##### 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 March 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to
 Commission File Number 000-23467
 PENWEST PHARMACEUTICALS CO.
 (Exact name of registrant as specified in its charter)
 Washington(State or other jurisdiction of 
incorporation or organization)
    
    91-1513032(I.R.S. Employer
Identification No.)39 Old Ridgebury Road 
Suite 11Danbury, Connecticut
    
    06810-5120(Address of Principal Executive Offices)
    
    (Zip Code)
 (877) 736-9378  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer oAccelerated filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ
  Class
    
    OutstandingCommon Stock, par value $.001
    
    31,735,442




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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
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    32PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    33Item 1A.
    
    Risk Factors
    
    
    35Item 6.
    
    Exhibits
    
    
    48Signature
    
    
    49Exhibit Index
    
    
    50Ex-10.1 Rights Agreement, dated as of March 11, 2009Ex-10.2 Third Amendment, signed March 31, 2009, to the Amended and Restated Strategic Alliance Agreement, dated as of April 2, 2002EX-31 Section 302 Certification of CEO & CFOEx-32 Section 906 Certification of CEO & CFO
   Forward-looking Statements
  2




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PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements (Unaudited)
 
 PENWEST PHARMACEUTICALS CO.
CONDENSED BALANCE SHEETS
 March 31,
    
    
    December 31,2009
    
    
    2008(Unaudited)
    
    
    (Note 2)(In thousands,except share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,465
    
    
    $
    16,692Marketable securities
    
    
    500
    
    
    
    Trade accounts receivable
    
    
    4,980
    
    
    
    4,894Inventories  finished goods
    
    
    265
    
    
    
    440Prepaid expenses and other current assets
    
    
    1,310
    
    
    
    1,365Total current assets
    
    
    21,520
    
    
    
    23,391Fixed assets, net
    
    
    2,019
    
    
    
    2,177Patents, net
    
    
    1,499
    
    
    
    1,819Deferred charges
    
    
    2,137
    
    
    
    2,244Other assets, net
    
    
    2,208
    
    
    
    2,223Total assets
    
    $
    29,383
    
    
    $
    31,854LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,388
    
    
    $
    745Accrued expenses
    
    
    1,734
    
    
    
    1,695Accrued development costs
    
    
    168
    
    
    
    385Loan payable  current portion
    
    
    5,483
    
    
    
    5,483Deferred compensation  current portion
    
    
    294
    
    
    
    291Total current liabilities
    
    
    9,067
    
    
    
    8,599Loan payable
    
    
    2,741
    
    
    
    4,112Accrued financing fees
    
    
    360
    
    
    
    360Deferred revenue
    
    
    267
    
    
    
    473Deferred compensation
    
    
    2,388
    
    
    
    2,384Total liabilities
    
    
    14,823
    
    
    
    15,928Shareholders equityPreferred stock, par value $.001, authorized
1,000,000 shares, none outstanding
    
    
    
    
    
    
    Common stock, par value $.001, authorized
60,000,000 shares, issued and outstanding
31,719,442 shares at March 31, 2009 and
31,697,250 shares at December 31, 2008
    
    
    32
    
    
    
    32Additional paid in capital
    
    
    248,858
    
    
    
    249,262Accumulated deficit
    
    
    (234,589
    )
    
    
    (233,627
    )Accumulated other comprehensive income
    
    
    259
    
    
    
    259Total shareholders equity
    
    
    14,560
    
    
    
    15,926Total liabilities and shareholders equity
    
    $
    29,383
    
    
    $
    31,854
  3




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PENWEST PHARMACEUTICALS CO.
CONDENSED STATEMENTS OF OPERATIONS
 Three Months EndedMarch 31,2009
    
    
    2008(Unaudited)(In thousands, exceptper share data)Revenues:Royalties
    
    $
    4,722
    
    
    $
    422Product sales
    
    
    180
    
    
    
    228Collaborative licensing and development revenue
    
    
    368
    
    
    
    89Total revenues
    
    
    5,270
    
    
    
    739Operating expenses:Cost of revenues
    
    
    654
    
    
    
    169Selling, general and administrative
    
    
    2,321
    
    
    
    4,324Research and product development
    
    
    3,006
    
    
    
    6,385Total operating expenses
    
    
    5,981
    
    
    
    10,878Loss from operations
    
    
    (711
    )
    
    
    (10,139
    )Investment income
    
    
    7
    
    
    
    200Interest expense
    
    
    (258
    )
    
    
    (358
    )Loss before income tax expense
    
    
    (962
    )
    
    
    (10,297
    )Income tax expense
    
    
    
    
    
    
    Net loss
    
    $
    (962
    )
    
    $
    (10,297
    )Basic and diluted net loss per common share
    
    $
    (0.03
    )
    
    $
    (0.41
    )Weighted average shares of common stock outstanding  basic and diluted
    
    
    31,719
    
    
    
    25,113
  4




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PENWEST PHARMACEUTICALS CO.
CONDENSED STATEMENTS OF CASH FLOWS
 Three months EndedMarch 31,2009
    
    
    2008(Unaudited)(In thousands)Operating activities:Net loss
    
    $
    (962
    )
    
    $
    (10,297
    )Adjustments to reconcile net loss to net cash used in operating activities
    
    
    651
    
    
    
    1,809Net cash used in operating activities
    
    
    (311
    )
    
    
    (8,488
    )Investing activities:Acquisitions of fixed assets
    
    
    (12
    )
    
    
    (22
    )Patent costs
    
    
    (34
    )
    
    
    (96
    )Purchases of marketable securities
    
    
    (499
    )
    
    
    (2,531
    )Proceeds from maturities of marketable securities
    
    
    
    
    
    
    4,650Loan disbursed to collaborator
    
    
    
    
    
    
    (1,000
    )Net cash (used in) provided by investing activities
    
    
    (545
    )
    
    
    1,001Financing activities:Repayment of debt
    
    
    (1,371
    )
    
    
    (601
    )Issuance of common stock, net
    
    
    
    
    
    
    25,093Net cash (used in) provided by financing activities
    
    
    (1,371
    )
    
    
    24,492Net (decrease) increase in cash and cash equivalents
    
    
    (2,227
    )
    
    
    17,005Cash and cash equivalents at beginning of period
    
    
    16,692
    
    
    
    15,680Cash and cash equivalents at end of period
    
    $
    14,465
    
    
    $
    32,685
  5




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 1. Business
  ® ®
   2. Basis of Presentation
   6




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   3. Recent Accounting Pronouncements
     7




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
      4. Fair Value Measurement
     8




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(Unaudited) (In thousands)Cash and cash equivalents
    
    $
    14,465
    
    
    $
    
    
    
    $
    
    
    
    $
    14,465Corporate debt securities
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    500Total
    
    $
    14,465
    
    
    $
    500
    
    
    $
    
    
    
    $
    14,965
 5. Other Assets
  March 31,
    
    
    December 31,2009
    
    
    2008(Unaudited) (In thousands)Assets held in a trust for the Companys
Supplemental Executive Retirement Plan and
Deferred Compensation Plan (see Note 11):Cash surrender value of life insurance policies
    
    $
    1,946
    
    
    $
    1,924Money market account
    
    
    262
    
    
    
    2992,208
    
    
    
    2,223Loan receivable from collaborator (see Note 13)
    
    
    1,000
    
    
    
    1,0003,208
    
    
    
    3,223Allowance for loan receivable from collaborator
    
    
    (1,000
    )
    
    
    (1,000
    )Other assets, net
    
    $
    2,208
    
    
    $
    2223
 6. Loan Payable
 Credit Facility
   9




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   (Unaudited)(In thousands)Less than one year
    
    $
    5,483One to two years
    
    
    2,741$
    8,224
  7. Shareholders Equity
  Private Placement
    10




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Share-Based Compensation
  Three Months EndedMarch 31,2009
    
    
    2008(Unaudited) (In thousands)Selling, general and administrative
    
    $
    (568
    )
    
    $
    681Research and product development
    
    
    164
    
    
    
    234Total
    
    $
    (404
    )
    
    $
    915
  Rights Plan
    11




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 8. Cost of Revenues
 Three Months EndedMarch 31,2009
    
    
    2008(Unaudited)(In thousands)Cost of royalties
    
    $
    113
    
    
    $
    21Cost of product sales
    
    
    181
    
    
    
    77Cost of collaborative licensing and development revenue
    
    
    360
    
    
    
    71Total cost of revenues
    
    $
    654
    
    
    $
    169
  9. Staff Reductions
  10. Income Taxes
  11. Supplemental Executive Retirement Plan and Deferred Compensation Plan
  12




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Three Months EndedMarch 31,2009
    
    
    2008(Unaudited) (In thousands)Interest cost
    
    $
    30
    
    
    $
    29Amortization of prior service cost
    
    
    
    
    
    
    1Net periodic benefit cost
    
    $
    30
    
    
    $
    30
   12. Comprehensive Income (Loss)
  March 31,
    
    
    December 31,2009
    
    
    2008(Unaudited)(In thousands)Adjustment for funded status of post retirement plan
    
    $
    259
    
    
    $
    259
  Three Months EndedMarch 31,2009
    
    
    2008(Unaudited)(In thousands)Net loss
    
    $
    (962
    )
    
    $
    (10,297
    )Changes in unrealized net gains and losses on marketable securities
    
    
    
    
    
    
    5Adjustment for funded status of post retirement plan
    
    
    
    
    
    
    1Comprehensive loss
    
    $
    (962
    )
    
    $
    (10,291
    )
 13. Collaborative and Licensing Agreements
  Endo Pharmaceuticals Inc.
  13




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   
    
    Endo has agreed to 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 were 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). In the third quarter of 2008, this Royalty Holiday ended. The
Company recognized royalties from Endo related to sales of Opana ER in the amount of $4.4
million for the three month period ended March 31, 2009.
    
    The Companys share of the development costs for Opana ER that it opted out of funding in
April 2003 totaled $28 million and will be recouped by Endo through a temporary 50%
reduction in royalties. Commencing in the third quarter of 2008, the Company began to
receive reduced royalty payments from Endo, with such temporary reductions to continue until
the $28 million is fully recouped. As of March 31, 2009, $9.4 million of the $28 million
has been recouped by Endo.
    
    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 net sales
thresholds. The Company has not received any additional payments under this provision
through March 31, 2009.
    14




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Edison Pharmaceuticals, Inc.
     15




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   Mylan Pharmaceuticals Inc.
   Drug Delivery Technology Collaborations
  14. Contingencies
  16




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Impax ANDA Litigation
    Actavis ANDA Litigation
  17




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
    Sandoz ANDA Litigation
  ® ®
  Barr ANDA Litigation
   18




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Tang/Edelman Shareholder Claim
   Tang Capital Partners, et al. Penwest Pharmaceuticals Co.
 Tang Capital Partners, et al. v.
Penwest Pharmaceuticals Co.)
 Tang Capital Partners, et al. v.
Penwest Pharmaceuticals Co.)
  19




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Overview
  ® ®
    
    
    Maximizing the value of Opana ER, working closely with Endo.We plan to continue to
take steps to protect and prosecute the intellectual property around Opana ER and
explore licensing opportunities for Opana ER outside the United States.
    
    Advancing the development of A0001 drug candidate.Through the planned Phase Ib and
IIa trials, we are seeking to establish proof of concept with respect to both safety and
efficacy.
    
    Monetizing the value of our proven drug delivery technologies and drug formulation
expertise by executing additional deals.We are seeking to enter into at least two new
collaborations in 2009. We believe that, with two agreements, this aspect of our
business can operate on a breakeven basis, fund a portion of our overhead and provide us
with a financial stake in products, should they advance in development and
commercialization.
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
    
    Managing overhead and other costs to ensure that our infrastructure is sized
appropriately to our priorities.In the three month period ended March 31, 2009, we
continued to reduce expenses and closely managed our cash expenditures, including staff
reductions implemented in January 2009.
  Products
 Opana ER. ®
    21




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A0001.
   22




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Nifedipine XL.
 Net Loss and Profitability
  
    
    the commercial success of Opana ER, and the amount of royalties from Endos sales of
Opana ER, which may be adversely affected by any potential generic competition;
    
    our ability to successfully defend our intellectual property protecting our products;
    
    our ability to access funding support for our development programs from third party
collaborators;
    
    the level of our investment in research and development activities, including the timing
and costs of conducting clinical trials of our products;
    
    the level of our general and administrative expenses;
    
    the successful development and commercialization of product candidates in our portfolio
and products being developed for collaborations; and
    
    royalties from Mylans sales of Pfizers generic version of Procardia XL 30 mg.
  Critical Accounting Policies and Estimates
  23




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Recent Accounting Pronouncements
  Results of Operations for the Three Month Periods Ended March 31, 2009 and 2008
 Revenues
 Three months
    
    
    
    
    
    Three monthsended
    
    
    Percentage
    
    
    endedMarch 31,
    
    
    increase
    
    
    March 31,2009
    
    
    (decrease)
    
    
    2008(In thousands, except percentages)Royalties
    
    $
    4,722
    
    
    
    1,019
    %
    
    $
    422Product sales
    
    
    180
    
    
    
    (21
    )
    
    
    228Collaborative licensing and development revenue
    
    
    368
    
    
    
    313
    
    
    
    89Total revenues
    
    $
    5,270
    
    
    
    613
    %
    
    $
    739
    24




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Cost of Revenues
 Three months
    
    
    Percentage
    
    
    Three monthsended
    
    
    increase
    
    
    endedMarch 31, 2009
    
    
    (decrease)
    
    
    March 31, 2008(In thousands, except percentages)Cost of royalties
    
    $
    113
    
    
    
    438
    %
    
    $
    21Cost of product sales
    
    
    181
    
    
    
    135
    
    
    
    77Cost of collaborative licensing and development revenue
    
    
    360
    
    
    
    407
    
    
    
    71Total cost of revenues
    
    $
    654
    
    
    
    287
    %
    
    $
    169
    Selling, General and Administrative Expenses
 Three months
    
    
    Percentage
    
    
    Three monthsended
    
    
    increase
    
    
    endedMarch 31, 2009
    
    
    (decrease)
    
    
    March 31, 2008(In thousands, except percentages)Selling, general and administrative expenses
    
    $
    2,321
    
    
    
    (46
    )%
    
    $
    4,324
   25




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Research and Product Development Expenses
   Three months
    
    
    Percentage
    
    
    Three monthsended
    
    
    increase
    
    
    endedMarch 31, 2009
    
    
    (decrease)
    
    
    March 31, 2008(In thousands, except percentages)A0001 and Edison Payments
    
    $
    998
    
    
    
    (54
    )%
    
    $
    2,180Nalbuphine ER
    
    
    
    
    
    
    (100
    )
    
    
    1,116Other Phase I Products and Internal Costs
    
    
    2,008
    
    
    
    (35
    )
    
    
    3,089Total Research and Product Development Expense
    
    $
    3,006
    
    
    
    (53
    )%
    
    $
    6,385
  
    
    A0001 and Edison Payments These expenses reflect our direct external expenses relating
to the development of A0001, and for the three month period ended March 31, 2008, they also
reflect our funding of Edisons research activities under the Edison agreement. These
expenses approximated 33% of our R&D expenses for the three month period ended March 31,
2009.In May 2008, we submitted an IND for A0001 for
the treatment of symptoms associated with inherited mitochondrial respiratory chain diseases.
In July 2008, we initiated a Phase Ia placebo-controlled, single ascending dose trial designed
to evaluate the safety and tolerability of A0001 in healthy subjects, and to collect
pharmacokinetic data. A0001 was well tolerated by all subjects across all dose groups and there
were no drug-related serious adverse events. In February 2009, we initiated a Phase Ib
multiple ascending dose clinical study in healthy subjects. The study is a single-blind,
placebo-controlled, multiple ascending dose clinical trial in healthy subjects, designed to
assess the safety, tolerability and pharmacokinetics of A0001 following repeat dosing in
healthy male and female subjects. We plan to enroll a total of approximately 30 healthy
subjects in the trial. We expect that results from this study will be available in the second
quarter of 2009. If A0001 demonstrates an acceptable safety profile and tolerability in this
Phase Ib study, we plan to commence a Phase IIa trial in patients with inherited mitochondrial
respiratory chain diseases in the second half of 2009. We are currently working on the study
design for the Phase IIa program. In parallel with the Phase Ib trial, we have initiated
long-term animal toxicology studies to support the clinical program.We expect our A0001 costs to decline in 2009 as compared to our costs in 2008 as the quarterly
contract research payments to Edison were completed by the end of 2008. We cannot reasonably
estimate or know the nature, timing and estimated costs of the efforts necessary to complete
the development of A0001 due to the numerous risks and uncertainties associated with developing
and commercializing drugs.
    
    Nalbuphine ER These expenses reflect our direct external expenses relating to the
development of nalbuphine ER. In the three month period ended March
31, 2008, these expenses consisted primarily of payments to third
parties in connection with clinical trials of nalbuphine ER which
were underway. Following the end of
the 2008 three month period, we determined to seek a collaborator for the further development
and commercialization of nalbuphine ER, and not to conduct any additional development work
until we enter into such a collaboration. As a result, we did not incur any R&D
 26




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expenses in the three month period ended March 31, 2009 and do not expect to incur any
additional R&D expenses for nalbuphine ER, unless we find a collaborator to continue the
development work.
    
    Other Phase I Products and Internal Costs These expenses reflect internal and
external expenses not separately reported under a product development program noted above,
and include the areas of pharmaceutical development, clinical and regulatory. The types of
expenses included in internal expenses primarily are salary and benefits, share-based
compensation costs, depreciation on purchased equipment, and the amortization or any
write-downs of patent costs, other than product patent write-offs charged directly to a
separately reported product development program or amortization of patent costs relating to
commercialized products, which are included in cost of revenues. The types of expenses
included in external expenses are primarily related to preclinical studies,
proof-of-principle biostudies conducted on our Phase I product candidates and payments to
third parties for drug active. These costs decreased in the three month period ended March
31, 2009 as compared to the three month period ended March 31, 2008 primarily as a result of
lower compensation expenses in the three month period ended March 31, 2009 due to staff
reductions implemented in March 2008, and allocations of internal costs related to our drug
delivery technology collaborations to cost of collaborative licensing and development
revenues.
   Share-Based Compensation
  Three Months EndedMarch 31,2009
    
    
    2008(Unaudited) (In thousands)Selling, general and administrative
    
    $
    (568
    )
    
    $
    681Research and product development
    
    
    164
    
    
    
    234Total share-based compensation
    
    $
    (404
    )
    
    $
    915
  Tax Rates
  27




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Liquidity and Capital Resources
 Sources of Liquidity
  Private Placement.
  Senior Secured Credit Facility.
   Cash Flows
  28




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Funding Requirements
       
    
    the commercial success of Opana ER, and the amount of royalties from Endos sales of
Opana ER, which may be adversely affected by any potential generic competition;
    
    the prosecution, defense and enforcement of our patents and other intellectual property
rights, such as our Orange Book listed patents for Opana ER, and the prosecution by us and
Endo of additional patent applications with respect to Opana ER;
    
    the timing and amount of payments received under collaborative agreements, including our
agreement with Mylan with respect to Pfizers generic version of Procardia XL 30 mg;
    
    the timing and amount of our internal costs of development for drug candidates for which
we acquire rights under the Edison agreement;
    
    the progress of our existing development projects and any development projects we may
undertake, funding obligations with respect to the projects and the related costs to us of
clinical studies for our product candidates;
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
    
    our ability to enter into collaborations for Opana ER outside the United States, nalbuphine
ER and our drug delivery technologies, and the structure and terms of any such agreements;
    
    our ability to access funding support for development programs from third party
collaborators;
    
    the level of our investment in capital expenditures for facilities or equipment;
    
    the timing and amount of our costs in connection with our proxy contest and the
shareholder lawsuits filed against us and our directors; and
    
    our success in reducing our spending and managing our costs.
     Contractual Obligations
  Less Than
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    618
    
    
    $
    618
    
    
    $
    
    
    
    $
    
    
    
    $
    Purchase obligations
    
    
    4,093
    
    
    
    4,093
    
    
    
    
    
    
    
    
    
    
    
    Payments due under credit facility
    
    
    9,268
    
    
    
    6,082
    
    
    
    3,186
    
    
    
    
    
    
    
    Deferred compensation, including current portion
    
    
    2,682
    
    
    
    294
    
    
    
    587
    
    
    
    587
    
    
    
    1,214Total
    
    $
    16,661
    
    
    $
    11,087
    
    
    $
    3,773
    
    
    $
    587
    
    
    $
    1,214
  30




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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
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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.
 (b) Changes in Internal Control Over Financial Reporting.
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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Impax ANDA Litigation
    Actavis ANDA Litigation
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Sandoz ANDA Litigation
  Barr ANDA Litigation
  Tang/Edelman Shareholder Claim
   Tang Capital Partners, et al. Penwest
Pharmaceuticals Co.
 34




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Tang Capital Partners, et al. v. Penwest
Pharmaceuticals Co.),
 Tang Capital Partners, et al. v. Penwest
Pharmaceuticals Co.),
 
 Item 1A. Risk Factors
 Investing in our common stock involves a high degree of risk, and you should carefully
consider the risks and uncertainties described below in addition to the other information included
or incorporated by reference in this quarterly report on Form 10-Q . 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 a history of net losses and may not be able to achieve or maintain profitability on an
annual basis
     
    
    the commercial success of Opana ER, and the amount of royalties from Endos sales of
Opana ER, which may be adversely affected by any potential generic competition;
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
    
    our ability to successfully defend our intellectual property protecting our products;
    
    our ability to access funding support for development programs from third party
collaborators;
    
    the level of our investment in research and development activities, including the timing
and costs of conducting clinical trials of our products;
    
    the level of our general and administrative expenses;
    
    the successful development and commercialization of product candidates in our portfolio
and products being developed for collaborations; and
    
    royalties from Mylans sales of Pfizers generic version of Procardia XL 30 mg.
 We may require additional funding which may be difficult to obtain
     
    
    the commercial success of Opana ER, and the amount of royalties from Endos sales of
Opana ER, which may be adversely affected by any potential generic competition;
    
    the prosecution, defense and enforcement of our patents and other intellectual property
rights, such as our Orange Book listed patents for Opana ER, and the prosecution by us and
Endo of additional patent applications with respect to Opana ER;
    
    the timing and amount of payments received under collaborative agreements including our
agreement with Mylan with respect to Pfizers generic version of Procardia XL 30 mg;
    
    the timing and amount of our internal costs of development for drug candidates for which
we acquire rights under the Edison agreement;
    
    the progress of our existing development projects and any development projects we may
undertake, funding obligations with respect to the projects and the related costs to us of
clinical studies for our product candidates;
    
    our ability to enter into collaborations for Opana ER outside the United States,
nalbuphine ER and our drug delivery technologies, and the structure and terms of any such
agreements;
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
    
    our ability to access funding support for development programs from third party
collaborators;
    
    the level of our investment in capital expenditures for facilities and equipment;
    
    the timing and amount of our costs in connection with our proxy contest and the
shareholder lawsuits filed against us and our directors; and
    
    our success in reducing our spending and managing our costs.
  Our ability to generate revenues depends heavily on the success of Opana ER
   
    
    the safety and efficacy of Opana ER as compared to competitive products;
    
    Endos ability to educate the medical community about the benefits, safety profile 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;
    
    the level of stocking of Opana ER by wholesalers and retail pharmacies; and
    
    the availability of generic versions of Opana ER and the timing of generic competition.
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Our success depends on our ability, or our collaborators ability, to protect our patents and
other intellectual property rights.
 ,
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We are dependent on our collaborators to manufacture and commercialize 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, which could reduce the revenues we receive on the products.
    
    Our collaborators may pursue higher priority programs or change the focus of their
commercialization 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, which we subsequently resolved. 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
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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
   Misuse and/or abuse of Opana ER , which contains a narcotic ingredient, could subject us to
additional regulations, including compliance with risk management programs, which may prove
difficult or expensive for us to comply with, and we and Endo may face lawsuits
  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 such as A0001
    41




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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.
      Even if we are able to obtain regulatory approvals for any of our product candidates, if they
exhibit harmful side effects after approval, our regulatory approvals could be revoked or
otherwise negatively impacted, and we could be subject to costly and damaging product liability
claims
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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
 We are subject to extensive government regulation including the requirement of approval before our
products may be marketed. Even if we obtain marketing approval, our products will be subject to
ongoing regulatory review
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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.
   We have only limited manufacturing capabilities and will be dependent on third party manufacturers
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
    
    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.
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We are dependent upon a limited number of suppliers for the gums used in our TIMERx materials
  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
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The market price of our common stock may be volatile
  Specific provisions of our Shareholder Rights Plan, Articles of Incorporation and Bylaws and the
laws of Washington State make a takeover of Penwest or a change in control or management of our
Company more difficult
  Proxy contests pursued by dissident shareholders may be costly and disruptive to our business
operations
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Item 6. Exhibits
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SIGNATURE
  PENWEST PHARMACEUTICALS CO.Date:  May 7, 2009
    /s/ Jennifer L. GoodJennifer L. GoodPresident and Chief Executive Officer 49




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EXHIBIT INDEX
 ExhibitNumber
    
    Description4.1
    
    Rights Agreement, dated as of March 11, 2009 between Penwest Pharmaceuticals
Co. and Mellon Investor Services LLC. (incorporated by reference to Exhibit
4.1 of the Companys Current Report on Form 8-K filed March 11, 2009).10.1
    
    Third Amendment, signed March 31, 2009, to the Amended and Restated Strategic
Alliance Agreement, dated as of April 2, 2002, by and between Penwest
Pharmaceuticals Co. and Endo Pharmaceuticals Inc.10.2
    
    Severance and Settlement Agreement and Release dated January 30, 2009 by and
between the Registrant and Benjamin L. Palleiko.31
    
    Certification of Principal Executive Officer and 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
    
    Certification of Principal Executive Officer and 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.
 50