exv10w1



 





Exhibit 10.1




PENWEST PHARMACEUTICALS CO.




SECURITIES PURCHASE AGREEMENT




March 5, 2008




 









 





	 	 	 	 	 	 	 
	Section 1
	 	Authorization and Sale of Securities	 	 	1	 
	1.1
	 	Authorization	 	 	1	 
	1.2
	 	Sale of Units	 	 	1	 
	 
	 	 	 	 	 	 
	Section 2
	 	Closing Date: Delivery	 	 	1	 
	2.1
	 	Closing Date	 	 	1	 
	2.2
	 	Delivery	 	 	1	 
	2.3
	 	Purchase Price	 	 	2	 
	 
	 	 	 	 	 	 
	Section 3
	 	Representations and Warranties of the Company	 	 	2	 
	3.1
	 	Subsidiaries; Organization and Standing	 	 	2	 
	3.2
	 	Corporate Power, Authorization	 	 	2	 
	3.3
	 	Issuance and Delivery of the Shares	 	 	3	 
	3.4
	 	SEC Documents; Financial Statements	 	 	3	 
	3.5
	 	Governmental Consents	 	 	3	 
	3.6
	 	No Material Adverse Change	 	 	4	 
	3.7
	 	Intellectual Property	 	 	4	 
	3.8
	 	Authorized Capital Stock	 	 	4	 
	3.9
	 	Litigation	 	 	5	 
	3.10
	 	Use of Proceeds	 	 	5	 
	3.11
	 	Accountants	 	 	5	 
	3.12
	 	Compliance With Other Instruments	 	 	5	 
	3.13
	 	Permits	 	 	5	 
	3.14
	 	Investment Company	 	 	6	 
	3.15
	 	Securities Laws Disclosure; Publicity	 	 	6	 
	3.16
	 	Private Placement	 	 	6	 
	3.17
	 	Form S-3 Eligibility	 	 	6	 
	3.18
	 	Listing and Maintenance Requirements	 	 	6	 
	3.19
	 	Application of Takeover Protections	 	 	7	 
	3.20
	 	Insurance	 	 	7	 
	3.21
	 	[Intentionally omitted.]	 	 	7	 
	3.22
	 	Labor Relations	 	 	7	 
	3.23
	 	Transactions With Affiliates and Employees	 	 	7	 
	3.24
	 	Acknowledgment Regarding Purchasers’ Purchase of Securities	 	 	7	 
	3.25
	 	Transfer Taxes	 	 	7	 
	3.26
	 	Foreign Corrupt Practices	 	 	8	 
	3.27
	 	Sarbanes-Oxley Act	 	 	8	 
	3.28
	 	Internal Controls	 	 	8	 
	3.29
	 	Disclosure Controls and Procedures	 	 	8	 
	3.30
	 	No Price Stabilization or Manipulation	 	 	8	 
	3.31
	 	Nonpublic Information	 	 	8	 
	3.32
	 	Regulatory Notices	 	 	9	 
	 
	 	 	 	 	 	 
	Section 4
	 	Representations, Warranties and Covenants of the Purchasers	 	 	9	 
	4.1
	 	Power; Authorization	 	 	9	 
	4.2
	 	Investment Experience	 	 	9	 
	4.3
	 	Investment Intent	 	 	9	 






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	4.4
	 	Registration or Exemption Requirements	 	 	10	 
	4.5
	 	Certain Trading Limitations	 	 	10	 
	 
	 	 	 	 	 	 
	Section 5
	 	Conditions to Closing of Purchasers	 	 	11	 
	5.1
	 	Representations and Warranties	 	 	11	 
	5.2
	 	Covenants	 	 	11	 
	5.3
	 	Blue Sky	 	 	11	 
	5.4
	 	Legal Opinions	 	 	11	 
	5.5
	 	Market Listing	 	 	11	 
	5.6
	 	Absence of Litigation	 	 	11	 
	5.7
	 	No Governmental Prohibition	 	 	11	 
	 
	 	 	 	 	 	 
	Section 6
	 	Conditions to Closing of Company	 	 	11	 
	6.1
	 	Representations and Warranties	 	 	11	 
	6.2
	 	Covenants	 	 	12	 
	6.3
	 	Blue Sky	 	 	12	 
	6.4
	 	Market Listing	 	 	12	 
	6.5
	 	Absence of Litigation	 	 	12	 
	6.6
	 	No Governmental Prohibition	 	 	12	 
	 
	 	 	 	 	 	 
	Section 7
	 	Affirmative Covenants of the Company	 	 	12	 
	7.1
	 	Registration Requirements	 	 	12	 
	7.2
	 	Indemnification and Contribution	 	 	14	 
	7.3
	 	Restrictions on Transferability	 	 	17	 
	7.4
	 	Restrictions on Sales and Issuance of Common Stock	 	 	17	 
	 
	 	 	 	 	 	 
	Section 8
	 	Restrictions on Transferability of Shares and Warrants: Compliance With Securities Act	 	 	17	 
	8.1
	 	Securities Law Transfer Restrictions	 	 	17	 
	8.2
	 	Restrictive Legend	 	 	18	 
	8.3
	 	Transfer of Shares After Registration	 	 	19	 
	8.4
	 	Purchaser Information	 	 	19	 
	 
	 	 	 	 	 	 
	Section 9
	 	Miscellaneous	 	 	19	 
	9.1
	 	Waivers and Amendments	 	 	19	 
	9.2
	 	Brokers and Finders	 	 	20	 
	9.3
	 	Governing Law	 	 	20	 
	9.4
	 	Survival	 	 	20	 
	9.5
	 	Successors and Assigns	 	 	20	 
	9.6
	 	Entire Agreement	 	 	20	 
	9.7
	 	Notices, etc	 	 	20	 
	9.8
	 	Severability of this Agreement	 	 	21	 
	9.9
	 	Counterparts	 	 	21	 
	9.10
	 	Further Assurances	 	 	21	 
	9.11
	 	Expenses	 	 	21	 
	9.12
	 	Currency	 	 	21	 
	9.13
	 	Replacement of Securities	 	 	21	 






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	9.14
	 	Remedies	 	 	21	 
	9.15
	 	Independent Nature of Purchasers’ Obligations and Rights	 	 	21	 






	 	 	 	 	 
	Exhibit A

	 	—
	 	Schedule of Purchasers
	Exhibit B

	 	—
	 	Form of Warrant
	Exhibit C

	 	—
	 	Instruction Sheet for Purchaser
	Exhibit C-1

	 	—
	 	Direct Registration Account and Warrant Questionnaire
	Exhibit C-2

	 	—
	 	Registration Statement Questionnaire
	Exhibit C-3

	 	—
	 	Certificate for Individual Purchasers
	Exhibit C-4

	 	—
	 	Certificate for Corporate, Partnership, Trust, Foundation
and Joint Purchasers
	Exhibit D-1

	 	—
	 	Form of Opinion of Company Washington Counsel
	Exhibit D-2

	 	—
	 	Form of Opinion of Company Corporate Counsel
	Exhibit E

	 	—
	 	Form of Purchaser’s Certificate of Subsequent Sale







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PENWEST PHARMACEUTICALS CO.




SECURITIES PURCHASE AGREEMENT




     This Securities Purchase Agreement (the “Agreement”) is made as of March 5, 2008, by
and among Penwest Pharmaceuticals Co., a Washington corporation (the “Company”), with its
principal office at 39 Old Ridgebury Road, Suite 11, Danbury, Connecticut 06810, and the persons
listed on the Schedule of Purchasers attached hereto as Exhibit A (the
“Purchasers”).



Section 1



Authorization and Sale of Securities




     1.1 Authorization. The Company has authorized the sale and issuance pursuant to this
Agreement of up to 8,140,600 Units, each Unit consisting of one share of Common Stock, $0.001 par value
per share (the “Common Stock”), of the Company (the shares of Common Stock included in the
Units sold being referred to as the “Purchased Shares”) and one warrant (a
“Warrant”) to purchase a number of shares of Common
Stock equal to 50% of one share of
Common Stock (the shares of Common Stock for which all Warrants included in the Units being sold
may be exercised being referred to as the “Warrant
Shares”) at an exercise price of $3.62 per share on the terms and in the form set forth in the Form of Warrant attached as Exhibit
B hereto.



     1.2 Sale of Units. Subject to the terms and conditions of this Agreement, the Company
agrees to issue and sell to each Purchaser and each Purchaser severally agrees to purchase from the
Company the number of Units set forth opposite such Purchaser’s
name on Exhibit A for $3.0825
per Unit (the “Purchase Price”). The maximum aggregate purchase price payable by the
Purchasers to the Company for all of the Units shall be $25,093,399.50.



Section 2



Closing Date: Delivery




     2.1 Closing Date. The closing of the purchase and sale of the Units hereunder (the
“Closing”) shall be held at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, 60
State Street, Boston, Massachusetts 02109, at or before 10:00 a.m. New York local time, on the date
that is four business days after the execution of this Agreement by the Company and the Purchasers,
or at such time and place upon which the Company and the Purchasers shall agree. The date of the
Closing is hereinafter referred to as the “Closing Date.”



     2.2 Delivery. At the Closing, the Company will deliver, or cause to be delivered, to
each Purchaser:



          (a) evidence of a direct registration account in such Purchaser’s name as shown on Exhibit
A, and the deposit, by direct registration, into such account of the number of shares of Common
Stock equal to the number of Units purchased by such Purchaser;




          (b) Warrant(s), registered in such Purchaser’s name as shown on Exhibit A, pursuant to
which such Purchaser shall have the right to acquire a number of
shares of Common Stock equal to 50% of the number of Units purchased by such Purchaser; and





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          (c) a certificate from the Company that the representations and warranties made by the Company
are true and correct in all material respects on the Closing Date with the same force and effect as
if they had been made on and as of said date.




     2.3 Purchase Price. The delivery of the Purchased Shares and the Warrants pursuant to
Section 2.2 shall be made against payment of the purchase price therefor by wire transfer of
immediately available funds to the Company’s account as designated in writing by the Company in the
amount set forth on Exhibit A.



Section 3



Representations and Warranties of the Company




     The Company represents and warrants to the Purchasers as of the date hereof as follows:



     3.1 Subsidiaries; Organization and Standing. The Company has no direct or indirect
subsidiaries. The Company is a corporation duly organized and validly existing under, and by
virtue of, the laws of the State of Washington and is in good standing as a domestic corporation
under the laws of said state and has all requisite corporate power and authority to conduct its
business as currently conducted and as currently proposed to be conducted as disclosed in the SEC
Documents (as defined below). The Company is qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to be so qualified or in
good standing, as the case may be, would not, individually or in the aggregate, have or reasonably
be expected to have a material adverse effect on the financial condition, business, properties or
operations of the Company (a “Material Adverse Effect”).



     3.2 Corporate Power, Authorization. The Company has all requisite corporate power and
has taken all requisite corporate action to execute and deliver this Agreement and the Warrants
(collectively, the “Transaction Documents”), to sell and issue the Units, and the Purchased
Shares and the Warrants comprising such Units (collectively, the “Securities”), and to
issue the Warrant Shares, and to carry out and perform all of its obligations under the Transaction
Documents. The Transaction Documents constitute legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the
enforcement of creditors’ rights generally, (ii) as limited with respect to rights of indemnity and
contribution by state or federal securities laws or the public policy underlying such laws and
(iii) as limited by equitable principles generally. The execution and delivery of the Transaction
Documents do not, and the performance of the Transaction Documents and the compliance with the
provisions thereof and the issuance, sale and delivery of the Securities will not, conflict with or
result in a breach or violation of the terms, conditions or provisions of, or constitute a default
under, or result in the creation or imposition of any lien pursuant to the terms of, the Articles
of Incorporation or Bylaws of the Company or any statute, law, rule or regulation or any state or
federal order, judgment or decree or any indenture, mortgage, lease or other agreement or
instrument to which the Company or any of its properties is subject, except for such violations,
defaults or liens as would not, individually or in the aggregate, have or reasonably be expected to
have a Material Adverse Effect.



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     3.3 Issuance and Delivery of the Shares. The Purchased Shares, when issued in
compliance with the provisions of this Agreement, and the Warrant Shares, when issued upon exercise
of the Warrants and payment of the consideration provide for therein, will be validly issued, fully
paid and nonassessable and not subject to any liens or other encumbrances. The Company has duly
authorized and reserved for issuance a sufficient number of its authorized but unissued shares of
Common Stock for (a) the issuance and delivery of the Purchased Shares and (b) for issuance and
delivery upon exercise of the Warrants. The issuance and delivery of the Securities are not, and
the issuance and delivery of the Warrant Shares will not be, subject to preemptive or any other
similar rights of the shareholders of the Company.



     3.4 SEC Documents; Financial Statements. The Company has filed in a timely manner all
documents that the Company was required to file with the Securities and Exchange Commission (the
“SEC”) under Sections 13, 14(a) and 15(d) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), during the twelve (12) months preceding the date of this
Agreement (the “SEC Documents”). As of their respective filing dates all SEC Documents
complied in all material respects with the requirements of the Exchange Act or the Securities Act
of 1933, as amended (the “Securities Act”), as applicable. None of the SEC Documents as of
their respective dates contained any untrue statement of material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements made therein, in
light of the circumstances under which they were made, not misleading. The financial statements of
the Company included in the SEC Documents (the “Financial Statements”), as of the dates
included in the SEC documents, complied as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC with respect
thereto. The Financial Statements have been prepared in accordance with generally accepted
accounting principles consistently applied as of the dates included in the SEC Documents and fairly
present the financial position of the Company at the dates thereof and the results of the Company’s
operations and cash flows for the periods then ended; provided, however, that the
unaudited financial statements are subject to normal recurring year-end adjustments (which in any
case will not be material) and do not contain all footnotes required under generally accepted
accounting principles. All material agreements that are required to have been filed as exhibits to
the SEC Documents under Item 601 of Regulation S-K to which the Company is a party or to which the
property or assets of the Company are subject have been filed as exhibits to the SEC Documents.



     3.5 Governmental Consents. No consent, approval, order or authorization of, or
registration, qualification, designation, declaration or filing with, any federal, state, or local
governmental authority on the part of the Company is required in connection with the consummation
of the transactions contemplated by this Agreement except for (a) the filing following the Closing
Date of a Form D with the SEC and compliance with the securities and blue sky laws in the states in
which the Units are offered and sold, (b) the filing of the registration statement on Form S-3 (or
any successor form thereto) and all amendments thereto (the “Registration Statement”) with
the SEC as contemplated by Section 7.1 of this Agreement, (c) all required filings with the Nasdaq
Stock Market, LLC necessary for the listing of the Purchased Shares and the Warrant Shares
(collectively, the “Shares”) or (d) those consents, approvals, orders or authorizations of
or registrations, qualifications, designations, declarations or filings with, any federal, state,
or local governmental authority on the part of the Company that have been obtained and will be in
effect as of the Closing Date.



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     3.6 No Material Adverse Change. Except as otherwise disclosed in the SEC Documents,
except with respect to the matter referenced in the joint press release issued by Endo
Pharmaceuticals Holding Inc. and the Company on February 15, 2008 (the “February 15 Press
Release”) and except for the amendment dated as of the date hereof (the “Rights Plan
Amendment”) to the Rights Agreement (the “Rights Agreement”) dated July 27, 1998
between the Company and Mellon Investor Services LLC to be disclosed in the Form 8-K (as defined
below) (which Rights Plan Amendment modifies the definition of “Exempted Person” under the Rights
Agreement to provide that Perceptive Life Sciences Master Fund Ltd. and its affiliates will be
“Exempted Persons” under the Rights Agreement until such time as they beneficially own more than
19.9% of the outstanding shares of Common Stock or less than 10% of the shares of outstanding
Common Stock), since September 30, 2007, there have not been any changes in the business, assets,
liabilities, properties, financial condition or operations of the Company from those reflected in
the Financial Statements except for such changes in the ordinary course of business which would
not, individually or in the aggregate, have or reasonably be expected to have a Material Adverse
Effect. The Company makes no representation as to whether or when the Company plans to sue Actavis
South Atlantic LLC (“Actavis”), whether the Company has a basis to sue Actavis and the
likelihood of success in the event the Company sues Actavis.



     3.7 Intellectual Property. The Company owns or possesses sufficient rights to use all
patents, patent rights, inventions, trade secrets, know-how, proprietary rights and processes that
it uses in the conduct of its business as described in the SEC Documents (the “Company
Proprietary Rights”). To the Company’s knowledge, there are no third parties who have or will
be able to establish rights to any of the Company Proprietary Rights, except for (i) the ownership
rights of the third party licensors to the Company Proprietary Rights which are licensed to the
Company by such third party licensors and (ii) the third party licensees of the Company Proprietary
Rights. To the knowledge of the Company, except as otherwise disclosed in the SEC Documents and
except with respect to the matter referenced in the February 15 Press Release as to which the
Company makes no representations, there is no infringement by any third parties of any of the
Company Proprietary Rights. Except as disclosed in the SEC Documents, the Company has not received
any notice of, and has no knowledge of any infringement of or conflict with asserted rights of
others with respect to any patent, patent right, invention, trade secret, know-how or other
proprietary rights.



     3.8 Authorized Capital Stock. All outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and nonassessable, have been issued
in compliance with all federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase securities, and the
authorized and outstanding capital stock of the Company conforms, as of the dates for which such
information is given, in all material respects to the statements relating thereto contained in the
SEC Documents; there is no capital stock outstanding as of such dates other than as described in
the SEC Documents. As of January 31, 2008, the authorized capital stock of the Company consists of
60,000,000 shares of Common Stock, of which 23,478,933 shares are outstanding, and 1,000,000 shares
of Preferred Stock, $0.001 par value per share, of which 100,000 shares have been designated Series
A Junior Participating Preferred Stock, none of which shares are outstanding. Except as disclosed
in or contemplated by the SEC Documents and the Financial Statements of the Company and the related
notes thereto, the Company does not have outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or



-4-









 







to purchase, any securities or obligations convertible into, or any contracts or commitments
to issue or sell, shares of its capital stock or any such options, rights, convertible securities
or obligations other than options granted under the Company’s stock plan and its employee stock
purchase plan. No shareholder of the Company, other than the Purchasers, has any right (which has
not been waived or has not expired by reason of lapse of time following notification of the
Company’s intent to file the Registration Statement) to require the Company to register the sale of
any shares owned by such shareholder under the Securities Act in the Registration Statement.



     3.9 Litigation. Except as set forth in the SEC Documents, as of the date hereof,
there are no actions, suits, proceedings or investigations pending or, to the Company’s knowledge,
threatened against the Company or any of its properties before or by any court or arbitrator or any
governmental body, agency or official, except for such actions, suits, proceedings or
investigations which would not, individually or in the aggregate, have or reasonably be expected to
have a Material Adverse Effect or which would prevent the consummation of the transactions
contemplated by this Agreement.



     3.10 Use of Proceeds. The Company will use the net proceeds from the sale of the
Units to fund the research, development, marketing and commercialization of its products and
technologies. The remainder of the net proceeds, if any, will be used for working capital and
other general corporate purposes. The Company also may use a portion of the net proceeds,
currently intended for general corporate purposes, to acquire or invest in technologies, products
or services that complement its business, although the Company has no present plans or commitments
and is not currently engaged in any material negotiations with respect to these types of
transactions. Pending these uses, the Company intends to invest the net proceeds from this
offering in short-term, interest-bearing, investment-grade securities.



     3.11 Accountants. Ernst & Young LLP, which the Company expects will express their
opinion with respect to the audited financial statements and schedules to be included as a part of
or incorporated by reference into the Registration Statement prior to the filing of the
Registration Statement, is an independent registered public accounting firm as required by the
Securities Act and the Exchange Act and the rules and regulations promulgated thereunder.



     3.12 Compliance With Other Instruments. The Company is not in violation or default of
any provision of its Articles of Incorporation or Bylaws, each as amended to date or, in any
material respect, of any provision of any federal or state statute, rule or regulation applicable
to the Company, except for such violations or defaults, as the case may be, which would not,
individually or in the aggregate, have or reasonably be expected to have a Material Adverse Effect.
The Company is not in violation or default of any provision of any agreement, license, permit,
instrument, judgment, order, writ or decree to which it is a party or by which it is bound, except
for such violations or defaults, as the case may be, which would not, individually or in the
aggregate, have or reasonably be expected to have a Material Adverse Effect.



     3.13 Permits. The Company has all franchises, permits, licenses, and any similar
authority, including without limitation all franchises, permits and licenses required by the United
States Food and Drug Administration (the “FDA”) or any other federal, state or foreign
agencies or bodies engaged in the regulation of pharmaceuticals or biohazardous materials,
necessary for the conduct of its business as now being conducted by it and as currently proposed to
be



-5-









 







conducted as disclosed in the SEC Documents, except where the failure to do so would not,
individually or in the aggregate, have or reasonably be expected to have a Material Adverse Effect.
The Company is not in violation of or default under any of such franchises, permits, licenses, or
other similar authority, except where such violation or default would not, individually or in the
aggregate, have or reasonably be expected to have a Material Adverse Effect.



     3.14 Investment Company. The Company is not an “investment company” within the
meaning of the Investment Company Act of 1940, as amended.



     3.15
Securities Laws Disclosure; Publicity. Prior to the
commencement of the trading of the Common Stock on the Trading Market on March 6, 2008 the Company shall issue a press release announcing the signing of this
Agreement and describing the terms of the transactions contemplated by this Agreement. On March 6,
2008, the Company shall file a Current Report on Form 8-K (the “Form 8-K”) with the SEC
describing the terms of the transactions contemplated by the Agreement and the Rights Plan
Amendment and including as an exhibit to the Form 8-K this Agreement, in the form required by the
Exchange Act, as well as the Rights Plan Amendment.



     3.16 Private Placement. Neither the Company nor any person acting on the Company’s
behalf has sold or offered to sell or solicited any offer to buy any of the Units by means of any
form of general solicitation or advertising. Assuming the accuracy of the representations and
warranties of the Purchasers set forth in Section 4 hereof and the completeness and accuracy of the
information required to be delivered by the Purchasers to the Company under this Agreement, the
offer and sale of the Units to the Purchasers as contemplated hereby are exempt from the
registration requirements of the Securities Act. Neither the Company nor any person acting on the
Company’s behalf has, directly or indirectly, at any time within the past six months, made any
offer or sale of any security or solicitation of any offer to buy any security under circumstances
that would (i) eliminate the availability of the exemption from registration under Regulation D
under the Securities Act in connection with the offer and sale by the Company of the Units as
contemplated hereby or (ii) cause the offering of the Units (the “Offering”) to be
integrated with prior offerings by the Company for purposes of any applicable law, regulation or
shareholder approval provisions, including, without limitation, under the rules and regulations of
any Trading Market (as defined below). The Company is not a United States real property holding
corporation within the meaning of the Foreign Investment in Real Property Tax Act of 1980.
“Trading Market” means the New York Stock Exchange, American Stock Exchange, NASDAQ Global
Market or NASDAQ Capital Market on which the Common Stock is then listed.



     3.17 Form S-3 Eligibility. The Company is eligible to register the Shares for resale
by the Purchasers using Form S-3 promulgated under the Securities Act.



     3.18 Listing and Maintenance Requirements. The Company has not, in the two years
preceding the date hereof, received notice (written or oral) from any Trading Market on which the
Common Stock is or has been listed or quoted to the effect that the Company is not in compliance
with the listing or maintenance requirements of such Trading Market. The Company is in compliance
with all such listing and maintenance requirements. The Company has taken no



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action designed to terminate the registration of the Common Stock under the Exchange Act or
the delisting of the Common Stock from the Trading Market.



     3.19 Application of Takeover Protections. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby will not impose any
restriction on any Purchaser, or create in any party (including any current shareholder of the
Company) any rights, under any share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or other similar anti-takeover provisions under the
Company’s charter documents or the laws of its state of incorporation.



     3.20 Insurance. The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as the Company believes are
prudent and customary for a company (i) in the businesses and location in which the Company is
engaged, (ii) with the resources of the Company and (iii) with products at a similar stage of
development as the Company. The Company has not received any written notice that the Company will
not be able to renew its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its business without a
significant increase in cost.



     3.21 [Intentionally omitted.]



     3.22 Labor Relations. No material labor dispute exists or, to the knowledge of the
Company, is imminent with respect to any of the employees of the Company.



     3.23 Transactions With Affiliates and Employees. Except as set forth in the SEC
Documents, none of the officers or directors of the Company and, to the knowledge of the Company,
none of the employees of the Company is presently a party to any transaction with the Company that
would be required to be disclosed pursuant to Item 404 of Regulation S-K promulgated under the
Securities Act.



     3.24 Acknowledgment Regarding Purchasers’ Purchase of Securities. The Company
acknowledges and agrees that each of the Purchasers is acting solely in the capacity of an arm’s
length purchaser with respect to this Agreement and the transactions contemplated hereby. The
Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the
Company (or in any similar capacity with respect to the Company) with respect to this Agreement and
the transactions contemplated hereby and any advice given by any Purchaser or any of their
respective representatives or agents to the Company in connection with this Agreement and the
transactions contemplated hereby is merely incidental to such Purchaser’s purchase of the
Securities. The Company further represents to each Purchaser that the Company’s decision to enter
into this Agreement has been based on the independent evaluation of the transactions contemplated
hereby by the Company and its representatives.



     3.25 Transfer Taxes. No stock transfer taxes or other taxes (other than income taxes)
are required to be paid in connection with the issuance and sale of the Securities other than such
taxes for which the Company has established appropriate reserves and intends to pay in full on or
before the Closing Date.



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     3.26 Foreign Corrupt Practices. Since January 1, 2004, neither the Company, nor any
director, officer, agent, employee or other person acting on behalf of the Company has, in the
course of its actions for, or on behalf of, the Company (i) used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating to political
activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government
official or employee from corporate funds; (iii) violated or is in violation of in any material
respect any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made
any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any
foreign or domestic government official or employee.



     3.27 Sarbanes-Oxley Act. There is and has been no failure on the part of the Company
or any of the Company’s directors or executive officers, in their capacities as such, to comply in
all material respects with any provision of the Sarbanes-Oxley Act of 2002, as in effect at the
applicable time, and the rules and regulations promulgated in connection therewith, including
Section 402 thereof related to loans and Sections 302 and 906 thereof related to certifications.



     3.28 Internal Controls. The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with the general or specific authorizations of the Company’s management, (ii)
transactions are recorded as necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain asset and liability accountability,
(iii) access to assets or incurrence of liabilities is permitted only in accordance with general or
specific authorization of the Company’s management and (iv) the recorded accountability for assets
and liabilities of the Company is compared with the existing assets and liabilities of the Company
at reasonable intervals and appropriate action is taken by the Company with respect to any
differences.



     3.29 Disclosure Controls and Procedures. The Company has established and maintains
“disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act); the Company’s “disclosure controls and procedures” are reasonably designed to ensure
that all information (both financial and non-financial) required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and regulations of the Exchange Act, and
that all such information is accumulated and communicated to the Company’s management as
appropriate to allow timely decisions regarding required disclosure and to support the
certifications of the Chief Executive Officer and Chief Financial Officer of the Company required
under the Exchange Act with respect to such reports.



     3.30 No Price Stabilization or Manipulation. The Company has not taken, directly or
indirectly, any action designed to cause or result in, or which has constituted, the stabilization
or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the
Shares.



     3.31 Nonpublic Information. The Company understands and confirms that the Purchaser
will rely on the representations and covenants set forth in this section in effecting its offering
of securities of the Company hereunder. To the Company’s knowledge, the Company has not provided
to any Purchaser any information that the Company believes constitutes



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material, non-public information, other than (i) information concerning the existence, terms
and conditions of the transactions contemplated by this Agreement, (ii) information concerning the
Rights Plan Amendment and (iii) solely as to those Purchasers that have entered into a
confidentiality agreement with the Company as to the matter referenced in the February 15 Press
Release, certain information relating to the matter referenced in such February 15 Press Release.



     3.32 Regulatory Notices. The Company has not received any written notices or
statements from the FDA, European Medicines Agency or any other governmental agency, and otherwise
has no knowledge, that any license, approval, permit or authorization to conduct any clinical trial
of any product of the Company has been, will be or may be suspended, revoked, modified or limited,
except as would not, individually or in the aggregate, have or reasonably be expected to have a
Material Adverse Effect.



Section 4



Representations, Warranties and Covenants of the Purchasers




     Each Purchaser hereby severally represents and warrants to the Company, effective as of the
date hereof, as follows:



     4.1 Power; Authorization. (i) Such Purchaser has all requisite corporate or other
power and capacity and has taken all requisite corporate or other action to execute and deliver
this Agreement, to purchase the Securities to be purchased by it, to exercise the Warrants and to
carry out and perform all of its obligations under this Agreement; and (ii) this Agreement
constitutes the legal, valid and binding obligation of such Purchaser, enforceable against such
Purchaser in accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, or similar laws relating to or affecting the enforcement of creditors’ rights
generally, (b) as limited with respect to rights of indemnity and contribution by state or federal
securities laws or the public policy underlying such laws and (c) as limited by equitable
principles generally.



     4.2 Investment Experience. Such Purchaser is an “accredited investor” as defined in
Rule 501(a) of Regulation D under the Securities Act. Such Purchaser has fully completed and
delivered to the Company Exhibit C-3 or C-4, as applicable, and the information
provided on such Exhibit is true and accurate. Such Purchaser has received and reviewed the SEC
Documents, is aware of the Company’s business affairs and financial condition and has had access to
and has acquired sufficient information about the Company to reach an informed and knowledgeable
decision to acquire the Securities being acquired on the date hereof and the Warrant Shares. Such
Purchaser has such business and financial experience as is required to permit it to protect its own
interests in connection with the purchase of such Securities and the exercise of the Warrants.
Such Purchaser’s financial condition is such that it is able to bear the risk of holding such
Securities and the Warrant Shares for an indefinite period of time and the risk of loss of its
entire investment.



     4.3 Investment Intent. Such Purchaser is purchasing the Securities being acquired on
the date hereof and shall purchase the shares of Common Stock issuable upon exercise of the
Warrants for its own account as principal, for investment purposes only, and not with a present



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view to, or for, the resale distribution thereof, in whole or in part, within the meaning of
the Securities Act or any state securities laws. Purchaser understands that its acquisition of
such Securities and the Warrant Shares has not and will not have been registered under the
Securities Act or registered or qualified under any state law in reliance on specific exemptions
therefrom, which exemptions may depend upon, among other things, the bona fide nature of such
Purchaser’s investment intent as expressed herein. Such Purchaser has completed or caused to be
completed the Purchaser Questionnaire attached hereto as Exhibit C-2 for use in the
Registration Statement, and the responses provided therein shall be true and correct as of the
Closing Date. Except as contemplated by this Agreement, such Purchaser has no present agreement,
undertaking, arrangement, obligation or commitment providing for the disposition of the Securities
or the Warrant Shares. Any Purchaser that is a corporation or other entity represents that it has
not been organized, reorganized or recapitalized specifically for the purpose of investing in the
Securities or the Warrant Shares. Purchaser has, in connection with its decision to purchase the
Securities, relied solely upon the SEC Documents, the documents attached as appendices thereto and
the materials provided to the Purchasers by the Company and representations and warranties of the
Company contained herein. Such Purchaser will not, directly or indirectly, offer, sell, pledge,
transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or
take a pledge of) any of the Securities or the Warrant Shares except in compliance with the
Securities Act, and the rules and regulations promulgated thereunder and applicable state
securities laws.



     4.4 Registration or Exemption Requirements. Such Purchaser further acknowledges,
understands and agrees that the Securities being acquired on the date hereof and the shares of
Common Stock issuable upon exercise of the Warrants may not be resold or otherwise transferred
unless (i) they are registered or such registration is not required, and (ii) if the transfer is
pursuant to an exemption from registration other than Rule 144 under the Securities Act and, if the
Company shall so request in writing, an opinion of counsel reasonably satisfactory to the Company
is obtained to the effect that the transaction is so exempt; provided, however,
that no opinion shall be required with respect to a transfer to a transferee that is a Qualifying
Holder (as defined in Section 7.3) under clause (i) or (ii) of the definition of Qualifying Holder.
The Company shall affix a legend to the Warrants and the direct registration account established
for (or if applicable, certificate(s) evidencing) the Shares to the foregoing effect.



     4.5 Certain Trading Limitations. Such Purchaser agrees that beginning on the date
hereof until the earlier to occur of (a) 90 days from the Closing Date and (b) the effective date
of the Registration Statement, it will not enter into any Short Sales. For purposes of this
Section 4.5, a “Short Sale” by a Purchaser means a sale of Common Stock that is marked as a short
sale and that is executed at a time when such Purchaser has no equivalent offsetting long position
in the Common Stock. For purposes of determining whether a Purchaser has an equivalent offsetting
long position in the Common Stock, all Common Stock that would be issuable upon exercise in full of
all options then held by such Purchaser (assuming that such options were then fully exercisable,
notwithstanding any provisions to the contrary, and giving effect to any exercise price adjustments
scheduled to take effect in the future) shall be deemed to be held long by such Purchaser.




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Section 5

Conditions to Closing of Purchasers




     Each Purchaser’s obligation to purchase the Units at the Closing is, at the option of such
Purchaser, subject to the fulfillment or waiver as of the Closing Date of the following conditions:



     5.1 Representations and Warranties. The representations and warranties made by the
Company in Section 3 hereof shall be true and correct in all material respects when made (other
than those qualified as to materiality, which shall be true and correct when made), and shall be
true and correct in all material respects on the Closing Date (other than those qualified as to
materiality, which shall be true and correct on the Closing Date) with the same force and effect as
if they had been made on and as of said date.



     5.2 Covenants. All covenants, agreements and conditions contained in this Agreement
to be performed by the Company on or prior to the Closing Date shall have been performed or
complied with in all material respects.



     5.3 Blue Sky. The Company shall have obtained all necessary blue sky law permits and
qualifications, or secured exemptions therefrom, required by any state or foreign or other
jurisdiction for the offer and sale of the Securities.



     5.4 Legal Opinions. The Purchasers shall have received a legal opinion of (i) Perkins
Coie LLP, Washington counsel to the Company, with respect to the matters set forth on Exhibit
D-1 and (ii) Wilmer Cutler Pickering Hale and Dorr LLP, corporate counsel to the Company, with
respect to the matters set forth on Exhibit D-2.



     5.5 Market Listing. The Shares shall be approved for listing on the NASDAQ Global
Market upon issuance.



     5.6 Absence of Litigation. No proceeding challenging this Agreement or the
transactions contemplated hereby, or seeking to prohibit, alter, prevent or materially delay the
Closing, shall have been instituted or be pending before any court, arbitrator, governmental body,
agency or official.



     5.7 No Governmental Prohibition. The sale of Securities by the Company shall not be
prohibited by any law or governmental order or regulation.



Section 6

Conditions to Closing of Company




     The Company’s obligation to sell and issue the Units at the Closing is, at the option of the
Company, subject to the fulfillment or waiver as of the Closing Date of the following conditions:



     6.1 Representations and Warranties. The representations made by the Purchasers in
Section 4 hereof shall be true and correct in all material respects when made, and shall be true
and correct in all material respects on the Closing Date with the same force and effect as if they
had been made on and as of such date.



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     6.2 Covenants. All covenants, agreements and conditions contained in this Agreement
to be performed by the Purchasers on or prior to the Closing Date shall have been performed or
complied with in all material respects.



     6.3 Blue Sky. The Company shall have obtained all necessary blue sky law permits and
qualifications, or secured exemptions therefrom, required by any state for the offer and sale of
the Securities and the shares of Common Stock issuable upon exercise of the Warrants.



     6.4 Market Listing. The Shares shall be approved for listing on the NASDAQ Global
Market upon issuance.



     6.5 Absence of Litigation. No proceeding challenging this Agreement or the
transactions contemplated hereby, or seeking to prohibit, alter, prevent or materially delay the
Closing, shall have been instituted or be pending before any court, arbitrator, governmental body,
agency or official.



     6.6 No Governmental Prohibition. The sale of Securities by the Company shall not be
prohibited by any law or governmental order or regulation.



Section 7

Affirmative Covenants of the Company




     The Company hereby covenants and agrees as follows:



     7.1 Registration Requirements.



          (a) The Company shall prepare and file the Registration Statement with the SEC under the
Securities Act to register the resale of the Shares by the Purchasers no later than thirty (30)
days following the Closing Date (the “Filing Deadline Date”)




          (b) The Company shall pay all Registration Expenses (as defined below) in connection with any
registration, qualification or compliance hereunder, and each Purchaser shall pay all Selling
Expenses (as defined below) and other expenses that are not Registration Expenses relating to the
Shares resold by such Purchaser. “Registration Expenses” shall mean all expenses, except
for Selling Expenses, incurred by the Company in complying with the registration provisions herein
described, including, without limitation, all registration, qualification and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and
expenses, and the expense of any special audits incident to or required by any such registration.
“Selling Expenses” shall mean all selling commissions, underwriting fees and stock transfer
taxes applicable to the Shares and all fees and disbursements of counsel for any Purchaser.




          (c) In the case of the registration effected by the Company pursuant to these registration
provisions, the Company will use its reasonable best efforts to: (i) cause the Registration
Statement to become effective as soon as practicable after the filing thereof but in any event
within 90 days after the Registration Statement is filed by the Company, subject to receipt of
necessary information from the Purchasers after prompt request from the Company to the Purchasers
to provide such information; (ii) keep such registration effective until the earlier




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(such date being referred to as the “Registration Termination Date”) of (A) the later
of (1) the twelve month anniversary of the Closing Date and (2) the twelve month anniversary of the
last date on which any Warrant Shares are issued upon the exercise of Warrants, or (B) such date as
all of the Shares have been resold by the original Purchasers thereof; (iii) prepare and file with
the SEC such amendments and supplements to the Registration Statement and the prospectus used in
connection with the Registration Statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by the Registration
Statement; (iv) furnish such number of prospectuses and other documents incident thereto, including
any amendment of or supplement to the prospectus, as a Purchaser from time to time may reasonably
request; (v) cause all Shares registered as described herein to be listed on each securities
exchange and quoted on each quotation service on which similar securities issued by the Company are
then listed or quoted; (vi) provide a transfer agent and registrar for all Shares registered
pursuant to the Registration Statement and a CUSIP number for all such Shares; (vii) to comply with
all applicable rules and regulations of the SEC; and (viii) file the documents required of the
Company and maintain requisite blue sky clearance in (A) all jurisdictions in which any of the
Shares are originally sold and (B) all other states reasonably specified in writing by a Purchaser,
provided, however, that the Company shall not be required to qualify to do business
or consent to service of process in any state in which it is not now so qualified or has not so
consented. After the Registration Termination Date, the Company shall be entitled to withdraw the
Registration Statement and the Purchasers shall have no further right to offer or sell any of the
Shares pursuant to the Registration Statement.




          (d) With a view to making available to the Purchasers the benefits of Rule 144, as amended,
promulgated under the Securities Act (“Rule 144”) and any other rule or regulation of the
SEC that may at any time permit a Purchaser to sell Shares to the public without registration or
pursuant to a registration on Form S-3, the Company covenants and agrees to: (i) make available
adequate current public information, as those terms are understood and defined in Rule 144, until
the earlier of (A) the later of (i) the one-year anniversary of the Closing Date and (ii) the
one-year anniversary of the last date on which Warrant Shares are issued upon exercise of the
Warrants or (B) such date as all of the Shares shall have been resold; (ii) file with the SEC in a
timely manner all reports and other documents required of the Company under the Securities Act and
the Exchange Act; and (iii) furnish to any Purchaser upon request, as long as the Purchaser owns
any Shares, (A) a written statement by the Company that it is in compliance with the reporting
requirements of the Securities Act and the Exchange Act, (B) a copy of the most recent annual or
quarterly report of the Company, and (C) such other information as may be reasonably requested in
order to avail any Purchaser of any rule or regulation of the SEC that permits the selling of any
such Shares without registration or pursuant to such Form S-3.




          (e) Notwithstanding anything in this Agreement to the contrary, if the Company shall furnish
to the selling Purchasers a certificate signed by the Chief Executive Officer or the Chief
Financial Officer of the Company stating that the Board of Directors of the Company has made the
good faith and reasonable determination (i) that continued use by the selling Purchasers of the
Registration Statement for purposes of effecting offers or sales of Shares pursuant thereto would
require, under the Securities Act, premature disclosure in the Registration Statement (or the
prospectus relating thereto) of material, nonpublic information concerning the Company, its
business or prospects or any proposed material transaction involving the Company, (ii) that such
premature disclosure would be materially adverse to the



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Company, its business or prospects or any such proposed material transaction or would make the
successful consummation by the Company of any such material transaction significantly less likely
and (iii) that it is therefore desirable to suspend the use by the Purchasers of such Registration
Statement (and the prospectus relating thereto) for purposes of effecting offers or sales of Shares
pursuant thereto, then the right of the selling Purchasers to use the Registration Statement (and
the prospectus relating thereto) for purposes of effecting offers or sales of Shares pursuant
thereto shall be suspended (an “Allowed Suspension”). Notwithstanding the foregoing, the
Company shall not under any circumstances be entitled to exercise its right to suspend the use of
the Registration Statement on more than three occasions during any 12-month period or for more than
30 days per such occasion. Each Purchaser hereby covenants and agrees that it will not sell any
Shares pursuant to the Registration Statement during the periods the Registration Statement is
withdrawn or the ability to sell thereunder is suspended as set forth in this Section 7.1(e).




          (f) If (i) the Company does not file the Registration Statement by the Filing Deadline Date or
(ii) such Registration Statement is not declared effective by the SEC on or before the date that is
90 days from the Filing Deadline Date (the “Registration Deadline”) (each of the foregoing
clauses (i) and (ii) being referred to herein as a “Registration Default”), the Company
shall pay to each Purchaser as liquidated damages and not as a penalty for such delay in or
reduction of its ability to sell its Shares under the Registration Statement (which remedy shall
constitute the Purchaser’s exclusive remedy) an amount of cash equal to one percent (1.0%) of the
aggregate purchase price paid by the Purchaser for the Units then held by it and, for each month
thereafter (pro rated for partial months) in which a Registration Default exists, a cash payment
equal to one percent (1.0%) of the aggregate purchase price paid by the Purchaser for the Units
then held by it. In the event that a Registration Default occurs under either clause (i) or (ii)
and, prior to the cessation of such Registration Default, another Registration Default occurs
pursuant to the other clause, the subsequent Registration Default shall be deemed to be a
continuation of the earlier Registration Default for purposes of calculating the payments required
to be made under this Section 7.1(f). Notwithstanding the foregoing, Registration Default payments
made by the Company under this Section 7.1(f) shall not exceed, for each individual or continuous
occurrence of a Registration Default with respect to the Company, six percent (6%) of the aggregate
purchase price paid by the Purchaser for the Units outstanding at the time such Registration
Default first occurred. The first payment required to be made by the Company under this Section
7.1(f) shall be made on the date that is 30 calendar days following the initial Registration
Default, and subsequent payments shall be made on the last day of each calendar month in which a
Registration Default exists (or, if such day is not a Business Day, on the Business Day immediately
following such day).




     7.2 Indemnification and Contribution.



          (a) The Company agrees to indemnify and hold harmless each selling Purchaser, each of its
directors, officers, members, agents, employees and each person who controls the Purchaser within
the meaning of the Securities Act (a “Purchaser Indemnified Person”) from and against any
losses, claims, damages or liabilities (or actions or proceedings in respect thereof) to which such
Purchaser Indemnified Person may become subject (under the Securities Act or otherwise) insofar as
such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise
out of or are based upon, (X) any untrue statement or



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alleged untrue statement of any material fact contained in the Registration Statement, any
preliminary prospectus or final prospectus contained in the Registration Statement, or any
amendment or supplement to such Registration Statement or prospectus or (Y) the omission or alleged
omission to state a material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of any prospectus or any form of prospectus or supplement
thereto, in light of the circumstances under which they were made), and the Company will, as
incurred, reimburse such Purchaser Indemnified Person for any legal or other expenses reasonably
incurred in investigating, defending or preparing to defend any such action, proceeding or claim;
provided, however, that the Company shall not be liable to a Purchaser Indemnified
Person in any such case to the extent that such loss, claim, damage or liability arises out of or
is based upon (i) an untrue statement or omission made in such Registration Statement, preliminary
prospectus or prospectus, or any such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Company by or on behalf of such Purchaser Indemnified
Person specifically for use in the Registration Statement, (ii) the failure of the selling
Purchaser related to such Purchaser Indemnified Person to comply with the covenants and agreements
contained in Section 8.3 hereof, or (iii) any untrue statement in any prospectus that is corrected
in any subsequent prospectus that was delivered to the Purchaser related to such Purchaser
Indemnified Person prior to the pertinent sale or sales by such Purchaser.




          (b) Each Purchaser, severally and not jointly, agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed the Registration Statement and
each person who controls the Company within the meaning of the Securities Act (a “Company
Indemnified Person”) from and against any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) to which the Company may become subject (under the Securities Act
or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, any preliminary prospectus or
final prospectus contained in the Registration Statement, or any amendment or supplement to the
Registration Statement or prospectus, or any omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not misleading (in the
case of any prospectus or any form of prospectus or supplement thereto, in light of the
circumstances under which they were made) in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Purchaser specifically for use in the
Registration Statement, provided, however, that no Purchaser shall be liable to a Company
Indemnified Person in any such case for any untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact included in any prospectus which
statement or omission has been corrected, in writing, by such Purchaser and delivered to the
Company before the sale from which such loss occurred, or (ii) the delivery by the Purchaser of a
prospectus (the “Previous Prospectus”) containing an untrue statement or omission that was
corrected by the Company by delivery to the Purchaser prior to the pertinent sale or sales by the
Purchaser of (X) a subsequent prospectus not containing such untrue statement or omission and (Y) a
written notice advising the Purchaser to terminate use of the Previous Prospectus, and each
Purchaser, severally and not jointly, will, as incurred, reimburse such Company Indemnified Person
for any legal or other expenses reasonably incurred in investigating, defending or preparing to
defend any such action, proceeding or claim; provided that each Purchasers’ obligations pursuant to
this Section 7.2(b)



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shall be limited to the net proceeds received by the Purchaser from the sale of the Shares
under the Registration Statement.




          (c) Promptly after receipt by any indemnified person of a notice of a claim or the beginning
of any action in respect of which indemnity is to be sought against an indemnifying person pursuant
to this Section 7.2, such indemnified person shall notify the indemnifying person in writing of
such claim or of the commencement of such action, and, subject to the provisions hereinafter
stated, in case any such action shall be brought against an indemnified person and the indemnifying
person shall have been notified thereof, the indemnifying person shall be entitled to participate
therein, and, to the extent that it shall wish, to assume at its expense the defense thereof, with
counsel reasonably satisfactory to the indemnified person. After notice from the indemnifying
person to such indemnified person of the indemnifying person’s election to assume the defense
thereof, the indemnifying person shall not be liable to such indemnified person for any legal
expenses subsequently incurred by such indemnified person in connection with the defense thereof,
provided, however, that if there exists or shall exist a conflict of interest that
would make it inappropriate in the reasonable judgment of the indemnified person for the same
counsel to represent both the indemnified person and such indemnifying person or any affiliate or
associate thereof, the indemnified person shall be entitled to retain its own counsel at the
expense of such indemnifying person. No indemnifying party, in the defense of any such claim or
litigation shall, except with the consent of each indemnified party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release from all liability in
respect of such claim or litigation, and no indemnified party shall consent to entry of any
judgment or settle such claim or litigation without the prior written consent of the indemnifying
party, which consent shall not be unreasonably withheld, conditioned or delayed.




          (d) If the indemnification provided for in this Section 7.2 is unavailable to or insufficient
to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses,
claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to
the amount paid or payable by such indemnified party as result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the
relative fault of the Company on the one hand and the Purchasers on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable considerations. The relative
fault shall be determined by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a material fact relates
to information supplied by the Company on the one hand or a Purchaser on the other and the parties’
relative intent, knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Purchasers agree that it would not be just and
equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation
(even if the Purchasers were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result of the losses,
claim, damages, or liabilities (or actions in respect thereof) referred to above in this subsection
(d) shall be deemed to include any legal or other expenses reasonably incurred by



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such indemnified party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Purchaser shall be required to
contribute any amount in excess of the amount by which the net amount received by the Purchaser
from the sale of the Shares to which such loss relates exceeds the amount of any damages which such
Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement
or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Purchasers’ obligations in this
subsection (d) to contribute are several in proportion to their respective sales of Shares to which
such loss relates and not joint.




          (e) The obligations of the Company and the Purchasers under this Section 7.2 shall be in
addition to any liability which the Company and the respective Purchasers may otherwise have and
shall extend, upon the same terms and conditions, to each person, if any, who controls the Company
or any Purchaser within the meaning of the Act.




     7.3 Restrictions on Transferability. None of the rights of any Purchaser under this
Agreement shall be transferred or assigned to any person unless (a) such person is a Qualifying
Holder (as defined below), and (b) such person agrees to become a party to, and bound by, all of
the terms and conditions of, this Agreement by duly executing and delivering to the Company an
instrument of adherence in the form prescribed by the Company. For purposes of this Agreement, the
term “Qualifying Holder” shall mean, with respect to any Purchaser, (i) any partner
thereof, (ii) any corporation, partnership controlling, controlled by, or under common control
with, such Investor or any partner thereof, or (iii) up to two other direct transferees from such
Purchaser. None of the rights of any Purchaser under this Agreement shall be transferred or
assigned to any Person (including, without limitation, a Qualifying Holder) that acquires Shares in
the event that and to the extent that such Person is eligible to freely resell such Shares pursuant
to Rule 144(b)(1) of the Securities Act. For purposes of this Agreement, “Person” means
mean any individual, corporation, limited liability company, partnership, association, trust,
estate or other entity or organization.



     7.4 Restrictions on Sales and Issuance of Common Stock. The Company hereby agrees
that, for a period until the later of (i) ninety (90) days after the Closing Date or (ii) ninety
(90) days after the effectiveness of the Registration Statement, it shall not issue or sell any
Common Stock, any warrants or other rights to acquire Common Stock or any other securities that are
convertible into Common Stock, with the exception of (i) issuances or sales (A) related to a
strategic transaction, (B) pursuant to the exercise of an option, warrant or other right to acquire
Common Stock outstanding as of the date of this Agreement, (C) to an employee, director,
consultant, supplier, lender or lessor, or (ii) any option grant or issuance.



Section 8

Restrictions on Transferability of Shares and Warrants:

Compliance With Securities Act




     8.1 Securities Law Transfer Restrictions. No Purchaser shall sell, assign, pledge,
transfer or otherwise dispose of or encumber any of the Shares or Warrants, except (i) pursuant to
an effective registration statement under the Securities Act or (ii) pursuant to an available



-17-









 




exemption from registration under the Securities Act and applicable state securities laws and,
if requested by the Company, upon delivery by such Purchaser of an opinion of counsel reasonably
satisfactory to the Company to the effect that the proposed transfer is exempt from registration
under the Securities Act and applicable state securities laws; provided that no such opinion shall
be requested for any transfer of Shares or Warrants that is exempt from such registration under
Rule 144 under the Securities Act. Any transfer or purported transfer of the Shares or Warrants in
violation of this Section 8.1 shall be voidable by the Company. The Company shall not register any
transfer of the Shares or Warrants in violation of this Section 8.1. The Company may, and may
instruct any transfer agent for the Company, to place such stop transfer orders as may be required
on the transfer books of the Company in order to ensure compliance with the provisions of this
Section 8.1.




     8.2 Restrictive Legend. The Shares deposited in each Purchaser’s direct registration
account shall be accompanied by such tags and other notifications substantially in the form of the
following legends (in addition to any legends required under applicable securities laws), and any
stock certificates issued to a Purchaser representing Shares shall also bear substantially the
following legends (in addition to any legends required under applicable securities laws):




THE SHARES REPRESENTED [BY THIS CERTIFICATE]/[HEREBY] HAVE BEEN
ACQUIRED FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM.




ADDITIONALLY THE TRANSFER OF THE SHARES REPRESENTED [BY THIS
CERTIFICATE]/[HEREBY] IS SUBJECT TO CERTAIN RESTRICTIONS SPECIFIED
IN THE SECURITIES PURCHASE AGREEMENT DATED MARCH 5, 2008 BETWEEN
THE COMPANY AND THE ORIGINAL PURCHASERS, AND NO TRANSFER OF SHARES
SHALL BE VALID OR EFFECTIVE ABSENT COMPLIANCE WITH SUCH
RESTRICTIONS. ALL SUBSEQUENT HOLDERS OF [THIS CERTIFICATE]/[THE
SHARES REPRESENTED IN THIS ACCOUNT] WILL HAVE AGREED TO BE BOUND BY
CERTAIN OF THE TERMS OF THE AGREEMENT, INCLUDING SECTIONS 8.1 AND
8.3 OF THE AGREEMENT. COPIES OF THE AGREEMENT MAY BE OBTAINED AT NO
COST BY WRITTEN REQUEST MADE BY THE REGISTERED HOLDER OF [THIS
CERTIFICATE]/[THE SHARES REPRESENTED IN THIS ACCOUNT] TO THE
SECRETARY OF THE COMPANY.



     The legends contained in this Section 8.2 may be removed from a Purchaser’s direct
registration account and/or a certificate in accordance with Section 8.3.



-18-









 





     8.3 Transfer of Shares After Registration. Each Purchaser hereby covenants with the
Company not to make any sale of the Shares or Warrants except either (i) in accordance with the
Registration Statement, in which case such Purchaser covenants to comply with the requirement of
delivering a current prospectus, or (ii) pursuant to an available exemption from registration under
the Securities Act and applicable state securities laws and, if requested by the Company, upon
delivery by such Purchaser of an opinion of counsel reasonably satisfactory to the Company to the
effect that the proposed transfer is exempt from registration under the Securities Act and
applicable state securities laws; provided that no such opinion shall be requested for any transfer
of Shares that is exempt from such registration under Rule 144 under the Securities Act. Such
Purchaser further acknowledges and agrees that such Shares are not transferable on the books of the
Company pursuant to the Registration Statement unless accompanied by a separate certificate
executed by an officer of, or other person duly authorized by, such Purchaser in the form attached
hereto as Exhibit E. If the Company is required to remove the restrictive legends
applicable to Shares deposited in a Purchaser’s direct registration account (or to issue unlegended
certificates with respect to such Shares), the Company shall use its best efforts to remove such
restricted legends within four (4) business days of the Purchaser’s valid request for the removal
of such legends and the Purchaser’s delivery of all documents required by the transfer agent in
connection therewith; provided, however, that if the Company does not remove such
legends within four (4) business days of the date (the “Violation Date”) that the Purchaser
submitted a valid request for the removal of such legends and its delivery of all documents
required by the transfer agent in connection therewith, the Company shall pay to the Purchaser, as
liquidated damages and not as a penalty for the delay in the delegending of shares deposited in the
Purchaser’s direct registration account or the delivery of unlegended certificates (which remedy
shall constitute the Purchaser’s exclusive remedy), an amount equal to one percent 1.0% of the
product of (i) the closing price per share of the Common Stock as listed on the Trading Market on
the date the Purchaser submits its legend removal request and (ii) the number of Shares for which
legends were not removed by the Company as required by this Section. The foregoing penalty shall
apply for each thirty (30) day period (or portion thereof) beyond such four (4) business day period
that the applicable legends were not so removed, with the payment of any such penalty to be made by
the Company pursuant to this Section 8.3 on the last day of the first full calendar month following
the Violation Date, and with subsequent penalty payments to be made on the last day of each
calendar month during which the penalty set forth in this Section 8.3 is required to be paid by the
Company.



     8.4 Purchaser Information. Each Purchaser covenants that it will promptly notify the
Company of any changes in the information set forth in the Registration Statement regarding such
Purchaser or such Purchaser’s “Plan of Distribution” and of any sale of Shares by such Purchaser.



Section 9

Miscellaneous




     9.1 Waivers and Amendments. The terms of this Agreement may be waived or amended only
with the written consent of the Company and each Purchaser.




-19-











 





     9.2 Brokers and Finders. Other than Banc of America Securities LLC and its subagents,
each of the parties hereto hereby represents there are no brokers or finders entitled to
compensation in connection with the sale of the Units to the Purchasers.



     9.3 Governing Law. All questions concerning the construction, validity, enforcement
and interpretation of this Agreement shall be governed by and construed in accordance with the laws
of the State of New York. Each party hereby irrevocable submits to the exclusive jurisdiction of
the state and federal courts sitting in the city of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the enforcement of this
Agreement), and hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service
of process and consents to process being served in any such suit, action or proceeding by mailing a
copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to
such party at the address in effect for notices to it under this agreement and agrees that such
service shall constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process in any manner
permitted by law. The Company and the Purchasers hereby waive all rights to trial by jury.



     9.4 Survival. The representations, warranties, covenants and agreements made in this
Agreement shall survive any investigation made by the Company or the Purchasers and the Closing.



     9.5 Successors and Assigns. The provisions hereof shall inure to the benefit of, and
be binding upon, the successors, assigns, heirs, executors and administrators of the parties to
this Agreement. Except as provided in Section 7.3, notwithstanding the foregoing, no Purchaser
shall assign this Agreement without the prior written consent of the Company.



     9.6 Entire Agreement. This Agreement constitutes the full and entire understanding
and agreement between the parties with regard to the subjects thereof.



     9.7 Notices, etc. All notices and other communications required or permitted under
this Agreement shall be effective upon receipt and shall be in writing and may be delivered in
person, by telecopy, overnight delivery service or registered or certified United States mail
addressed to the Company at its address set forth below or the Purchasers at their respective
addresses set forth at the beginning of this Agreement or on Exhibit A or at such other
address as the Company or the Purchasers shall have furnished to the other party in writing. All
notices and other communications shall be effective upon the earlier of actual receipt thereof by
the person to whom notice is directed or (i) in the case of notices and communications sent by
personal delivery or telecopy, one business day after such notice or communication arrives at the
applicable address or was successfully sent to the applicable telecopy number, (ii) in the case of
notices and communications sent by overnight delivery service, at noon (local time) on the second
business day following the day such notice or communication was sent, and (iii) in the case of
notices and communications sent by United States mail seven days after such notice or communication
shall have been deposited in the United States mail.



-20-









 





     Notices to the Company shall be addressed



	 	 	 
	to:

	 	with a copy to:
	 
	 	 
	Penwest Pharmaceuticals Co.

	 	Wilmer Cutler Pickering Hale and Dorr LLP
	Attn: Chief Financial Officer

	 	Attn: Stuart M. Falber, Esq
	39 Old Ridgebury Road, Suite 11

	 	60 State Street
	Danbury, Connecticut 06810

	 	Boston, Massachusetts 02109
	Fax: (203) 796-1393.

	 	Fax: (617) 526-5000






     9.8 Severability of this Agreement. If any provision of this Agreement shall be
judicially determined to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or impaired thereby.



     9.9 Counterparts. This Agreement may be executed in any number of counterparts, each
of which shall be an original, but all of which together shall constitute one instrument.



     9.10 Further Assurances. Each party to this Agreement shall do and perform or cause
to be done and performed all such further acts and things and shall execute and deliver all such
other agreements, certificates, instruments and documents as the other party hereto may reasonably
request in order to carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.



     9.11 Expenses. The Company and each such Purchaser shall bear its own expenses
incurred on its behalf with respect to this Agreement and the transactions contemplated hereby,
including fees of legal counsel.



     9.12 Currency. All references to “dollars” or “$” in this Agreement shall be deemed
to refer to United States dollars.



     9.13 Replacement of Securities. If any certificate or instrument evidencing any
Securities or Warrant Shares is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued, in exchange and substitution for and upon cancellation thereof, or in lieu of
and substitution therefor, a new certificate or instrument, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and customary and
reasonable indemnity, if requested, and upon satisfaction by the Purchaser of any requirements of
the Company’s transfer agent. The applicants for a new certificate or instrument under such
circumstances shall also pay any reasonable third-party costs associated with the issuance of such
replacement Securities or Warrant Shares.



     9.14 Remedies. In addition to being entitled to exercise all rights provided herein
or granted by law, including recovery of damages, each of the Purchasers and the Company will be
entitled to seek specific performance under the Transaction Documents. The parties agree that
monetary damages may not be adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence.



     9.15 Independent Nature of Purchasers’ Obligations and Rights. The obligations of
each Purchaser under the Transaction Documents are several and not joint with the obligations of



-21-









 




any other Purchaser, and no Purchaser shall be responsible in any way for the performance of
the obligations of any other Purchaser under any Transaction Document. Each Purchaser represents
that the decision of each Purchaser to purchase Units pursuant to this Agreement has been made by
such Purchaser independently of any other Purchaser and independently of any information,
materials, statements or opinions as to the business, affairs, operations, assets, properties,
liabilities, results of operations, condition (financial or otherwise) or prospects of the Company
which may have been made or given by any other Purchaser or by any agent or employee of any other
Purchaser, and no Purchaser or any of its agents or employees shall have any liability to any other
Purchaser (or any other Person) relating to or arising from any such information, materials,
statements or opinions. Nothing contained herein or in any Transaction Document, and no action
taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or create a presumption
that the Purchasers are in any way acting in concert or as a group with respect to such obligations
or the transactions contemplated by the Transaction Document. Each Purchaser acknowledges that no
other Purchaser has acted as agent for such Purchaser in connection with making its investment
hereunder and that no other Purchaser will be acting as agent of such Purchaser in connection with
monitoring its investment hereunder. Each Purchaser shall be entitled to independently protect and
enforce its rights, including without limitation the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined
as an additional party in any proceeding for such purpose.




[Remainder of This Page Intentionally Left Blank.]




-22-









 








     The foregoing agreement is hereby executed as of the date first above written.



	 	 	 	 	 
	 	PENWEST PHARMACEUTICALS CO.



a Washington corporation

 	 
	 	/s/ Benjamin L. Palleiko 	 
	 	By:  	Benjamin L. Palleiko
 	 
	 	Title:  	      Senior Vice President, Finance, and 	 
	 	 	Chief Financial Officer 	 
	 



	 	 	 	 	 
	 	PURCHASERS:




Counterpart signature pages attached.

 	 
	 	 	 
	 	 	 
	 	 	 



-23-









 






	 	 	 	 	 



Purchaser Signature Page





     By its execution and delivery of this signature page, the undersigned Purchaser hereby joins
in and agrees to be bound by the terms and conditions of the Securities Purchase Agreement dated as
of March 5, 2008 (the “Purchase Agreement”) by and among Penwest Pharmaceuticals Co. and
the Purchasers (as defined therein), as to the number of Units set forth below, and authorizes this
signature page to be attached to the Purchase Agreement or counterparts thereof.



	 	 	 	 	 
	 	Name of Purchaser:

 	 
	 	 	 
	 
	 	By:  	 	 
	 	 	Title 	 



	 	 	 	 	 
	 	 Record 	 
	 	Address:	 	  	 




	 	 	 	 	 
	 	 	  	 
	 
	 	 Telecopy No.: 	  	 




	 	 	 	 	 
	 	Number of Units: 	  	 




	 	 	 	 	 
	 	Aggregate Purchase Price: $	  	 
	 	 	 
	 	 	 



Agreed to and accepted this

5 day of March, 2008




	 	 	 	 	 
	Penwest Pharmaceuticals Co.

 	 
	By:  	 	 
	 	Name:  	Benjamin L. Palleiko 	 
	 	Title:  	Senior Vice President, Finance, and Chief
Financial Officer 	 




-24-









 








Exhibit A




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Purchaser’s	 
	 	 	 	 	 	 	Purchased	 	 	 	 	 	 	Aggregate	 
	Purchaser	 	Units	 	 	Shares	 	 	Warrant Shares	 	 	Purchase Price	 
	WS Opportunity Fund, L.P.

300 Crescent Court

Suite 1111

Dallas, TX 75201

Fax: 214-756-6079
	 	 	73,577	 	 	 	73,577	 	 	 	36,789	 	 	$	226,801.10	 
	WS Opportunity Fund (QP), L.P.

300 Crescent Court

Suite 1111

Dallas, TX 75201

Fax: 214-756-6079
	 	 	66,310	 	 	 	66,310	 	 	 	33,155	 	 	$	204,400.58	 
	WS Opportunity Fund International, Ltd.

300 Crescent Court

Suite 1111

Dallas, TX 75201

Fax: 214-756-6079
	 	 	90,154	 	 	 	90,154	 	 	 	45,077	 	 	$	277,899.71	 
	Walker Smith International Fund, Ltd.

300 Crescent Court

Suite 1111

Dallas, TX 75201

Fax: 214-756-6079
	 	 	647,754	 	 	 	647,754	 	 	 	323,877	 	 	$	1,996,701.71	 
	Walker Smith Capital (QP), L.P.

300 Crescent Court

Suite 1111

Dallas, TX 75201

Fax: 214-756-6079
	 	 	409,343	 	 	 	409,343	 	 	 	204,672	 	 	$	1,261,799.80	 
	Walker Smith Capital, L.P.

300 Crescent Court

Suite 1111

Dallas, TX 75201

Fax: 214-756-6079
	 	 	62,125	 	 	 	62,125	 	 	 	31,062	 	 	$	191,500.31	 
	HHMI Investments, L.P.

300 Crescent Court

Suite 1111

Dallas, TX 75201

Fax: 214-756-6079
	 	 	272,798	 	 	 	272,798	 	 	 	136,399	 	 	$	840,899.84	 
	RA Capital Biotech Fund, L.P.

111 Huntington Ave

Suite 610

Boston, MA 02199

Fax: 617-778-2509
	 	 	1,280,780	 	 	 	1,280,780	 	 	 	640,390	 	 	$	3,948,004.35	 
	RA Capital Biotech Fund II, L.P.

111 Huntington Ave

Suite 610

Boston, MA 02199

Fax: 617-778-2509
	 	 	16,870	 	 	 	16,870	 	 	 	8,435	 	 	$	52,001.78	 
	Quogue Capital LLC

1285 Ave. of Americas

35th Floor

New York, NY 10019

Fax: 212-554-4475
	 	 	1,100,000	 	 	 	1,100,000	 	 	 	550,000	 	 	$	3,390,750.00	 
	Perceptive Life Sciences Master Fund, Ltd.

499 Park Ave

25th Floor

New York, NY 10022
Fax:
	 	 	1,850,000	 	 	 	1,850,000	 	 	 	925,000	 	 	$	5,702,625.00	 
	Deerfield Special Situations Fund International Limited

780 3rd Ave

37th Floor

New York, NY 10017

Fax: 212-551-1612
	 	 	836,985	 	 	 	836,985	 	 	 	418,493	 	 	$	2,580,006.26	 
	Deerfield Special Situations Fund, L.P.

780 3rd Ave

37th Floor

New York, NY 10017

Fax: 212-551-1612
	 	 	460,665	 	 	 	460,665	 	 	 	230,332	 	 	$	1,419,999.86	 
	H&Q Healthcare Investors

2 Liberty Square

Boston, MA 02109

Fax: 617-772-8577
	 	 	574,211	 	 	 	574,211	 	 	 	287,106	 	 	$	1,770,005.44	 
	H&Q Life Science Investors

2 Liberty Square

Boston, MA 02109

Fax: 617-772-8577
	 	 	399,028	 	 	 	399,028	 	 	 	199,514	 	 	$	1,230,003.78	 














 





Exhibit B




FORM OF WARRANT



THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE PURSUANT TO THE WARRANT ARE REGISTERED UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.



THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT ARE SUBJECT TO
THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTIONS 3 AND 11 OF THIS WARRANT




PENWEST PHARMACEUTICALS CO.




WARRANT




			
	Warrant No.      
	 	Dated: March      , 2008






     PENWEST PHARMACEUTICALS CO., a Washington corporation (the “Company”), hereby
certifies that, for value received, [ ], or its registered assigns (the “Holder”), is
entitled to purchase from the Company up to a total of [ ] shares of common stock, $0.001 par
value per share (the “Common Stock”), of the Company (each such share as adjusted from time
to time as provided in Section 9, a “Warrant Share” and all such shares, the “Warrant
Shares”) at an exercise price equal to $3.62 (as adjusted from time to time as provided in
Section 9, the “Exercise Price”), at any time on or before 6:30 p.m. (New York local time)
on March [ ], 2013 (the “Expiration Date”), subject to the terms and conditions set forth
herein. This warrant (this “Warrant”) is one of a series of similar warrants issued
pursuant to that certain Securities Purchase Agreement, dated as of March 5, 2008 by and among the
Company and the Purchasers identified therein (the “Securities Purchase Agreement”). All
such warrants are referred to herein, collectively, as the “Warrants.”



     1. Definitions. Capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Securities Purchase Agreement.



     2. Registration of Warrant. The Company shall register this Warrant, upon records to
be maintained by the Company for that purpose (the “Warrant Register”), in the name of the
Holder (which shall include the initial Holder or, as the case may be, any registered assignee to
which this Warrant is permissibly assigned hereunder from time to time). The Company may deem and
treat the registered Holder as the absolute owner of this Warrant for the purpose of any exercise
hereof, any distribution in respect hereof and for all other purposes, absent actual notice to the
contrary.



     3. Transfers. Neither this Warrant nor the Warrant Shares shall be sold or
transferred unless either (i) they first shall have been registered under the Securities Act or



-1-









 




(ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably
satisfactory to the Company, to the effect that such sale or transfer is exempt from the
registration requirements of the Securities Act. In addition, the Holder acknowledges and agrees
that this Warrant and the Warrant Shares may not be assigned or transferred in whole or in part
except to an Affiliate (as defined below) of the Holder. If the assignment or transfer is to an
Affiliate of the Holder, no registration or opinion of counsel shall be required and the Company
shall register any such assignment or transfer of all or any portion of this Warrant in the Warrant
Register, upon (i) surrender of this Warrant, with the Form of Assignment attached hereto duly
completed and signed, and (ii) delivery by the transferee of a written statement to the Company
certifying that the transferee is an Affiliate of the Holder and an “accredited investor” as
defined in Rule 501(a) under the Securities Act and making the representations and certifications
as set forth in Section 4 of the Securities Purchase Agreement, in each case, to the Company at its
address specified in the Securities Purchase Agreement. Upon any such registration or transfer, a
new Warrant to purchase Common Stock, in substantially the form of this Warrant (any such new
Warrant, a “New Warrant”), evidencing the portion of this Warrant so transferred shall be
issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so
transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant
by the transferee shall be deemed the acceptance by such transferee of all of the rights and
obligations in respect of the New Warrant that the Holder has in respect of this Warrant. For the
purposes of this Section 3, “Affiliate” means any person or entity that, directly or
indirectly through one or more intermediaries, controls or is controlled by or is under common
control with a person or entity, as such terms are used in and construed under Rule 144 under the
Securities Act.




     4. Exercise and Duration of Warrant.



          (a) This Warrant shall be exercisable by the registered Holder at any time and from time to
time after the date hereof and through and including the Expiration Date. At 6:30 P.M., New York
time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and
become void and of no value and this Warrant shall be terminated and no longer outstanding.




          (b) The Holder may exercise this Warrant by delivering to the Company (with copies to its
counsel) in accordance with the notice provisions of this Warrant (i) by surrendering this Warrant
along with an exercise notice, in the form attached hereto (the “Exercise Notice”),
completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares
as to which this Warrant is being exercised, and the date such items are delivered to the Company
(as determined in accordance with the notice provisions hereof) is an “Exercise Date”. The
delivery by (or on behalf of) the Holder of the Exercise Notice, the Warrant and the applicable
Exercise Price as provided above shall constitute the Holder’s certification to the Company that
its representations contained in Section 4 of the Securities Purchase Agreement are true and
correct as of the Exercise Date as if remade in their entirety (or, in the case of any assignee
Holder that is not a party to the Securities Purchase Agreement, such assignee Holder’s
certification to the Company that such representations are true and correct as to such assignee
Holder as of the Exercise Date).




          (c) Cashless Exercise.




-2-









 








          (i) At any time prior to and through the Expiration Date when the resale of the Warrant Shares
by the Holder is not registered pursuant to an effective registration statement filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities
Act”), the Holder may, at its option, elect to exercise this Warrant, in whole or in part, on a
cashless basis, by surrendering this Warrant, with the purchase form appended hereto duly executed
by or on behalf of the Holder, at the principal office of the Company, or at such other office or
agency as the Company may designate, by canceling a portion of this Warrant in payment of the
Exercise Price payable in respect of the number of Warrant Shares purchased upon such exercise. In
the event of an exercise pursuant to this subsection 4(c), the number of Warrant Shares issued to
the Holder shall be determined according to the following formula:




	 	 	 
	 

	 	X = Y(A-B)

            A







	     Where: X =  	 	the number of Warrant Shares that shall be issued to the Holder;






Y = the number of Warrant Shares for which this Warrant is being
exercised (which shall include both the number of Warrant Shares
issued to the Holder and the number of Warrant Shares subject to the
portion of the Warrant being cancelled in payment of the Exercise
Price);




A = the Fair Market Value (as defined below) of one share of Common
Stock; and




B = the Purchase Price then in effect.



          (ii) The Fair Market Value per share of Common Stock shall be determined as follows:




               (1) If the Common Stock is listed on a national securities exchange, the Nasdaq Global Market,
the Nasdaq Capital Market, the American Stock Exchange or another nationally recognized trading
system, including the OTC Bulletin Board, as of the Exercise Date, the Fair Market Value per share
of Common Stock shall be deemed to be the average of the high and low reported sale prices per
share of Common Stock thereon on the trading day immediately preceding the Exercise Date (provided
that if no such price is reported on such day, the Fair Market Value per share of Common Stock
shall be determined pursuant to clause (2) below).



               (2) If the Common Stock is not listed on a national securities exchange, the Nasdaq Global
Market, the Nasdaq Capital Market, the American Stock Exchange or another nationally recognized
trading system, including the OTC Bulletin Board, as of the Exercise Date, the Fair Market Value
per share of Common Stock shall be deemed to be the amount most recently determined in good faith
by the Board of Directors of the Company (the “Board”) to represent the fair market value per share
of the Common Stock (including without limitation a determination for purposes of granting Common
Stock options or issuing Common Stock under any plan, agreement or arrangement with employees of
the Company); and, upon request of the Holder, the Board (or a representative thereof) shall, as
promptly as reasonably practicable but in any event not later than 10 days after such request,
notify the Holder of the Fair Market Value per share of Common Stock and furnish the Holder with
reasonable



-3-









 







documentation of the Board’s determination of such Fair Market Value. Notwithstanding the
foregoing, if the Board has not made such a determination within the three-month period prior to
the Exercise Date, then (A) the Board shall make, and shall provide or cause to be provided to the
Holder notice of, a determination of the Fair Market Value per share of the Common Stock within 15
days of a request by the Holder that it do so, and (B) the exercise of this Warrant pursuant to
this subsection 4(c) shall be delayed until such determination is made and notice thereof is
provided to the Holder.



          (d) Holder’s Restrictions. The Holder shall not have the right to exercise any
portion of this Warrant, pursuant to Section 4 or otherwise, to the extent that after giving effect
to such issuance after exercise as set forth on the applicable Exercise Notice, such Holder
(together with such Holder’s Affiliates, and any other person or entity acting as a group together
with such Holder or any of such Holder’s Affiliates), would beneficially own in excess of the
Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the
number of shares of Common Stock beneficially owned by such Holder and its Affiliates shall include
the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which
such determination is being made, but shall exclude the number of shares of Common Stock which
would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant
beneficially owned by such Holder or any of its Affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company (including, without
limitation, any other Common Stock equivalents) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by such Holder or any of its
Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4,
beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) and the rules and regulations promulgated
thereunder, it being acknowledged by the Holder that the Company is not representing to such Holder
that such calculation is in compliance with Section 13(d) of the Exchange Act and such Holder is
solely responsible for any schedules required to be filed in accordance therewith. To the extent
that the limitation contained in this Section 4 applies, the determination of whether this Warrant
is exercisable (in relation to other securities owned by such Holder together with any Affiliates)
and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder,
and the submission of a Exercise Notice shall be deemed to be the Holder’s determination of whether
this Warrant is exercisable (in relation to other securities owned by such Holder together with any
Affiliates) and of which portion of this Warrant is exercisable, in each case subject the
Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the
accuracy of such determination or any liability under this Section 4(c). In addition, a
determination as to any group status as contemplated above shall be determined in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For
purposes of this Section 4, in determining the number of outstanding shares of Common Stock, a
Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the
Company’s most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q, or such similar
form, as the case may be, or (y) any other written notice by the Company or the Company’s Transfer
Agent setting forth the number of shares of Common Stock outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including this Warrant, by such Holder or its Affiliates
since the date as of which such number of outstanding shares of Common Stock was reported.




-4-









 







The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares of Common Stock
issuable upon exercise of this Warrant. The Beneficial Ownership Limitation provisions of this
Section 4 may be waived by such Holder, at the election of such Holder, upon not less than 61 days’
prior notice to the Company to change the Beneficial Ownership Limitation to 9.99% of the number of
shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of
Common Stock upon exercise of this Warrant, and the provisions of this Section 4 shall continue to
apply. Upon such a change by a Holder of the Beneficial Ownership Limitation from such 4.99%
limitation to such 9.99% limitation, the Beneficial Ownership Limitation may not be further waived
by such Holder. The provisions of this paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this Section 4 to correct this paragraph (or
any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership
Limitation herein contained or to make changes or supplements necessary or desirable to properly
give effect to such limitation. The limitations contained in this paragraph shall apply to a
successor holder of this Warrant.




     5. Delivery of Warrant Shares.



          (a) As soon as practicable after the exercise of this Warrant (but in no event later than five
business days after the Exercise Date) in whole or in part, the Company, at its expense, will cause
to be issued in the name of, and delivered to, the Holder, or as the Holder (upon payment by the
Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number
of full Warrant Shares to which the Registered Holder shall be entitled upon such exercise.




          (b) This Warrant is exercisable either in its entirety or, from time to time, for a portion of
the Warrant Shares. Upon surrender of this Warrant following one or more partial exercises, the
Company shall issue or cause to be issued, at its expense, a new Warrant evidencing the right to
purchase the remaining number of Warrant Shares.




     6. Charges, Taxes and Expenses. Issuance and delivery of certificates for shares of
Common Stock upon exercise of this Warrant shall be made without charge to the Holder for any
transfer agent fee or other incidental expense in respect of the issuance of such certificates, all
of which expenses shall be paid by the Company; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer involved in the
registration of any certificates for Warrant Shares or any Warrant. The Holder shall be
responsible for all other tax liability that may arise as a result of holding or transferring this
Warrant or receiving Warrant Shares upon exercise hereof.



     7. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed,
the Company shall issue or cause to be issued in exchange and substitution for and upon
cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and,
if requested by the Company, customary and reasonable indemnity. If the Holder seeks a New Warrant
under such circumstances, it shall also comply with such other reasonable regulations and
procedures and pay such other reasonable third party costs as the Company may prescribe.



-5-









 





     8. Reservation of Warrant Shares. The Company covenants that it will at all times
reserve and keep available out of the aggregate of its authorized but unissued and otherwise
unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon
exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable
and deliverable upon the exercise in full of this Warrant, free from preemptive rights or any other
contingent purchase rights of persons other than the Holder (taking into account the adjustments
and restrictions of Section 9). The Company covenants that all Warrant Shares so issuable and
deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance
with the terms hereof, be duly and validly authorized and issued, fully paid and nonassessable.
Each of the Company and the Holder will take all such action as may be necessary to assure that
such shares of Common Stock may be issued as provided herein without violation of any applicable
law or regulation or of any requirements of any securities exchange or automated quotation system
upon which the Common Stock may be listed.



     9. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon
exercise of this Warrant are subject to adjustment from time to time as set forth in this Section
9.



          (a) Stock Dividends and Splits. If the Company, at any time while this Warrant is
outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any
class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding
shares of Common Stock into a larger number of shares of Common Stock, or (iii) combines
outstanding shares of Common Stock into a smaller number of shares of Common Stock, then in each
such case the Exercise Price shall be adjusted by multiplying a fraction of which the numerator
shall be the number of shares of Common Stock outstanding immediately before such event and of
which the denominator shall be the number of shares of Common Stock outstanding immediately after
such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective
immediately after the record date for the determination of shareholders entitled to receive such
dividend or distribution; provided, however, that if such record date shall have been fixed and
such dividend is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Exercise Price shall be recomputed accordingly as of the close of business on such
record date and thereafter the Exercise Price shall be adjusted pursuant to this paragraph as of
the time of actual payment of such dividends or distributions. Any adjustment pursuant to clauses
(ii) or (iii) of this paragraph shall become effective immediately after the effective date of such
subdivision or combination.




          (b) Number of Warrant Shares. Simultaneously with any adjustment to the Exercise
Price pursuant to paragraph (a) of this Section, the number of Warrant Shares that may be purchased
upon exercise of this Warrant shall be increased or decreased proportionately, so that after such
adjustment the aggregate Exercise Price payable hereunder for the increased or decreased number of
Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to
such adjustment.




          (c) Pro Rata Distributions. If the Company, at any time while this Warrant is
outstanding, distributes to holders of Common Stock (i) evidence of its indebtedness, (ii) any
security (other than a distribution of Common Stock covered by Section 9(a)), (iii) rights or
warrants to subscribe for or purchase any security, or (iv) any other asset (other than regular




-6-









 







cash dividends paid out of earnings or earned surplus, determined in accordance with generally
accepted accounting principles) (in each case, “Distributed Property”), then, upon any
exercise of the Warrant that occurs after the record date fixed for determination of shareholders
entitled to receive such distribution, the Holder shall be entitled to receive, in addition to the
Warrant Shares otherwise issuable upon such exercise (if applicable), the kind and amount of
Distributed Property which the Holder would have been entitled to receive had this Warrant been
exercised immediately prior to the record date for such distribution and had the Holder thereafter,
during the period from such record date to and including the Exercise Date, retained any such
evidence of indebtedness, securities, rights or warrants or other assets receivable during such
period, giving application to all adjustments called for during such period under this Section 9
with respect to the rights of the Holder.




          (d) Fundamental Transactions. If there shall occur any reorganization,
recapitalization, reclassification, consolidation or merger involving the Company in which the
Common Stock is converted into or exchanged for securities, cash or other property (other than a
transaction covered by subsections 9(a) or 9(c)) (collectively, a “Fundamental
Transaction”), then, following such Fundamental Transaction, the Holder shall receive upon
exercise hereof the kind and amount of securities, cash or other property which the Holder would
have been entitled to receive pursuant to such Fundamental Transaction if such exercise had taken
place immediately prior to such Fundamental Transaction. In any such case, appropriate adjustment
(as determined in good faith by the Board of Directors of the Company) shall be made in the
application of the provisions set forth herein with respect to the rights and interests thereafter
of the Holder, to the end that the provisions set forth in this Section 9 (including provisions
with respect to changes in and other adjustments of the Exercise Price) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any securities, cash or other property
thereafter deliverable upon the exercise of this Warrant (the “Transaction Consideration”).
The aggregate Exercise Price for this Warrant will not be affected by any such Fundamental
Transaction, but the Company shall apportion such aggregate Exercise Price among the Transaction
Consideration in a reasonable manner reflecting the relative value of any different components of
the Transaction Consideration, if applicable. If holders of Common Stock are given any choice as
to the securities, cash or property to be received in a Fundamental Transaction, then the Holder
shall be given the same choice as to the Transaction Consideration it receives upon any exercise of
this Warrant following such Fundamental Transaction. At the Holder’s request, any successor to the
Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new Warrant
consistent with the foregoing provisions and evidencing the Holder’s right to purchase the
Transaction Consideration for the aggregate Exercise Price upon exercise thereof. The terms of any
agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of this paragraph (d) and insuring
that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction. Notwithstanding anything to the contrary, in
the event of a Fundamental Transaction that is (1) an all cash transaction, (2) a “Rule 13e-3
transaction” as defined in Rule 13e-3 under the Securities Exchange Act of 1934, as amended, or (3)
a Fundamental Transaction involving a person or entity not traded on a national securities
exchange, the Nasdaq Global Select Market, the Nasdaq Global Market, or the Nasdaq Capital Market,
the Company or any successor entity shall pay at the Holder’s option, exercisable at any time
concurrently with or within 30 days after the consummation of the Fundamental Transaction, an




-7-









 







amount of cash equal to the value of this Warrant as determined in accordance with the Black
Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P. using (i) a price
per share of Common Stock equal to the VWAP of the Common Stock for the Trading Day immediately
preceding the date of consummation of the applicable Fundamental Transaction, (ii) a risk-free
interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of
this Warrant as of the date of consummation of the applicable Fundamental Transaction and (iii) an
expected volatility equal to the 100 day volatility obtained from the “HVT” function on Bloomberg
L.P. determined as of the Trading Day immediately following the public announcement of the
applicable Fundamental Transaction; provided, however, that the foregoing sentence
shall not apply unless the aggregate Exercise Price of this Warrant at the time of the closing of
the Fundamental Transaction is less than the value of the Transaction Consideration payable with
respect to this Warrant.




          (e) Calculations. All calculations under this Section 9 shall be made to the nearest
cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for the account of the
Company; provided that such shares, upon disposition to a third party, shall then be considered
outstanding.




          (f) Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this
Section 9, the Company at its expense will promptly compute such adjustment in accordance with the
terms of this Warrant and prepare a certificate setting forth such adjustment, including a
statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other
securities issuable upon exercise of this Warrant (as applicable), describing the transactions
giving rise to such adjustments and showing in reasonable detail the facts upon which such
adjustment is based, and deliver a copy of each such certificate to the Holder.




          (g) Notice of Corporate Events. If, while this Warrant is outstanding, the Company
(i) declares a dividend or any other distribution of cash, securities or other property in respect
of its Common Stock, including, without limitation, any granting of rights or warrants to subscribe
for or purchase any capital stock of the Company or any subsidiary of the Company, (ii) authorizes
or approves, enters into any agreement contemplating or solicits shareholder approval for any
Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of
the affairs of the Company, then the Company shall deliver to the Holder a notice describing the
material terms and conditions of such transaction, at least 10 days prior to the applicable record
or effective date on which a person or entity would need to hold Common Stock in order to
participate in or vote with respect to such transaction; provided, however, that the failure to
deliver such notice or any defect therein shall not affect the validity of the corporate action
required to be described in such notice.




     10. Payment of Exercise Price. The Holder shall pay the Exercise Price in immediately
available funds.



     11. Transfer of Warrant Shares, Restrictive Legend.



          (a) The Warrant Shares shall upon issuance be subject to the restrictions on transfer set
forth in Section 8 of the Securities Purchase Agreement.




-8-









 








          (b) The Warrant Shares deposited in the Holder’s direct registration account upon exercise of
this Warrant shall be accompanied by such tags or other notifications substantially in the form of
the following legends (in addition to any legends required under applicable securities laws), and
any stock certificates issued to the Holder representing the Warrant Shares shall also bear
substantially the following legends (in addition to any legends required under applicable
securities laws):





THE SHARES REPRESENTED [BY THIS CERTIFICATE]/[HEREBY] HAVE BEEN
ACQUIRED FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM.




ADDITIONALLY THE TRANSFER OF THE SHARES REPRESENTED [BY THIS
CERTIFICATE]/[HEREBY] IS SUBJECT TO CERTAIN RESTRICTIONS SPECIFIED
IN THE SECURITIES PURCHASE AGREEMENT DATED MARCH 5, 2008 BETWEEN THE
COMPANY AND THE ORIGINAL PURCHASER, AND NO TRANSFER OF SHARES SHALL
BE VALID OR EFFECTIVE ABSENT COMPLIANCE WITH SUCH RESTRICTIONS. ALL
SUBSEQUENT HOLDERS OF THIS CERTIFICATE WILL HAVE AGREED TO BE BOUND
BY CERTAIN OF THE TERMS OF THE AGREEMENT, INCLUDING SECTIONS 8.1 AND
8.3 OF THE AGREEMENT. COPIES OF THE AGREEMENT MAY BE OBTAINED AT NO
COST BY WRITTEN REQUEST MADE BY THE REGISTERED HOLDER OF THIS
CERTIFICATE TO THE SECRETARY OF THE COMPANY.



          The legends contained in this Section 11 may be removed from a certificate in accordance with
Section 8.3 of the Securities Purchase Agreement.




     12. Fractional Shares. No fractional shares of Warrant Shares will be issued in
connection with any exercise of this Warrant. In lieu of any fractional shares which would,
otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied
by the closing price of one Warrant Share as reported by the NASDAQ Global Market on the date of
exercise.



     13. Notices. Any and all notices or other communications or deliveries hereunder
(including without limitation any Exercise Notice) shall be in writing and shall be deemed given
and effective on the earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile number of the recipient of such notice specified in the
Securities Purchase Agreement prior to 6:30 p.m. (New York local time) on a business day, (ii) the
next business day after the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number of the recipient of such notice specified in the Securities
Purchase Agreement on a day that is not a business day or later than 6:30 p.m. (New York time)



-9-









 




on any business day, (iii) the business day following the date of deposit with a nationally
recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice
is required to be given. The address and facsimile numbers for such notices or communications
shall be as set forth in the Securities Purchase Agreement.




     14. Warrant Agent. The Company shall serve as Warrant agent under this Warrant. Upon
30 days’ notice to the Holder, the Company may appoint a new Warrant agent. Any corporation into
which the Company or any new Warrant agent may be merged or any corporation resulting from any
consolidation to which the Company or any new Warrant agent shall be a party or any corporation to
which the Company or any new Warrant agent transfers substantially all of its corporate trust or
shareholder services business shall be a successor Warrant agent under this Warrant without any
further act. Any such successor Warrant agent shall promptly cause notice of its succession as
Warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder’s
last address as shown on the Warrant Register.



     15. Miscellaneous.



          Subject to the restrictions on transfer set forth on the first page hereof and in Section 3
hereof, this Warrant may be assigned by the Holder. This Warrant may not be assigned by the
Company except to a successor of the Company in the event of a Fundamental Transaction. This
Warrant shall be binding on and inure to the benefit of the parties hereto and their respective
successors and assigns. Subject to the preceding sentence, nothing in this Warrant shall be
construed to give to any person or entity other than the Company and the Holder any legal or
equitable right, remedy or cause of action under this Warrant. This Warrant may be amended only in
writing signed by the Company and the Holder, or their respective successors and assigns.




          (a) The Company will not, by amendment of its governing documents or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or performance of any of the
terms of this Warrant, but will at all times in good faith assist in the carrying out of all such
terms and in the taking of all such action as may be necessary or appropriate in order to protect
the rights of the Holder against impairment. Without limiting the generality of the foregoing, the
Company (i) will not increase the par value of any Warrant Shares above the amount payable therefor
on such exercise, (ii) will take all such action as may be reasonably necessary or appropriate in
order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares on
the exercise of this Warrant, and (iii) will not close its shareholder books or records in any
manner which interferes with the timely exercise of this Warrant.




          (b) All questions concerning the construction validity, enforcement and interpretation of this
Warrant shall be governed by and construed and enforced in accordance with the laws of the State of
New York. Each party hereby irrevocable submits to the exclusive jurisdiction of the state and
federal courts sitting in the city of New York, Borough of Manhattan, for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated hereby or
discussed herein (including with respect to the enforcement of any of the Transaction Documents),
and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any
claim that it is not personally subject to the jurisdiction of




-10-









 







any such court, that such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight
delivery (with evidence of delivery) to such party at the address in effect for notices to it under
this agreement and agrees that such service shall constitute good and sufficient service of process
and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to
serve process in any manner permitted by law. The Company and Holder hereby waive all rights to
trial by jury.




          (c) The headings herein are for convenience only, do not constitute a part of this Warrant and
shall not be deemed to limit or affect any of the provisions hereof.




          (d) If any provision of this Warrant shall be judicially determined to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.




          (e) This Warrant and the Securities Purchase Agreement constitute the full and entire
understanding and agreement between the parties with regard to the subjects thereof.




          (f) Prior to exercise of this Warrant, the Holder hereof shall not, by reason of being a
Holder, be entitled to any rights of a stockholder with respect to the Warrant Shares.




-11-









 








     IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized
officer as of the date first indicated above.



	 	 	 	 	 
	 	PENWEST PHARMACEUTICALS CO.

 	 
	 	By:  	____________________
 	 
	 	 	Name:  	__________________ 	 
	 	 	 	 
	 




-12-











 





FORM OF EXERCISE NOTICE




     To be executed by the Holder to exercise the right to purchase shares of Common Stock under
the foregoing Warrant)



To: Penwest Pharmaceuticals Co.




     The undersigned is the Holder of Warrant No.            (the “Warrant”) issued by Penwest
Pharmaceuticals Co., a Washington corporation (the “Company”). Capitalized terms used herein and
not otherwise defined have the respective meanings set forth in the Warrant.




	1.	 	The Warrant is currently exercisable to purchase a total of                      Warrant Shares.
	 
	2.	 	The undersigned Holder hereby exercises its right to purchase                      Warrant
Shares pursuant to the Warrant.
	 
	3.	 	The Holder shall pay the sum of $                     to the Company in accordance with the terms of
the Warrant.
	 
	4.	 	Pursuant to this exercise, the Company shall deliver to the Holder                      Warrant
Shares in accordance with the terms of the Warrant.
	 
	5.	 	Following this exercise, the Warrant shall be exercisable to purchase a total of
                     Warrant Shares.





Dated:                                         ,           




Name of Holder:




(Print)                                                             




By:                                                             




Name:                                                             




Title:                                                             



(Signature must conform in all respects to name of holder as specified on the face of the Warrant)





-13-









 








FORM OF ASSIGNMENT




     [To be completed and signed only upon transfer of Warrant]



     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
                                                             the right represented by the within Warrant to purchase
                   
shares of Common Stock of Penwest Pharmaceuticals Co. to which the within Warrant relates and
appoints                                          attorney to transfer said right on the books of Penwest Pharmaceuticals
Co. with full power of substitution in the premises.



Dated:                                         ,           




                                                            



(Signature must conform in all respects to name of holder as specified on the face of the Warrant)




                                                            




Address of Transferee




                                                            




                                                            




In the presence of:




                                                            





-14-












 





Exhibit C




INSTRUCTION SHEET FOR PURCHASER




(to be read in conjunction with the entire

Securities Purchase Agreement)





	A.	 	Complete the following items in the Securities Purchase Agreement:






1. Complete and execute the Purchaser Signature Page. The Agreement must be executed by an
individual authorized to bind the Purchaser.




2. Exhibit C-1 — Direct Registration Account and Warrant Questionnaire:




Provide the information requested by the Direct Registration Account and Warrant
Questionnaire;




3. Exhibit C-2 — Registration Statement Questionnaire:




Provide the information requested by the Registration Statement Questionnaire.




4. Exhibit C-3 /C-4 — Purchaser Certificate:




Provide the information requested by the Certificate for Individual Purchasers (C-3) or the
Certificate for Corporate, Partnership, Trust, Foundation and Joint Purchasers (C-4), as
applicable.




5. Return, via facsimile, the signed Securities Purchase Agreement including the properly
completed Exhibits C-1 through C-4, to:


Wilmer Cutler Pickering Hale and Dorr LLP

Facsimile: (617) 526-5000

Telephone: (617) 526-6000

Attn: Michael Penney





6. After completing instruction number five (5) above, deliver the original signed
Securities Purchase Agreement including the properly completed Exhibits C-1 through C-4 to:


Wilmer Cutler Pickering Hale and Dorr LLP

60 State Street

Boston, MA 02109

Telephone: (617) 526-6000

Attn: Michael Penney





	B.	 	Instructions regarding the transfer of funds for the purchase of Units will be telecopied to
the Purchaser by the Company at a later date.




 









 












	C.	 	Upon the resale of any Shares by the Purchaser after the Registration Statement covering any
Shares is effective, as described in the Purchase Agreement, the Purchaser:






(i) must deliver a current prospectus, and annual and quarterly reports of the
Company to the buyer (prospectuses, and annual and quarterly reports may be obtained
from the Company at the Purchaser’s request); and




(ii) must send a letter in the form of Exhibit E to the Company and the Company’s
transfer agent so that the Shares may be properly transferred.



 









 





Exhibit C-1




PENWEST PHARMACEUTICALS CO.




DIRECT REGISTRATION ACCOUNT AND WARRANT QUESTIONNAIRE




     Pursuant to Section 4.3 of the Agreement, please provide us with the following information:



	 	 	 	 	 
	1.

	 	The exact name in which the Purchased Shares and the Warrant purchased
by the Purchaser are to be registered (this is the name that will be
used for the direct registration account, any physical stock
certificates that may in the future be issued and the Warrant(s)).
You may use a nominee name if appropriate:
	 	 
	 
	 	 	 	 
	2.

	 	The relationship between the Purchaser of the Securities and the
Registered Holder listed in response to item 1 above:
	 	 
	 
	 	 	 	 
	3.

	 	The mailing address, telephone and telecopy number of the Registered
Holder listed in response to item 1 above:
	 	 
	 
	 	 	 	 
	 

	 	 
	 	 
	 
	 	 	 	 
	 

	 	 
	 	 
	 
	 	 	 	 
	 

	 	 
	 	 
	 
	 	 	 	 
	 

	 	 
	 	 
	 
	 	 	 	 
	4.

	 	The Tax Identification Number of the Registered Holder listed in
response to item 1 above:
	 	 






 









 






Exhibit C-2




PENWEST PHARMACEUTICALS CO.




REGISTRATION STATEMENT QUESTIONNAIRE




     In connection with the Registration Statement, please provide us with the following
information regarding the Purchaser.



     1. Please state your organization’s name exactly as it should appear in the Registration
Statement:



     2. Have you or your organization had any position, office or other material relationship
within the past three years with the Company or its affiliates?



                          Yes                                          No



     If yes, please indicate the nature of any such relationship below:



	 
	 


	 

	 


	 

	 


	 

	 








     3. Are you the beneficial owner of any other securities of the Company?



                          Yes                                          No



     If yes, please describe the nature and amount of such ownership.



	 
	 


	 

	 


	 

	 


	 

	 








 









 






     4. Have you made or are you aware of any arrangements relating to the distribution of the
shares of the Company pursuant to the Registration Statement?



                          Yes                                          No



     If yes, please describe the nature and amount of such arrangements.



	 
	 


	 

	 


	 

	 


	 

	 









 











 





Exhibit C-3




PENWEST PHARMACEUTICALS CO.




CERTIFICATE FOR INDIVIDUAL PURCHASERS




     If the investor is an individual Purchaser (or married couple) the Purchaser must complete,
date and sign this Certificate.



CERTIFICATE




     I certify that the representations and responses below are true and accurate:



     In order for the Company to offer and sell the Units in conformance with state and federal
securities laws, the following information must be obtained regarding your investor status. Please
initial each category applicable to you as an investor in the Company.



          ___ (1) A natural person whose individual net worth, or joint net worth with that person’s
spouse, at the time of his purchase exceeds $1,000,000;




          ___ (2) A natural person who had an individual income in excess of $200,000 in each of the two
most recent years, or joint income with that person’s spouse in excess of $300,000, in each of
those years, and has a reasonable expectation of reaching the same income level in the current
year;




          ___ (3) An executive officer or director of the Company.




     Set forth in the space provided below the state(s), if any, in the U.S. in which you
maintained your residence during the past two years and the dates during which you resided in each state:



 







	 	 
	 
	 
	 	. 









	 	 	 	 	 	 	 	 	 	 	 
	Dated:                     	 	 	 	Name(s) of Purchaser	 	 	 
	 

	 	 	 	 	 	 	 	 

	 	 
	 	 	 	 	Signature	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	Signature	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	Dated                                         , 2008	 	 






 









 






Exhibit C-4




PENWEST PHARMACEUTICALS CO.




CERTIFICATE FOR CORPORATE, PARTNERSHIP,

TRUST, FOUNDATION AND JOINT PURCHASERS




     If the investor is a corporation, partnership, trust, pension plan, foundation, joint
purchaser (other than a married couple) or other entity, an authorized officer, partner, or trustee
must complete, date and sign this Certificate.



CERTIFICATE




     The undersigned certifies that the representations and responses below are true and accurate:



     (a) The investor has been duly formed and is validly existing and has full power and authority
to invest in the Company. The person signing on behalf of the undersigned has the authority to
execute and deliver the Securities Purchase Agreement on behalf of the Purchaser and to take other
actions with respect thereto.



     (b) Indicate the form of entity of the undersigned:



          ___ Limited Partnership




          ___ General Partnership




          ___ Corporation




          ___ Revocable Trust (identify each grantor and indicate under what circumstances the trust is
revocable by the grantor):
 




		
	 
	 
	 	. 





(Continue on a separate piece of paper, if necessary.)




          ___ Other type of Trust (indicate type of trust and, for trusts other than pension trusts,
name the grantors and beneficiaries):
 




		
	 
	 
	 	. 





(Continue on a separate piece of paper, if necessary.)




          ___ Other form of organization (indicate form of organization (
 


		
	 
	 
	 	). 





 










 








     (c) Indicate the approximate date the undersigned entity was formed: _______________.



     (d) In order for the Company to offer and sell the Units in conformance with state and federal
securities laws, the following information must be obtained regarding your investor status. Please
initial each category applicable to you as an investor in the Company.



	 	 	 	 	 
	 

	 	___
	 	1. A bank as defined in Section 3(a)(2) of the Securities Act,
or any savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary
capacity;
	 
	 	 	 	 
	 

	 	___
	 	2. A broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934;
	 
	 	 	 	 
	 

	 	___
	 	3. An insurance company as defined in Section 2(13) of the
Securities Act;
	 
	 	 	 	 
	 

	 	___
	 	4. An investment company registered under the Investment
Company Act of 1940 or a business development company as defined in Section
2(a)(48) of that Act;
	 
	 	 	 	 
	 

	 	___
	 	5. A Small Business Investment Company licensed by the U.S.
Small Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958;
	 
	 	 	 	 
	 

	 	___
	 	6. A plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees, if such plan has total assets
in excess of $5,000,000;
	 
	 	 	 	 
	 

	 	___
	 	7. An employee benefit plan within the meaning of the Employee
Retirement Income Security Act of 1974, if the investment decision is made by a
plan fiduciary, as defined in Section 3(21) of such Act, which is either a
bank, savings and loan association, insurance company, or registered investment
advisor, or if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self-directed plan, with investment decisions made solely
by persons that are accredited investors;
	 
	 	 	 	 
	 

	 	___
	 	8. A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
	 
	 	 	 	 
	 

	 	___
	 	9. An organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the Shares, with
total assets in excess of $5,000,000;






 









 






	 	 	 	 	 	 
	 

	 	___	 	10. A trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the Shares, whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii) of the
Exchange Act;
	 
	 	 	 	 
	 

	 	___
	 	11. An entity in which all of the equity owners qualify
under any of the above subparagraphs. If the undersigned belongs to this
investor category only, list the equity owners of the undersigned, and the
investor category which each such equity owner satisfies:
	 

	 	 	 	 
	 

	 	 	 	 
	 

	 	 	 	 
	 

	 	 	 	 	. 
	 

	 	 	 	(Continue on a separate piece of paper, if necessary.)






     Please set forth in the space provided below the (i) states, if any, in the U.S. in which you
maintained your principal office during the past two years and the dates during which you
maintained your office in each state, (ii) state(s), if any, in which you are incorporated or
otherwise organized and (iii) state(s), if any, in which you pay income taxes.



	 	 	 	 	 	 
	 

	 	 	 	 
	 

	 	 	 	 
	 

	 	 	 	 	. 






	 	 	 
	Dated:                                                     , 2008
	 	 
	 
	 	 
	 
	 	 
	 

Name of investor

	 	 
	 
	 	 
	 


	 	 
	Signature and title of authorized officer, partner or trustee







 











 





Exhibit D-1




OPINION OF COMPANY WASHINGTON COUNSEL




     1. The Company is a corporation duly incorporated and validly existing under the laws of the
State of Washington.



     2. The Company has the necessary corporate power and authority to (i) enter into, and to
perform its obligations under, the Purchase Agreement and the Warrants, (ii) sell and issue the
Purchased Shares and the Warrants, and (iii) issue the Warrant Shares upon exercise of the
Warrants.



     3. The execution, delivery and performance of the Purchase Agreement and the Warrants by the
Company have been duly authorized by all necessary corporate action of the Company.



     4. Execution and delivery by the Company of, and the performance of its agreements in, the
Purchase Agreement and the Warrants will not violate any provision of the Articles of
Incorporation, the Bylaws or the Washington Business Corporation Act.



     5. The Purchased Shares have been duly authorized and will be, upon issuance and delivery
against payment therefor in accordance with the terms of the Purchase Agreement, duly authorized,
validly issued, fully paid and nonassessable. The Warrant Shares have been duly authorized and
will be, upon issuance upon exercise of the Warrants and delivery against payment of the
consideration therefor in accordance with the terms of the Warrants, duly authorized, validly
issued, fully paid and nonassessable. Shareholders of the Company have no preemptive rights under
the Articles of Incorporation or the Bylaws or under the laws of the State of Washington, including, without limitation, the Washington Business Corporation Act.



 









 





Exhibit D-2




OPINION OF COMPANY CORPORATE COUNSEL




     1. The consummation by the Company of the transactions contemplated by the Securities Purchase
Agreement do not conflict with, violate or breach any of the terms and provisions, or constitute a
default under, (A) any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness, or any lease, contract or other agreement or
instrument to which the Company is a party that is filed by the Company as an exhibit to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed as of March
16, 2007 (or incorporated by reference as an exhibit to such Annual Report on Form 10-K), the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007, filed as of
May 10, 2007, the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2007, filed as of August 8, 2007, the Company’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2007, filed as of November 8, 2007, or the Company’s Current Report on
Form 8-K filed as of November 13, 2007 (together, the “SEC Exhibits”) (provided that for purposes
of this opinion letter, the term SEC Exhibits shall not be deemed to include the Company’s Articles
of Incorporation or By-Laws), or, (B) any order, writ or decree of any court or governmental agency
or body having jurisdiction over the Company, or over any of its properties or operations,
specifically naming the Company and known to us.



     2. Assuming that the Securities Purchase Agreement and Warrants have been duly authorized,
executed and delivered by the Company, the Securities Purchase Agreement and the Warrants
constitute the valid and binding obligations of the Company, enforceable against the Company in
accordance with their terms.



     3. The shareholders of the Company have no preemptive rights under the SEC Exhibits.



     4. Based in part on the representations of each of the Purchasers in Section 4 of the
Securities Purchase Agreement, the offer and sale of the Shares and Warrants pursuant to the
Securities Purchase Agreement are exempt from registration under the Securities Act of 1933, as
amended.



     5. Based in part on the representations of each of the Purchasers in Section 4 of the
Securities Purchase Agreement, no filing, consent, approval, authorization or qualification of or
with any United States federal or New York state court, governmental authority or agency is
required for the issuance and sale by the Company of the Shares and the Warrants, except with
respect to state securities or Blue Sky laws and the United States federal securities laws, as to
which we express no opinion in this paragraph.



     6. The Company is not an “investment company,” as such term is defined in the Investment
Company Act of 1940, as amended.



 









 





Exhibit E




PURCHASER’S CERTIFICATE OF SUBSEQUENT SALE




	 	 	 	 	 	 	 	 	 
	To:	 	[Transfer agent name and address]	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	Attention:	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 





     The undersigned, the Purchaser or an officer of, or other person duly authorized by the
Purchaser, hereby certifies that                                          was the Purchaser of the Shares



     (fill in name of Purchaser)



[evidenced by the attached certificate]/[provide identifying information with respect to direct
registration shares], and as such, proposes to transfer such Shares on or about                      in
accordance with the registration statement, file number           , and the Purchaser certifies that
the transfer has complied with and will comply with all applicable requirements of the Securities
Act of 1933, as amended (the “Act”), including without limitation the requirement of delivering a
current prospectus in a timely manner.




	 	 	 	 	 	 	 
	Print or type:	 	 	 	 
	 

	 	 	 	 
	 	 
	 

	 	Name of Purchaser:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Name of Individual representing
Purchaser (if an Institution):	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Title of Individual representing
Purchaser (if an Institution):	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	Signature by:	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Purchaser or Individual

representing Purchaser: