2,398Issuance of common
stock pursuant to Stock
Purchase Plan
    
    
    14
    
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    
    
    
    
    137Balances, December 31, 2005
    
    
    21,890
    
    
    $
    22
    
    
    $
    201,659
    
    
    $
    (141,116
    )
    
    $
    (154
    )
    
    $
    60,411
  F-5




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 YEAR ENDED DECEMBER 31,2005
    
    
    2004
    
    
    2003(see Note 2 - Basis of Presentation)Operating activities:Net loss
    
    $
    (22,898
    )
    
    $
    (23,785
    )
    
    $
    (15,935
    )Less earnings from discontinued operations, net of tax expense
    
    
    
    
    
    
    
    
    
    
    (177
    )Less gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (9,894
    )Loss from continuing operations
    
    
    (22,898
    )
    
    
    (23,785
    )
    
    
    (26,006
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation
    
    
    987
    
    
    
    1,042
    
    
    
    679Amortization
    
    
    464
    
    
    
    410
    
    
    
    219Inventory reserves
    
    
    497
    
    
    
    75
    
    
    
    113Patent impairment losses
    
    
    137
    
    
    
    417
    
    
    
    5Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    (118
    )Deferred revenue
    
    
    (14
    )
    
    
    (14
    )
    
    
    (53
    )Deferred compensation
    
    
    194
    
    
    
    211
    
    
    
    215Stock compensation
    
    
    3,083
    
    
    
    297
    
    
    
    110Changes in operating assets and liabilities:Trade accounts receivable
    
    
    184
    
    
    
    27
    
    
    
    (35
    )Inventories
    
    
    5
    
    
    
    (62
    )
    
    
    (308
    )Accounts payable, accrued expenses and other
    
    
    (2,700
    )
    
    
    (1,505
    )
    
    
    2,112Net cash used in continuing operations operating activities
    
    
    (20,061
    )
    
    
    (22,887
    )
    
    
    (23,067
    )Net cash provided by discontinued operations operating
activities
    
    
    
    
    
    
    
    
    
    
    874Net cash used in operating activities
    
    
    (20,061
    )
    
    
    (22,887
    )
    
    
    (22,193
    )Investing activities:Proceeds from sale of discontinued operations, net of
transaction costs of $1,351 paid in 2003
    
    
    
    
    
    
    1,250
    
    
    
    36,900Acquisitions of fixed assets, net
    
    
    (276
    )
    
    
    (1,226
    )
    
    
    (1,810
    )Patent costs
    
    
    (479
    )
    
    
    (643
    )
    
    
    (965
    )Purchases of marketable securities
    
    
    (51,499
    )
    
    
    (57,681
    )
    
    
    (62,170
    )Proceeds from maturities of marketable securities
    
    
    47,054
    
    
    
    17,795
    
    
    
    7,299Proceeds from sales of marketable securities
    
    
    25,450
    
    
    
    35,150
    
    
    
    1,100Net cash provided by (used in) continuing operations
investing activities
    
    
    20,250
    
    
    
    (5,355
    )
    
    
    (19,646
    )Net cash used in discontinued operations investing activities
    
    
    
    
    
    
    
    
    
    
    (97
    )Net cash provided by (used in) investing activities
    
    
    20,250
    
    
    
    (5,355
    )
    
    
    (19,743
    )Financing activities:Proceeds from loans and notes payable
    
    
    
    
    
    
    
    
    
    
    1,354Repayments of loans and notes payable
    
    
    
    
    
    
    
    
    
    
    (7,047
    )Issuance of common stock, net
    
    
    1,479
    
    
    
    34,250
    
    
    
    51,960Net cash provided by discontinued operations financing
activities
    
    
    
    
    
    
    
    
    
    
    2,249Net cash provided by financing activities
    
    
    1,479
    
    
    
    34,250
    
    
    
    48,516Effect of exchange rate changes on cash and cash equivalents
of discontinued operations
    
    
    
    
    
    
    
    
    
    
    32Net increase in cash and cash equivalents
    
    
    1,668
    
    
    
    6,008
    
    
    
    6,612Cash and cash equivalents at beginning of year
    
    
    14,249
    
    
    
    8,241
    
    
    
    1,629Cash and cash equivalents at end of year
    
    $
    15,917
    
    
    $
    14,249
    
    
    $
    8,241
  F-6




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##### Table of Contents



1. BUSINESS
     2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   F-7




---



##### Table of Contents



F-8




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##### Table of Contents



Machinery and equipment
    
    5-10 yearsOffice furniture, equipment and software
    
    3-10 yearsLeasehold improvements
    
    1-3 years
        F-9




---



##### Table of Contents



Royalties and licensing fees
 Product sales
     F-10




---



##### Table of Contents



DECEMBER 31,2005
    
    2004
    
    2003(in thousands of shares)Stock options outstanding
    
    
    3,016
    
    
    
    2,647
    
    
    
    2,437Restricted stock outstanding
    
    
    68
    
    
    
    50
    
    
    
    603,084
    
    
    
    2,697
    
    
    
    2,497
    YEAR ENDED DECEMBER 31,2005
    
    
    2004
    
    
    2003(in thousands, except per share data)Net loss  as reported
    
    $
    (22,898
    )
    
    $
    (23,785
    )
    
    $
    (15,935
    )Stock-based compensation expense included in reported net loss
    
    
    2,939
    
    
    
    296
    
    
    
    305Stock-based compensation under fair value method
    
    
    (3,652
    )
    
    
    (3,575
    )
    
    
    (3,316
    )Net loss  pro forma after stock-based compensation under
fair value method
    
    $
    (23,611
    )
    
    $
    (27,064
    )
    
    $
    (18,946
    )Net loss per share, basic and diluted  as reported
    
    $
    (1.05
    )
    
    $
    (1.28
    )
    
    $
    (0.96
    )Net loss per share, basic and diluted  pro forma after
stock-based compensation under fair value method
    
    $
    (1.09
    )
    
    $
    (1.45
    )
    
    $
    (1.14
    )
 3. RECENT ACCOUNTING PRONOUNCEMENTS
  F-11




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,
   F-12




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##### Table of Contents



4. MARKETABLE SECURITIES
  Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(in thousands)December 31, 2005:Corporate debt securities
    
    $
    32,472
    
    
    $
    
    
    
    $
    113
    
    
    $
    32,359U.S. government agency-backed discounted notes
    
    
    7,059
    
    
    
    
    
    
    
    41
    
    
    
    7,018Total marketable securities
    
    $
    39,531
    
    
    $
    
    
    
    $
    154
    
    
    $
    39,377December 31, 2004:Corporate debt securities
    
    $
    32,410
    
    
    $
    
    
    
    $
    64
    
    
    $
    32,346U.S.
government agency-backed discounted notes
    
    
    7,019
    
    
    
    
    
    
    
    36
    
    
    
    6,983Municipal securities
    
    
    20,792
    
    
    
    
    
    
    
    
    
    
    
    20,792Total marketable securities
    
    $
    60,221
    
    
    $
    
    
    
    $
    100
    
    
    $
    60,121
  Contractual maturity:Maturing in one year or less
    
    $
    34,328Maturing after one year through five years
    
    
    5,049Total marketable securities
    
    $
    39,377
   5. INVENTORIES
  DECEMBER 31,2005
    
    
    2004(in thousands)Raw materials
    
    $
    44
    
    
    $
    134Finished products
    
    
    96
    
    
    
    509Total inventories
    
    $
    140
    
    
    $
    643
 F-13




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##### Table of Contents



6. FIXED ASSETS
  DECEMBER 31,2005
    
    
    2004(in thousands)Equipment and leasehold improvements
    
    $
    5,092
    
    
    $
    5,487Software
    
    
    1,834
    
    
    
    1,653Projects in progress
    
    
    76
    
    
    
    1547,002
    
    
    
    7,294Less: accumulated depreciation and amortization
    
    
    4,012
    
    
    
    3,620$
    2,990
    
    
    $
    3,674
  7. PATENTS
  DECEMBER 31,2005
    
    
    2004(in thousands)Patents, net of accumulated amortization of $1,625 and $1,234
    
    $
    3,383
    
    
    $
    3,504
 F-14




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##### Table of Contents



8. LOANS AND NOTES PAYABLE
        F-15




---



##### Table of Contents



9. SHAREHOLDERS EQUITY
       F-16




---



##### Table of Contents



WeightedOption Price
    
    AverageShares
    
    Range
    
    Exercise PriceBALANCE, DECEMBER 31, 2002
    
    
    2,399,114
    
    
    $
    3.70-19.76
    
    
    $
    9.37Options Exercisable
    
    
    1,566,988
    
    
    $
    3.70-18.18
    
    
    $
    7.662003Granted
    
    
    539,511
    
    
    $
    7.43-21.24
    
    
    $
    11.32Exercised
    
    
    (334,914
    )
    
    $
    4.06-12.75
    
    
    $
    7.30Forfeited
    
    
    (68,000
    )
    
    $
    6.38-19.13
    
    
    $
    12.89Expired
    
    
    (98,911
    )
    
    $
    3.70-15.47
    
    
    $
    7.42BALANCE, DECEMBER 31, 2003
    
    
    2,436,800
    
    
    $
    3.70-21.24
    
    
    $
    10.06Options Exercisable
    
    
    1,464,472
    
    
    $
    3.70-19.76
    
    
    $
    9.162004Granted
    
    
    510,495
    
    
    $
    8.30-18.68
    
    
    $
    15.09Exercised
    
    
    (123,225
    )
    
    $
    5.41-15.94
    
    
    $
    10.53Forfeited
    
    
    (146,100
    )
    
    $
    9.90-21.24
    
    
    $
    16.34Expired
    
    
    (31,000
    )
    
    $
    15.47-19.13
    
    
    $
    19.01BALANCE, DECEMBER 31, 2004
    
    
    2,646,970
    
    
    $
    3.70-21.24
    
    
    $
    10.56Options Exercisable
    
    
    1,754,356
    
    
    $
    3.70-21.24
    
    
    $
    9.162005Granted
    
    
    696,000
    
    
    $
    10.10-18.44
    
    
    $
    12.42Exercised
    
    
    (137,502
    )
    
    $
    5.41-14.43
    
    
    $
    9.64Forfeited
    
    
    (165,855
    )
    
    $
    9.90-18.96
    
    
    $
    12.48Expired
    
    
    (24,050
    )
    
    $
    9.90-21.24
    
    
    $
    16.81BALANCE, DECEMBER 31, 2005
    
    
    3,015,563
    
    
    $
    3.70-21.24
    
    
    $
    10.88Options Exercisable
    
    
    2,120,947
    
    
    $
    3.70-19.76
    
    
    $
    9.99
   2005
    
    2004
    
    2003Expected dividend yield
    
    None
    
    None
    
    NoneRisk free interest rate
    
    
    4.1
    %
    
    
    3.7
    %
    
    
    3.8
    %Expected volatility
    
    
    48
    %
    
    
    46
    %
    
    
    46
    %Expected life of options
    
    7.5 years
    
    7.5 years
    
    7.5 years
 F-17




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##### Table of Contents



Weighted AverageRange of
    
    Options
    
    Remaining Years of
    
    Weighted Average
    
    Options
    
    Weighted AverageExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$  3.70
- $  7.00
    
    
    911,100
    
    
    
    1.6
    
    
    $
    6.32
    
    
    
    911,100
    
    
    $
    6.32$  7.01 - $11.00
    
    
    710,062
    
    
    
    5.0
    
    
    $
    9.84
    
    
    
    464,809
    
    
    $
    9.69$11.01 - $15.00
    
    
    820,611
    
    
    
    6.5
    
    
    $
    12.38
    
    
    
    441,736
    
    
    $
    12.52$15.01 - $19.00
    
    
    454,790
    
    
    
    6.9
    
    
    $
    16.69
    
    
    
    203,552
    
    
    $
    16.96$19.01 - $21.24
    
    
    119,000
    
    
    
    5.8
    
    
    $
    19.35
    
    
    
    99,750
    
    
    $
    19.403,015,563
    
    
    
    4.7
    
    
    $
    10.88
    
    
    
    2,120,947
    
    
    $
    9.99
  WeightedAverageShares
    
    Fair Value2003
    
    
    60,000
    
    
    $
    10.052004
    
    
    5,000
    
    
    $
    16.392005
    
    
    38,000
    
    
    $
    12.52
      F-18




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##### Table of Contents



10. COMMITMENTS
      OperatingLeases(in thousands)2006
    
    $
    6712007
    
    
    322008
    
    
    12009
    
    
    2010
    
    
    Thereafter
    
    
    Total minimum lease payments
    
    $
    704
 11. INCOME TAXES
   2005
    
    2004
    
    2003Statutory tax rate
    
    
    (34
    )%
    
    
    (34
    )%
    
    
    (34
    )%Valuation allowance
    
    
    34
    
    
    
    34
    
    
    
    34
    %
    
    
    
    %
    
    
    
    %
 F-19




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##### Table of Contents



2005
    
    
    2004(in thousands)Inventory allowance and basis differences
    
    $
    (163
    )
    
    $
    (146
    )Deferred compensation and SERP liability
    
    
    (1,307
    )
    
    
    (1,280
    )Deferred revenue
    
    
    (23
    )
    
    
    (27
    )Tax credit carryforwards
    
    
    (4,497
    )
    
    
    (3,264
    )Net operating loss carryforwards
    
    
    (47,603
    )
    
    
    (37,337
    )Other
    
    
    
    
    
    
    (109
    )Total deferred tax assets
    
    
    (53,593
    )
    
    
    (42,163
    )Depreciation and amortization
    
    
    1,708
    
    
    
    1,718Other
    
    
    284
    
    
    
    259Total deferred tax liabilities
    
    
    1,992
    
    
    
    1,977Net deferred tax asset before valuation allowance
    
    
    (51,601
    )
    
    
    (40,186
    )Valuation allowance
    
    
    51,601
    
    
    
    40,186Net deferred tax liability
    
    $
    
    
    
    $
    
    12. COMPENSATION CHARGE
  F-20




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##### Table of Contents



13. RETIREMENT PLANS AND OTHER EMPLOYEE BENEFITS
       2005
    
    
    2004(in thousands)Benefit obligation at beginning of period
    
    $
    2,168
    
    
    $
    2,048Service cost
    
    
    
    
    
    
    (32
    )Interest cost
    
    
    122
    
    
    
    126Actuarial (gain) loss
    
    
    (21
    )
    
    
    26Benefits paid
    
    
    (101
    )
    
    
    Benefit obligation at December 31,
    
    $
    2,168
    
    
    $
    2,168
  2005
    
    
    2004(in thousands)Funded status (unfunded)
    
    $
    (2,168
    )
    
    $
    (2,168
    )Unrecognized prior service cost
    
    
    14
    
    
    
    16Unrecognized net actuarial gain
    
    
    (172
    )
    
    
    (152
    )Net amount recognized at December 31, (included in deferred compensation)
    
    $
    (2,326
    )
    
    $
    (2,304
    )
  2005
    
    
    2004(in thousands)Accrued benefit cost (minimum liability)
    
    $
    (2,326
    )
    
    $
    (2,304
    )Net amount recognized at December 31,
    
    $
    (2,326
    )
    
    $
    (2,304
    )
 F-21




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##### Table of Contents



2005
    
    2004(in thousands)Projected benefit obligation
    
    $
    2,168
    
    
    $
    2,168Accumulated benefit obligation
    
    $
    2,168
    
    
    $
    1,887Plan assets of fair value
    
    $
    
    
    
    $
    
  2005
    
    
    2004(in thousands)Service cost
    
    $
    
    
    
    $
    (33
    )Interest cost
    
    
    123
    
    
    
    126Amortization of unrecognized transition obligation
    
    
    
    
    
    
    40Amortization of prior service cost
    
    
    2
    
    
    
    2Amortization of gains
    
    
    (1
    )
    
    
    Net periodic benefit cost
    
    $
    124
    
    
    $
    135
   2005
    
    2004Discount rate
    
    
    5.75
    %
    
    
    6.00
    %Rate of compensation increase
    
    
    N/A
    
    
    
    3.0
    %
  2005
    
    2004Discount rate
    
    
    6.00
    %
    
    
    6.25
    %Rate of compensation increase
    
    
    N/A
    
    
    
    4.0
    %
  2006
    
    $
    1512007
    
    
    1512008
    
    
    1512009
    
    
    1512010
    
    
    151Years 2011-2015
    
    
    753
   F-22




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##### Table of Contents



2006
    
    $
    1402007
    
    
    1402008
    
    
    1402009
    
    
    14020010
    
    
    140Years 2011-2014
    
    
    560
    14. DISCONTINUED OPERATIONS
    F-23




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##### Table of Contents



15. LICENSING AGREEMENTS
  Endo Pharmaceuticals Inc.
 ® ® ®
   Mylan Pharmaceuticals Inc.
  F-24




---



##### Table of Contents



Prism Pharmaceuticals, Inc.
   16. CONTINGENCIES
   17. RELATED PARTY TRANSACTIONS
 ®
 F-25




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##### Table of Contents



®
 ® ®
  18. QUARTERLY FINANCIAL DATA (UNAUDITED)
  Quarter EndedMar. 31, 2005
    
    
    June 30, 2005
    
    
    Sept. 30, 2005(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    Dec. 31, 2005(a)
    
    
    (b)
    
    
    (c)
    
    
    (Unaudited)(in thousands, except per share data)Total revenues
    
    $
    982
    
    
    $
    1,296
    
    
    $
    3,004
    
    
    $
    931Gross profit
    
    
    974
    
    
    
    1,282
    
    
    
    2,996
    
    
    
    922Net loss
    
    $
    (8,947
    )
    
    $
    (5,686
    )
    
    $
    (2,986
    )
    
    $
    (5,279
    )Net loss per share
    
    $
    (0.41
    )
    
    $
    (0.26
    )
    
    $
    (0.14
    )
    
    $
    (0.24
    )
 Quarter EndedJune 30, 2004Mar. 31, 2004
    
    
    (Unaudited)
    
    
    Sept. 30, 2004
    
    
    Dec. 31, 2004(Unaudited)
    
    
    (d)
    
    
    (Unaudited)
    
    
    (Unaudited)(in thousands, except per share data)Total revenues
    
    $
    1,483
    
    
    $
    1,266
    
    
    $
    1,210
    
    
    $
    1,149Gross profit
    
    
    1,434
    
    
    
    1,237
    
    
    
    1,195
    
    
    
    1,138Net loss
    
    $
    (4,778
    )
    
    $
    (7,509
    )
    
    $
    (5,008
    )
    
    $
    (6,490
    )Net loss per share
    
    $
    (0.26
    )
    
    $
    (0.41
    )
    
    $
    (0.27
    )
    
    $
    (0.34
    )
 
 (a)
    
    During the first quarter of 2005, the Company recorded a $3.0 million compensation charge in
connection with a Severance and Settlement Agreement and Release it entered into with Tod
Hamachek, Penwests former Chairman and Chief Executive Officer, upon his resignation in
February 2005. Such charge is reflected in selling, general and administrative expense.(b)
    
    During the second quarter of 2005, the Company recorded a write-off of inventory of
approximately $395,000 relating primarily to a change in specifications for TIMERx. The
Company also recognized impairment losses F-26




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##### Table of Contents



of $118,000 related to patents covering PW2101, a beta blocker intended for the treatment of
hypertension and angina, which the Company determined no longer had value. Such charges are
reflected in research and product development expense.(c)
    
    During the third quarter of 2005, the Company recognized $2.25 million of licensing revenue
under its agreement with Prism, which was terminated in July 2005. Such revenue is reflected
in royalties and licensing fees.(d)
    
    During the second quarter of 2004, the Company recognized impairment losses of $410,000
related to patents covering its inhalation technology which the Company determined no longer
had value. Such losses are reflected in research and product development expense. F-27




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##### Table of Contents



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 PENWEST PHARMACEUTICALS CO.
DECEMBER 31, 2005
(in thousands)
 AdditionsCharged toBalance at
    
    Charged to
    
    Other
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    Accounts-
    
    Deductions-
    
    End ofof Period
    
    Expenses
    
    Describe
    
    Describe
    
    PeriodYear ended December 31, 2005Allowance for Doubtful Accounts
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Inventory Allowances
    
    $
    85
    
    
    $
    497
    
    
    $
    
    
    
    $
    374
    (a)
    
    $
    208Year ended December 31, 2004Allowance for Doubtful Accounts
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Inventory Allowances
    
    $
    82
    
    
    $
    75
    
    
    $
    
    
    
    $
    72
    (a)
    
    $
    85Year ended December 31, 2003Allowance for Doubtful Accounts
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Inventory Allowances
    
    $
    16
    
    
    $
    113
    
    
    $
    
    
    
    $
    47
    (a)
    
    $
    82
 
 (a)
    
    Disposals of unrecoverable inventory costs. S-1




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##### Table of Contents



Exhibit Index
 Filed withExhibit
    
    
    
    this Form
    
    Form or
    
    Filing Date
    
    SEC FileNumber
    
    Description
    
    10-K
    
    Schedule
    
    with SEC
    
    Number2.1
    
    Purchase Agreement by and between Penwest
Pharmaceuticals Co. and Josef Rettenmaier
Holding GmBh & Co. KG, dated November 1,
2002.
    
    
    
    Schedule 14A
    
    1/31/2003
    
    000-234672.2
    
    Amendment to Purchase Agreement made as of
February 26, 2003, by and among Penwest
Pharmaceuticals Co., Josef Rettenmaier
Holding GmbH & Co. KG, and the other parties
named therein.
    
    
    
    
    8-K
    
    
    2/28/2003
    
    000-234673.1
    
    Amended and Restated Articles of Incorporation
    
    
    
    
    10-Q
    
    
    8/3/2004
    
    000-234673.2
    
    Amended and Restated Bylaws of the Company.
    
    
    
    
    S-1
    
    
    10/21/1997
    
    333-383893.3
    
    Designation of Rights and Preference of
Series A Junior Participating Preferred Stock
of the Company filed on July 17, 1998.
    
    
    
    
    10/A
    
    
    7/17/1998
    
    000-234674.1
    
    Specimen certificate representing the Common
Stock.
    
    
    
    
    S-1/A
    
    
    12/17/1997
    
    333-383894.2
    
    Form of Rights Agreement dated as of July 27,
1998 between the Company and the Rights
Agent.
    
    
    
    
    10/A
    
    
    7/17/1998
    
    000-2346710.1+
    
    Product Development and Supply Agreement
dated August 17, 1994 by and between the
Registrant and Mylan Pharmaceuticals Inc.
    
    
    
    
    S-1
    
    
    10/21/1997
    
    333-3838910.2+
    
    Sales and Distribution Agreement dated
January 3, 1997 by and between the Registrant
and Mylan Pharmaceuticals Inc.
    
    
    
    
    S-1
    
    
    10/21/1997
    
    333-3838910.3+
    
    Letter Agreement dated February 25, 2000 by
and between the Registrant Mylan
Pharmaceuticals Inc.
    
    
    
    
    10-Q
    
    
    8/14/2000
    
    000-2346710.4+
    
    Amended and Restated Strategic Alliance
Agreement, dated as of April 2, 2002, by and
between Endo Pharmaceuticals Holdings Inc.
and the Company
    
    
    
    
    10-Q
    
    
    8/14/2002
    
    000-2346710.5++
    
    1997 Equity Incentive Plan.
    
    
    
    
    S-1
    
    
    10/21/1997
    
    333-3838910.6++
    
    1997 Employee Stock Purchase Plan.
    
    
    
    
    S-1
    
    
    10/21/1997
    
    333-3838910.7++
    
    1998 Spinoff Option Plan.
    
    
    
    
    10/A
    
    
    7/7/1998
    
    000-2346710.8
    
    Form of Tax Allocation Agreement entered into
between the Registrant and Penford
Corporation.
    
    
    
    
    10
    
    
    6/22/1998
    
    000-2346710.9++
    
    Recognition and Incentive Agreement dated as
of May 14, 1990 between the Registrant and
Anand Baichwal, as amended.
    
    
    
    
    S-1/A
    
    
    11/10/1997
    
    333-38389




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##### Table of Contents



Filed withExhibit
    
    
    
    this Form
    
    Form or
    
    Filing Date
    
    SEC FileNumber
    
    Description
    
    10-K
    
    Schedule
    
    with SEC
    
    Number10.10
    
    Manufacturing Agreement dated September 27,
1999 between the Company and Draxis Pharma,
Inc.
    
    
    
    
    10-K
    
    
    3/21/2000
    
    000-2346710.11
    
    Royalty Agreement dated September 25, 1992
between the Company and John N. Staniforth.
    
    
    
    
    10-Q
    
    
    5/15/2002
    
    000-2346710.12
    
    Confidentiality, Consulting and
Noncompetition Agreement dated September 25,
1992 between the Company and John N.
Staniforth.
    
    
    
    
    10-Q
    
    
    5/15/2002
    
    000-2346710.13
    
    Summary Description of Directors Compensation
    
    
    
    
    10-K
    
    
    3/16/05
    
    000-2346710.14
    
    Lease Agreement dated as of February 3, 2003
by and between Union Carbide Corporation and
the Registrant.
    
    
    
    
    10-Q
    
    
    5/15/2003
    
    000-2346710.15
    
    Lease Amendment and Attornment Agreement,
dated March 15, 2004, by and between Union
Carbide Corporation and the Registrant.
    
    
    
    
    10-Q
    
    
    8/3/2004
    
    000-2346710.16
    
    Form of Option Agreement for 1997 Incentive
Plan
    
    
    
    
    10-K
    
    
    3/16/05
    
    000-2346710.17
    
    Securities Purchase Agreement dated as of
August 1, 2003 by and among the Registrant
and the purchasers identified therein.
    
    
    
    
    8-K
    
    
    8/5/2003
    
    000-2346710.18
    
    Securities Purchase Agreement dated as of
August 4, 2003 by and among the Registrant
and the purchasers identified therein.
    
    
    
    
    8-K
    
    
    8/6/2003
    
    000-2346710.19
    
    Share Purchase Agreement dated as of December
10, 2004 by and among the Registrant and the
purchasers identified therein.
    
    
    
    
    8-K
    
    
    12/15/2004
    
    000-2346710.20
    
    Nonstatutory Stock Option Agreement dated
June 21, 2004 by and between the Registrant
and Alan F. Joslyn, Ph.D.
    
    
    
    
    S-8
    
    
    7/26/2005
    
    333-12689710.21
    
    Severance and Settlement Agreement and
Release dated February 14, 2005 by and
between the Registrant and Tod R. Hamachek
    
    
    
    
    10-Q
    
    
    5/9/2005
    
    000-2346710.22
    
    Offer Letter dated February 15, 2005 by and
between the Registrant and Robert J.
Hennessey
    
    
    
    
    10-Q
    
    
    5/9/2005
    
    000-2346710.23
    
    2005 Stock Incentive Plan
    
    
    
    
    8-K
    
    
    6/7/2005
    
    000-2346710.24
    
    Form of Incentive Stock Option Agreement for
grants under 2005 Stock Incentive Plan
    
    
    
    
    8-K
    
    
    6/7/2005
    
    000-2346710.25
    
    Form of Employee Nonstatutory Stock Option
Agreement for grants under 2005 Stock
Incentive Plan
    
    
    
    
    8-K
    
    
    6/7/2005
    
    000-23467




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##### Table of Contents



Filed withExhibit
    
    
    
    this Form
    
    Form or
    
    Filing Date
    
    SEC FileNumber
    
    Description
    
    10-K
    
    Schedule
    
    with SEC
    
    Number10.26
    
    Form of Nonstatutory Stock Option Agreement
(Consultants and Directors) for grants under
2005 Stock Incentive Plan
    
    
    
    
    8-K
    
    
    6/7/2005
    
    000-2346710.27
    
    Form of Director Restricted Stock Agreement
for grants under 2005 Stock Incentive Plan
    
    
    
    
    8-K
    
    
    6/7/2005
    
    000-2346710.28
    
    Form of Executive Retention Agreement entered
into by the Registrant and each of Jennifer
L. Good, Alan F. Joslyn, Ph.D., Anand R.
Baichwal Ph.D., Theodor Rozsa and Thomas R.
Sciascia, M.D., on December 6, 2005
    
    X10.29
    
    Summary Description of Executive Officer
Bonus Program
    
    X23
    
    Consent of Ernst & Young LLP
    
    X31
    
    Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Exchange
Act Rules 13a-14 or 15d-14, as adopted
pursuant to Section 302 of Sarbanes-Oxley Act
of 2002.
    
    X32
    
    Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Exchange
Act Rules 13a-14(b) or 15d-14(b) and 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
    
    X
 
 
    
    Confidential treatment granted as to certain portions, which portions
are omitted and filed separately with the Commission.
    
    Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to the Annual Report on Form 10-K.