##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File No. 000-23467
 Penwest Pharmaceuticals Co.
 (Exact Name of Registrant as Specified in Its Charter)
 Washington
    
    91-1513032(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)39 Old Ridgebury Road, Suite 11,Danbury, Connecticut
    
    06810-5120(Address of Principal Executive Offices)
    
    (Zip Code)
 (877) 736-9378  (Registrants telephone number, including area code)
 þ o
  o þ o
  o þ
  Class
    
    OutstandingCommon stock, par value $.001
    
    23,395,731




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##### 



PENWEST PHARMACEUTICALS CO.
TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Condensed Financial Statements (Unaudited)Condensed Balance Sheets
    
    
    3Condensed Statements of Operations
    
    
    4Condensed Statements of Cash Flows
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONItem 1A. Risk Factors
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 6. Exhibits
    
    
    37Signature
    
    
    38Exhibit Index
    
    
    39Ex-10.1 Second Amendment to Lease, dated June 6, 2006 and Third Amendment to Lease, dated April 13, 2007Ex-31.1 Section 302 Certification of the Principal Executive OfficerEx-31.2 Section 302 Certification of the Principal Financial OfficerEx-32.1 Section 906 Certification of the Principal Executive OfficerEx-32.2 Section 906 Certification of the Principal Financial Officer
  ® ® ®
 Forward-looking Statements
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements (Unaudited)
 PENWEST PHARMACEUTICALS CO.
 
 CONDENSED BALANCE SHEETS
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Note 2)(In thousands,except share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,987
    
    
    $
    16,182Marketable securities
    
    
    16,602
    
    
    
    24,408Trade accounts receivable
    
    
    608
    
    
    
    683Inventories:Raw materials and other
    
    
    67
    
    
    
    64Finished goods
    
    
    320
    
    
    
    137Total inventories
    
    
    387
    
    
    
    201Prepaid expenses and other current assets
    
    
    935
    
    
    
    1,595Total current assets
    
    
    39,519
    
    
    
    43,069Fixed assets, net
    
    
    3,636
    
    
    
    3,787Patents, net
    
    
    3,119
    
    
    
    3,184Deferred charges
    
    
    2,553
    
    
    
    Other assets
    
    
    2,546
    
    
    
    2,702Total assets
    
    $
    51,373
    
    
    $
    52,742LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,348
    
    
    $
    1,324Accrued expenses
    
    
    1,802
    
    
    
    2,096Accrued development costs
    
    
    822
    
    
    
    1,105Loan payable  current portion
    
    
    1,202
    
    
    
    Deferred compensation  current portion
    
    
    290
    
    
    
    290Total current liabilities
    
    
    5,464
    
    
    
    4,815Loan payable
    
    
    10,798
    
    
    
    Accrued financing fees
    
    
    360
    
    
    
    Deferred revenue
    
    
    36
    
    
    
    43Deferred compensation
    
    
    2,636
    
    
    
    2,763Total liabilities
    
    
    19,294
    
    
    
    7,621Shareholders equity:Preferred stock, par value $.001, authorized 1,000,000 shares, none outstanding
    
    
    
    
    
    
    Common stock, par value $.001, authorized 60,000,000 shares, issued and
outstanding 23,385,717 shares at June 30, 2007 and 23,132,815 shares at
December 31, 2006
    
    
    23
    
    
    
    23Additional paid in capital
    
    
    220,290
    
    
    
    217,427Accumulated deficit
    
    
    (188,340
    )
    
    
    (172,428
    )Accumulated other comprehensive income
    
    
    106
    
    
    
    99Total shareholders equity
    
    
    32,079
    
    
    
    45,121Total liabilities and shareholders equity
    
    $
    51,373
    
    
    $
    52,742
  3




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PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF OPERATIONS
 Three Months EndedJune 30,2007
    
    
    2006(Unaudited)(In thousands, exceptper share data)Revenues:Royalties and licensing fees
    
    $
    546
    
    
    $
    929Product sales
    
    
    166
    
    
    
    146Total revenues
    
    
    712
    
    
    
    1,075Cost of revenues
    
    
    144
    
    
    
    33Gross profit
    
    
    568
    
    
    
    1,042Operating expenses:Selling, general and administrative
    
    
    3,667
    
    
    
    3,849Research and product development
    
    
    6,042
    
    
    
    5,221Total operating expenses
    
    
    9,709
    
    
    
    9,070Loss from operations
    
    
    (9,141
    )
    
    
    (8,028
    )Investment income
    
    
    530
    
    
    
    612Interest expense
    
    
    (347
    )
    
    
    Loss before income tax expense
    
    
    (8,958
    )
    
    
    (7,416
    )Income tax expense
    
    
    
    
    
    
    Net loss
    
    $
    (8,958
    )
    
    $
    (7,416
    )Net loss per common share
    
    $
    (0.39
    )
    
    $
    (0.33
    )Weighted average shares of common stock outstanding
    
    
    23,185
    
    
    
    22,796
 Six Months EndedJune 30,2007
    
    
    2006(Unaudited)(In thousands, exceptper share data)Revenues:Royalties and licensing fees
    
    $
    1,265
    
    
    $
    1,860Product sales
    
    
    289
    
    
    
    180Total revenues
    
    
    1,554
    
    
    
    2,040Cost of revenues
    
    
    254
    
    
    
    55Gross profit
    
    
    1,300
    
    
    
    1,985Operating expenses:Selling, general and administrative
    
    
    7,388
    
    
    
    7,312Research and product development
    
    
    10,426
    
    
    
    9,565Total operating expenses
    
    
    17,814
    
    
    
    16,877Loss from operations
    
    
    (16,514
    )
    
    
    (14,892
    )Investment income
    
    
    1,019
    
    
    
    1,173Interest expense
    
    
    (417
    )
    
    
    Loss before income tax expense
    
    
    (15,912
    )
    
    
    (13,719
    )Income tax expense
    
    
    
    
    
    
    Net loss
    
    $
    (15,912
    )
    
    $
    (13,719
    )Net loss per common share
    
    $
    (0.69
    )
    
    $
    (0.61
    )Weighted average shares of common stock outstanding
    
    
    23,164
    
    
    
    22,522
  4




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PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2007
    
    
    2006(Unaudited)(In thousands)Operating activities:Net loss
    
    $
    (15,912
    )
    
    $
    (13,719
    )Adjustments to reconcile net loss to net cash used in operating activities
    
    
    619
    
    
    
    3,833Net cash used in operating activities
    
    
    (15,293
    )
    
    
    (9,886
    )Investing activities:Acquisitions of fixed assets, net
    
    
    (399
    )
    
    
    (350
    )Patent costs
    
    
    (141
    )
    
    
    (247
    )Proceeds from maturities of marketable securities
    
    
    25,304
    
    
    
    21,715Proceeds from sales of marketable securities
    
    
    
    
    
    
    1,600Purchases of marketable securities
    
    
    (17,403
    )
    
    
    (3,736
    )Proceeds from cash surrender value of life insurance policy withdrawal
    
    
    
    
    
    
    446Net cash provided by investing activities
    
    
    7,361
    
    
    
    19,428Financing activities:Proceeds from loan payable
    
    
    12,000
    
    
    
    Debt issuance costs
    
    
    (112
    )
    
    
    Issuance of common stock, net
    
    
    849
    
    
    
    8,122Net cash provided by financing activities
    
    
    12,737
    
    
    
    8,122Net increase in cash and cash equivalents
    
    
    4,805
    
    
    
    17,664Cash and cash equivalents at beginning of period
    
    
    16,182
    
    
    
    15,917Cash and cash equivalents at end of period
    
    $
    20,987
    
    
    $
    33,581
  5




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 1. Business
 ® ®
  2. Basis of Presentation
   3. Summary of Significant Accounting Policies
 Revenue Recognition
 Royalties and licensing fees
 6




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Product sales 
 Research and Development Expenses
  Income Taxes
      7




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Impairment of Long-Lived Assets
  Share-Based Compensation
   
    
    the stock option exercise price;
    
    the expected term of the option;
    
    the grant date price of the Companys common stock, which is issuable upon
exercise of the option;
    
    the expected volatility of the Companys common stock;
    
    expected dividends on the Companys common stock (the Company does not
anticipate paying dividends for the foreseeable future); and
    
    the risk-free interest rate for the expected option term.
   8




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   4. Recent Accounting Pronouncements
    5. Share-Based Compensation
    9




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 6. Loans Payable
 Credit Facility
    (unaudited)(in thousands)Less than one year
    
    $
    1,202One to two years
    
    
    3,944Two to three years
    
    
    5,483Three to four years
    
    
    1,371$
    12,000
  7. Income Taxes
  10




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 8. Supplemental Executive Retirement Plan and Deferred Compensation Plan
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(unaudited)(in thousands)Interest cost
    
    $
    30
    
    
    $
    30
    
    
    $
    59
    
    
    $
    60Amortization of prior service cost
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    1Net periodic benefit cost
    
    $
    30
    
    
    $
    31
    
    
    $
    60
    
    
    $
    61
   9. Royalty Termination Agreements
  11




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   10. Comprehensive Income/(Loss)
  June 30,
    
    
    December 31,2007
    
    
    2006(unaudited)(in thousands)Unrealized losses on
marketable securities
    
    $
    (4
    )
    
    $
    (11
    )Adjustment for funded status of
post retirement plan
    
    
    110
    
    
    
    110Accumulated other comprehensive
income
    
    $
    106
    
    
    $
    99
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(unaudited)(in thousands)Net loss
    
    $
    (8,958
    )
    
    $
    (7,416
    )
    
    $
    (15,912
    )
    
    $
    (13,719
    )Changes in unrealized net gains and losses on
marketable securities
    
    
    
    
    
    
    46
    
    
    
    7
    
    
    
    66Adjustment for funded status of post retirement plan
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Comprehensive loss
    
    $
    (8,957
    )
    
    $
    (7,370
    )
    
    $
    (15,904
    )
    
    $
    (13,653
    )
 11. Licensing Agreements
  Endo Pharmaceuticals Inc.
 ® ® ® ® ®.
  12




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
    
    
    Endo will pay the Company royalties on U.S. sales of Opana ER calculated based on a
royalty rate starting at 22% of annual net sales of the product up to $150 million of annual
net sales, with the royalty rate then increasing, based on agreed-upon levels of annual net
sales achieved, from 25% up to a maximum of 30%.
    
    No royalty payments will be due to the Company for the first $41 million of royalties
that would otherwise have been payable beginning from the time of the product launch in July
2006 (the Royalty Holiday). If the Company was not subject to the $41 million Royalty
Holiday, the Company believes that it would have received royalties from Endo of
approximately $4.3 million and $9.3 million, respectively, for the three and six months
ended June 30, 2007. Cumulatively, through June 30, 2007, the Company believes that
approximately $10.4 million has been applied against the Royalty Holiday.
    
    Endo will pay the Company a percentage of any sublicense income it receives and milestone
payments of up to $90 million based upon the achievement of agreed-upon annual sales
thresholds.
    
    The Companys share of the development costs for Opana ER that it opted out of funding in
April 2003 will be fixed at $28 million and will be recouped by Endo through a temporary 50%
reduction in royalties. This temporary reduction in royalties will not apply until the
threshold for the $41 million Royalty Holiday has been met.
 Mylan Pharmaceuticals Inc.
  13




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 12. Contingencies
   13. Subsequent Events
 Collaboration and License Agreement with Edison
      14




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  15




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
 ®
 Opana ER
  EPI-A0001.
  16




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Additional Product Candidates.
 
    
    Nalbuphine ER.We are developing nalbuphine ER, a controlled release formulation of
nalbuphine hydrochloride, for the treatment of chronic pain. Nalbuphine ER, which is
formulated using our TIMERx drug delivery technology, is designed to be taken as a tablet
twice daily. We expect that nalbuphine ER, if approved, would compete in the moderate pain
market with products such as Tramadol® ER, codeine and Demerol®. In
December 2005, we completed a Phase IIa trial of nalbuphine ER designed to determine the
degree and duration of pain relief of two different dose levels of nalbuphine ER in acute
pain. No unusual side effects were reported during the twelve-hour dosing interval. In
2006, we decided to develop this product for a chronic pain indication and conducted
reformulation work and several Phase I studies to optimize the formulation for this purpose.
In March 2007, we completed a Phase I dose-escalation to
steady-state safety trial, which
collected additional safety and pharmacokinetic information for use in designing future
trials. In June 2007, we initiated a Phase IIa proof of concept, forced titration,
dose-ranging trial designed to determine the efficacy and safety of nalbuphine ER compared
to placebo for treatment of chronic pain. We anticipate preliminary results from this
trial in early 2008.
    
    Torsemide ER.We are developing torsemide ER, which is a controlled release formulation
of torsemide. Torsemide is a loop diuretic used to treat chronic edema, a condition
involving excess fluid accumulation resulting from congestive heart failure, or CHF.
Torsemide ER, which we are developing using our TIMERx drug delivery technology, is designed
to be taken as a tablet once daily. We expect that torsemide ER, if approved, would compete
with furosemide and other loop diuretics. We have completed several Phase I pharmacokinetic
studies of torsemide ER and completed a Phase IIa study in which torsemide ER caused
prolonged urinary sodium excretion in CHF patients. We are currently evaluating all of the
data generated for torsemide ER prior to making further decisions regarding future
development plans for this candidate.
    
    
    the commercial success of Opana ER, and the timing and amount of royalties from Endos
sales of Opana ER;
    
    the level of our investment in research and development activities;
    
    the level of our investment for acquisitions, or in-licensing of technologies or compounds
intended to support our growth;
    
    the successful development and commercialization of product candidates in our portfolio;
    
    the timing and amounts of payments to Edison in connection with the Edison agreement,
as well as our costs of development for drug candidates to which we acquire rights under the
Edison agreement; and
 17




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
    
    royalties from Mylans sales of Pfizers generic version of Procardia XL 30 mg.
   Share-Based Compensation
    Critical Accounting Policies and Estimates
  18




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Recent Accounting Pronouncements
        19




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Results of Operations for the Three and Six Month Periods Ended June 30, 2007 and 2006
 Revenues
 Three months
    
    
    
    
    
    
    Three months
    
    
    Six months
    
    
    
    
    
    
    Six monthsended
    
    
    Percentage
    
    
    ended
    
    
    ended
    
    
    Percentage
    
    
    endedJune 30,
    
    
    Increase
    
    
    June 30,
    
    
    June 30,
    
    
    Increase
    
    
    June 30,2007
    
    
    (Decrease)
    
    
    2006
    
    
    2007
    
    
    (Decrease)
    
    
    2006(in thousands, except percentages)
    
    
    (in thousands, except percentages)Royalties and Licensing Fees
    
    $
    546
    
    
    
    (41
    )%
    
    $
    929
    
    
    $
    1,265
    
    
    
    (32
    )%
    
    $
    1,860Product Sales
    
    
    166
    
    
    
    14
    
    
    
    146
    
    
    
    289
    
    
    
    61
    
    
    
    180Total Revenues
    
    $
    712
    
    
    
    (34
    )%
    
    $
    1,075
    
    
    $
    1,554
    
    
    
    (24
    )%
    
    $
    2,040
   Selling, General and Administrative Expense
 ,
  Research and Product Development Expense
  20




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Three months
    
    
    
    
    
    
    Three months
    
    
    Six months
    
    
    
    
    
    
    Six monthsended
    
    
    Percentage
    
    
    ended
    
    
    ended
    
    
    Percentage
    
    
    endedJune 30,
    
    
    Increase
    
    
    June 30,
    
    
    June 30,
    
    
    Increase
    
    
    June 30,2007
    
    
    (Decrease)
    
    
    2006
    
    
    2007
    
    
    (Decrease)
    
    
    2006(in thousands, except percentages)
    
    
    (in thousands, except percentages)Nalbuphine ER
    
    $
    2,522
    
    
    
    166
    %
    
    $
    949
    
    
    $
    3,487
    
    
    
    178
    %
    
    $
    1,254Torsemide ER
    
    
    104
    
    
    
    (77
    )%
    
    
    462
    
    
    
    254
    
    
    
    (54
    )%
    
    
    554Phase I Products and Internal Costs
    
    
    2,908
    
    
    
    (7
    )%
    
    
    3,139
    
    
    
    5,750
    
    
    
    (13
    )%
    
    
    6,589Research and New Technology
Development
    
    
    508
    
    
    
    (24
    )%
    
    
    671
    
    
    
    935
    
    
    
    (20
    )%
    
    
    1,168Total Research and Product
Development Expense
    
    $
    6,042
    
    
    
    16
    %
    
    $
    5,221
    
    
    $
    10,426
    
    
    
    9
    %
    
    $
    9,565
 
    
    Nalbuphine ER These expenses reflect our direct external expenses relating to the
development of nalbuphine ER. These expenses approximated 42% and 33% of our research and
development expenses in the three and six month periods ended June 30, 2007, respectively,
and consisted primarily of payments to third parties in connection with clinical trials of
nalbuphine ER, including payments for the drug active. The expenses for this compound
increased in the three and six month periods ended June 30, 2007 from the comparable period
in 2006, as we completed a Phase I safety trial and also initiated a Phase IIa proof of
concept efficacy and safety trial. During the remainder of 2007, we expect our research and product
development expenses relating to nalbuphine ER to increase as we conduct animal toxicology
work and continue a Phase IIa chronic efficacy trial that we
anticipate preliminary results from in early
2008.
    
    Torsemide ER These expenses reflect our direct external expenses relating to the
development of torsemide ER. These expenses consisted primarily of payments to third
parties in connection with clinical trials of torsemide ER, and approximated 2% of our
research and development expenses in each of the three and six month periods ended June 30,
2007. The expenses for this compound decreased in the three and six month periods ended
June 30, 2007 from the comparable periods in 2006, as we determined we would conduct some
additional preclinical work prior to conducting further clinical trials. We are currently
evaluating all of the data generated for torsemide ER prior to making further decisions
regarding future development plans for this candidate. We do not expect to incur
significant expenses for torsemide ER during the remainder of 2007.
    
    Phase I Products and Internal Costs These expenses primarily reflect our expenses
such as salaries and benefits of our product development personnel, including our
pharmaceutical development, clinical and regulatory groups, and other costs primarily
related to our laboratory facilities that are not allocated to specific programs. These
expenses also reflect both our direct external expenses and our allocated internal expenses
relating to the development of Phase I product candidates. Our direct external expenses
primarily reflect payments to third parties for the drug active and proof-of-principle
biostudies conducted on our Phase I products. These costs decreased in the three and six
month periods ended June 30, 2007 from the comparable periods in 2006, primarily as a
result of a decrease in share-based compensation expense, as noted above. We continually
evaluate the Phase I product candidates we are developing, and may terminate or accelerate
development of product candidates based on study results, product development risk,
commercial opportunity, perceived time to market and other factors.
    
    Research and New Technology Development These expenses reflect both our direct
external expenses and our allocated internal expenses relating to the development of new
drug delivery technologies. These direct external expenses consist primarily of payments to
third parties in connection with outside laboratory and consulting fees. Our internal
expenses primarily include salaries and benefits for our research and new technology
development group, and other costs such as depreciation on purchased equipment, and the
amortization or any write-downs of patent costs, other than product patent write-offs
charged directly to a product development project or amortization of patent costs relating
to commercialized products which are included in cost of revenues. These expenses
decreased in the three and six month periods ended June 30, 2007 over the comparable
periods in 2006, primarily due to decreased legal fees and amortization expense related to
patents.
 21




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Tax Rates
  Liquidity and Capital Resources
 Sources of Liquidity
     22




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Cash Flows
     Funding Requirements
   23




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
    
    the commercial success of Opana ER and royalties received from Endo on sales of Opana ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular our agreement with Endo with respect to Opana ER and our agreement with Mylan
with respect to Pfizers generic Procardia XL 30 mg;
    
    the timing and amount of payments to Edison in connection with the Edison agreement, as
well as our costs of development for drug candidates for which we acquire rights under the
Edison agreement;
    
    the progress of other collaborative and independent development projects, funding
obligations with respect to the projects, and the related costs to us of clinical studies
for our products;
    
    the level of investment for the acquisition or in-licensing of technologies or compounds
intended to support our growth;
    
    the structure and terms of any future collaborative agreements;
    
    the prosecution, defense and enforcement of our patents and other intellectual property rights; and
    
    the level of our investment in capital expenditures for facilities or equipment.
    Contractual Obligations
  Less Than
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating Leases
    
    $
    1,778
    
    
    $
    774
    
    
    $
    1,004
    
    
    $
    
    
    
    $
    Purchase Obligations
    
    
    4,416
    
    
    
    4,416
    
    
    
    
    
    
    
    
    
    
    
    Payments Due Under Credit Facility
    
    
    15,053
    
    
    
    2,435
    
    
    
    10,863
    
    
    
    1,755
    
    
    
    Deferred Compensation, including current portion
    
    
    2,926
    
    
    
    294
    
    
    
    587
    
    
    
    587
    
    
    
    1,458Total
    
    $
    24,173
    
    
    $
    7,919
    
    
    $
    12,454
    
    
    $
    2,342
    
    
    $
    1,458
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
    
    We have a Supplemental Executive Retirement Plan, or SERP, a nonqualified plan which
covers our former Chairman and Chief Executive Officer, Tod R. Hamachek. Under the SERP,
effective in May 2005, we became obligated to pay Mr. Hamachek approximately $12,600 per
month over the lives of Mr. Hamachek and his spouse.
    
    We also have a Deferred Compensation Plan, or DCP, a nonqualified plan which covers Mr.
Hamachek. Under the DCP, effective in May 2005, we became obligated to pay Mr. Hamachek
approximately $140,000 per year, including interest, in ten annual installments; however,
these installments are recalculated annually based on market interest rates as provided for
under the DCP.
  Net Operating Loss Carryforwards
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk and Risk Management Policies
    
 Item 4. Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures.
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(b) Changes in Internal Control Over Financial Reporting.
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PART II  OTHER INFORMATION
 
 Item 1A. Risk Factors
 An updated description of the risk factors associated with our business is set forth below.
This description includes any material changes to and supersedes the description of the risk
factors associated with our business previously disclosed in Part I, Item 1A of our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2007. Investing in our common stock involves a
high degree of risk, and you should carefully consider the risks and uncertainties described below
in addition to the other information included or incorporated by reference in this quarterly
report. If any of the following risks actually occurs, our business, financial condition or results
of operations would likely suffer, possibly materially. In that case, the trading price of our
common stock could fall.
 We have not been profitable and expect to continue to incur substantial losses
    
    
    the commercial success of Opana ER, and the timing and amount of royalties from Endos
sales of Opana ER;
    
    the timing and amount of payments to Edison in connection with the Edison agreement, as
well as our costs of development for drug candidates to which we acquire rights under the
Edison agreement;
    
    the level of our investment in research and development activities;
    
    the successful development and commercialization of product candidates in our portfolio;
    
    the level of investment for acquisitions or in-licensing of technologies or compounds
intended to support our growth; and
    
    royalties from Mylans sales of Pfizers generic Procardia XL 30 mg.
 We may require additional funding, which may be difficult to obtain
   
    
    the commercial success of Opana ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular our agreement with Endo with respect to Opana ER and our agreement with Mylan
with respect to Pfizers generic Procardia XL 30 mg;
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
    
    the timing and amount of payments to Edison in connection with our agreement signed in
July 2007, as well as our internal costs of development for drug candidates obtained through
this agreement;
    
    the progress of our collaborative and internal development projects, funding obligations
with respect to the projects, and the related costs to us of clinical studies for our
product candidates;
    
    the level of investment for the acquisition or in-licensing of technologies or compounds
intended to support our growth;
    
    the structure and terms of any future collaborative agreements;
    
    the prosecution, defense and enforcement of our patents and other intellectual property rights; and
    
    the level of our investments in capital expenditures for facilities and equipment.
   We depend heavily on the success of Opana ER, which may not be widely accepted by physicians,
patients, third-party payors, or the medical community in general
  
    
    the safety and efficacy of Opana ER as compared to competitive products;
    
    Endos ability to educate the medical community about the benefits, safety and efficacy of Opana ER;
    
    the effectiveness of Endos sales and marketing activities;
    
    Endos ability to manufacture and maintain suitable inventory for sale on an ongoing basis;
    
    the reimbursement policies of government and third party payors with respect to Opana ER;
    
    the pricing of Opana ER; and
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
    
    the level of stocking of Opana ER by wholesalers and retail pharmacies.
   We are dependent on our collaborators to develop and commercialize several of our products
     
    
    Our collaborators may be pursuing alternative technologies or developing alternative
products, either on their own or in collaboration with others, that may be competitive to
the product on which we are collaborating, which could affect our collaborators commitment
to our collaboration.
    
    Our collaborators may reduce marketing or sales efforts, or discontinue marketing or
sales of our products. This could reduce the revenues we receive on the products.
    
    Our collaborators may terminate their collaborations with us under certain circumstances.
As a result, we may have to terminate the development of some drug candidates. This could
also adversely affect perception of us in the business and financial communities and make it
difficult for us to attract new collaborators.
    
    Our collaborators may pursue higher priority programs or change the focus of their
development programs, which could affect the collaborators commitment to us. Pharmaceutical
and biotechnology companies re-evaluate their priorities from time to time, including
following mergers and consolidations, which have been common in recent years in these
industries.
    
    Disputes may arise between us and our collaborators from time to time regarding
contractual or other matters. In 2006, we were engaged in a dispute with Endo with regard to
the sharing of marketing expenses during the period prior to when Opana ER reaches
profitability. In January 2007, we resolved our dispute as part of an
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amendment to the strategic alliance agreement between us and Endo. Any other such disputes with
Endo or other collaborators could be time consuming and expensive, and could impact our
anticipated rights under our agreements with those collaborators.
 We have limited experience in developing, manufacturing, marketing and selling pharmaceutical
products
   The Drug Enforcement Agency, or DEA, limits the availability of the active drug substances used in
Opana ER. As a result, Endos procurement quota may not be sufficient to meet commercial demand
   We face significant competition, which may result in others discovering, developing or
commercializing products before us or more successfully than we do
  
    
    significantly greater financial, technical and human resources than we have and may be
better equipped to develop, manufacture and commercialize drug products;
    
    more extensive experience than we have in conducting preclinical studies and clinical
trials, obtaining regulatory approvals, and manufacturing and marketing pharmaceutical
products;
    
    competing products that have already received regulatory approval or are in late-stage development; or
    
    collaborative arrangements in our target markets with leading companies and research institutions.
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If our clinical trials are not successful or take longer to complete than we expect, we may not be
able to develop and commercialize our products
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
    
    be delayed in obtaining marketing approval for our products;
    
    not be able to obtain marketing approval for our products; or
    
    not be able to obtain approval for indications that are as broad as intended.
    Our controlled release drug delivery technologies rely on the ability to control the release of
the active drug substances and our business would be harmed if it was determined that there were
circumstances under which the active drug substances from one of our extended release products
would be released rapidly into the blood stream
  ® in vitro in vitro
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We are subject to extensive government regulation including the requirement of approval before our
products may be marketed. Even if we obtain marketing approval, our products will be subject to
ongoing regulatory review
     Opana ER contains a narcotic ingredient. As a result of reported misuse and abuse of
prescription narcotics, the sale of Opana ER is subject to additional regulations, including
compliance with risk management programs, which may prove difficult or expensive to comply
with; and we and Endo may face lawsuits
  Our success depends on our ability to protect our patents and other intellectual property
rights
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We may become involved in patent litigation or other proceedings relating to our products or
processes, which could result in liability for damages or termination of our development and
commercialization programs
  
    
    We or our collaborators may initiate litigation or other proceedings against third
parties to enforce our intellectual property rights.
    
    If our competitors file patent applications that claim technology also claimed by us, we
or our collaborators may participate in interference or opposition proceedings to determine
the priority of invention.
    
    If third parties initiate litigation claiming that our processes or products infringe
their patent or other intellectual property rights, we and our collaborators will need to
defend our rights in such proceedings.
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We have only limited manufacturing capabilities and will be dependent on third party
manufacturers
    
    
    we or our collaborators may not be able to meet commercial demands for Opana ER or our other products;
    
    we may not be able to initiate or continue clinical trials for products that are under development; and
    
    we may be delayed in submitting applications for regulatory approvals of our products.
   We are dependent upon a limited number of suppliers for the gums used in our TIMERx materials
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If we or our collaborators fail to obtain an adequate level of reimbursement by governmental
or third party payors for Opana ER or any other products we develop, we may not be able to
successfully commercialize the affected product
    We will be exposed to product liability claims and may not be able to obtain adequate product
liability insurance
   If we are unable to retain our key personnel and continue to attract additional professional
staff, we may not be able to maintain or expand our business
  The market price of our common stock may be volatile
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Specific provisions of our Shareholder Rights Plan, Certificate of Incorporation and Bylaws and
the laws of Washington State make a takeover of Penwest or a change in control or management of
Penwest more difficult
  
 Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    WithheldClass IPaul E. Freiman
    
    
    20,656,904
    
    
    
    196,726Jennifer L. Good
    
    
    20,729,608
    
    
    
    124,022Class IIDavid P. Meeker
    
    
    20,743,916
    
    
    
    109,714
    b.
    
    Ratification of the selection of Ernst & Young LLP as our independent registered public
accounting firm for the current year:
 For
    
    Against
    
    Abstain
    
    Broker Non-Votes20,754,784
    
    95,876
  
    2,970
    
    none
 
 Item 6. Exhibits
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SIGNATURE
  PENWEST PHARMACEUTICALS CO.Date: August 6, 2007
    
    /s/ Benjamin L. Palleiko

Benjamin L. PalleikoSenior Vice President, Corporate Development andChief Financial Officer(Principal Financial Officer)
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EXHIBIT INDEX
 Exhibit Number
    
    Description10.1
    
    Second Amendment to Lease, dated as of June 6, 2006,
by and among Danbury Buildings, Inc., Union Carbide
Corporation and Penwest Pharmaceuticals Co. and Third
Amendment to Lease, dated as of April 13, 2007 by and
among Danbury Buildings Co., L.P. and Penwest
Pharmaceuticals Co.31.1
    
    Certification of Principal Executive Officer pursuant
to Exchange Act Rules 13a-14(a) or 15d-14(a), as
adopted pursuant to Section 302 of Sarbanes-Oxley Act
of 2002.31.2
    
    Certification of Principal Financial Officer pursuant
to Exchange Act Rules 13a-14(a) or 15d-14(a), as
adopted pursuant to Section 302 of Sarbanes-Oxley Act
of 2002.32.1
    
    Certification of Principal Executive Officer pursuant
to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Principal Financial Officer
pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b)
and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
 39