<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  For the quarterly period ended June 30, 1999

                                       OR

[ ]  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 of Incorporation)            (I.R.S. Employer Identification No.)

      2981 Route 22, Patterson, NY                       12563-9970
----------------------------------------    ------------------------------------
(Address of principal executive offices)                 (Zip Code)


                                 (914) 878-3414
              -----------------------------------------------------
              (Registrant's telephone number, including area code.)


     Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                             Yes [X]         No [ ]

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of August 10, 1999.

                 Class                                   Outstanding
     -----------------------------                       -----------
     Common stock, par value $.001                        11,118,583




<PAGE>   2




                           PENWEST PHARMACEUTICALS CO.

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

Part I.       Financial Information

    Item 1.   Financial Statements (Unaudited)

              Consolidated Balance Sheets...................................  3

              Consolidated Statements of Operations.........................  4

              Condensed Consolidated Statements of Cash Flows...............  5

              Notes to Condensed Consolidated Financial Statements..........  6

    Item 2.   Management's Discussion and Analysis of Financial
              Condition and Results of Operations...........................  9

    Item 3.   Quantitative and Qualitative Disclosures About Market Risk.... 14

Part II.      Other Information

    Item 4.   Submission of Matters to a Vote of Security Holders........... 15

    Item 6.   Exhibits and Reports on Form 8-K.............................. 15

Signature................................................................... 16

Exhibit Index............................................................... 16






                                       2

<PAGE>   3




                         PART I -- FINANCIAL INFORMATION


ITEM 1.    FINANCIAL STATEMENTS


                           PENWEST PHARMACEUTICALS CO.
                           CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                 JUNE 30,           DECEMBER 31,
                                                                   1999                1998
                                                                 --------           -----------
                                                               (UNAUDITED)
<S>                                                              <C>                 <C>
ASSETS
Current assets:
  Cash and cash equivalents                                      $    467            $  1,476
  Trade accounts receivable, net                                    5,440               4,381
  Inventories:
    Raw materials and other                                         1,225               1,365
    Finished goods                                                  5,973               7,439
                                                                 --------            --------
                                                                    7,198               8,804
   Prepaid expenses and other current assets                          496                 572
   Deferred income taxes                                              356                 356
                                                                 --------            --------
     Total current assets                                          13,957              15,589

Fixed assets, net                                                  19,514              20,822
Other assets                                                        4,738               4,671
                                                                 --------            --------
     Total assets                                                $ 38,209            $ 41,082
                                                                 ========            ========

LIABILITIES AND SHAREHOLDERS'  EQUITY
Current liabilities:
   Accounts payable and accrued expenses                         $  5,269            $  5,405
   Taxes payable                                                      351                 336
   Loans payable                                                    3,400               2,200
                                                                 --------            --------
     Total current liabilities                                      9,020               7,941
Deferred income taxes                                                 747                 932
Other long-term liabilities                                         2,245               2,177
                                                                 --------            --------
     Total liabilities                                             12,012              11,050

Shareholders' equity:
  Preferred stock, par value $.001, authorized
   1,000,000 shares, none outstanding
  Common stock, par value $.001, authorized 39,000,000
   shares, issued and outstanding 11,104,816 shares and
   11,043,331 shares                                                   11                  11
  Additional paid-in capital                                       59,431              59,025
  Accumulated deficit                                             (32,279)            (28,478)
  Accumulated other comprehensive loss                               (966)               (526)
                                                                 --------            --------
     Total shareholders' equity                                    26,197              30,032
                                                                 --------            --------
     Total liabilities and shareholders' equity                  $ 38,209            $ 41,082
                                                                 ========            ========
</TABLE>





     See accompanying notes to condensed consolidated financial statements.

                                       3


<PAGE>   4

                           PENWEST PHARMACEUTICALS CO.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                               THREE MONTHS
                                                              ENDED JUNE 30,
                                                          ---------------------
                                                            1999          1998
                                                          -------       -------
                                                               (UNAUDITED)

Revenues
  Product sales                                           $ 8,274       $ 7,488
  Royalties and licensing fees                                 70            68
                                                          -------       -------
    Total revenues                                          8,344         7,556
Cost of product sales                                       5,853         5,348
                                                          -------       -------
    Gross profit                                            2,491         2,208
Operating expenses
  Selling, general and administrative                       2,955         2,670
  Research and product development                          1,762         1,458
                                                          -------       -------
    Total operating expenses                                4,717         4,128
                                                          -------       -------
Loss from operations                                       (2,226)       (1,920)
Interest expense                                               70            --
                                                          -------       -------
Loss before income taxes                                   (2,296)       (1,920)
Income tax expense (benefit)                                  (36)           66
                                                          -------       -------
Net loss                                                  $(2,260)      $(1,986)
                                                          =======       =======

Basic and diluted net loss per share                      $ (0.20)      $ (0.18)
                                                          =======       =======

Weighted average shares of common stock outstanding        11,104        11,037
                                                          =======       =======


                                                                SIX MONTHS
                                                              ENDED JUNE 30,
                                                          ---------------------
                                                            1999          1998
                                                          -------       -------
                                                               (UNAUDITED)

Revenues
  Product sales                                           $18,011       $15,249
  Royalties and licensing fees                                150            93
                                                          -------       -------
    Total revenues                                         18,161        15,342
Cost of product sales                                      12,797        11,264
                                                          -------       -------
    Gross profit                                            5,364         4,078
Operating expenses
  Selling, general and administrative                       5,551         5,027
  Research and product development                          3,499         2,663
                                                          -------       -------
    Total operating expenses                                9,050         7,690
                                                          -------       -------
Loss from operations                                       (3,686)       (3,612)
Interest expense                                              134            --
                                                          -------       -------
Loss before income taxes                                   (3,820)       (3,612)
Income tax expense (benefit)                                  (19)          404
                                                          -------       -------
Net loss                                                  $(3,801)      $(4,016)
                                                          =======       =======

Basic and diluted net loss per share                      $ (0.34)      $ (0.36)
                                                          =======       =======

Weighted average shares of common stock outstanding        11,079        11,037
                                                          =======       =======




     See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>   5





                           PENWEST PHARMACEUTICALS CO.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
                                 (IN THOUSANDS)


                                                                SIX MONTHS
                                                              ENDED JUNE 30,
                                                          ---------------------
                                                            1999          1998
                                                          -------       -------
                                                               (UNAUDITED)

Net cash used in operating activities                     $(2,124)      $(3,634)
Investing activities:
  Acquisitions of fixed assets, net                          (246)         (951)
  Other                                                      (145)         (125)
                                                          -------       -------
Net cash used in investing activities                        (391)       (1,076)
Financing activities:
  Borrowings from credit facility                           4,800            --
  Repayments of credit facility                            (3,600)           --
  Issuance of common stock                                    407            --
  Increase in payable to Penford                               --         4,676
                                                          -------       -------
Net cash provided by financing activities                   1,607         4,676
Effect of exchange rate changes on cash and cash
  equivalents                                                (101)           (4)
                                                          -------       -------
Net decrease in cash and cash equivalents                  (1,009)          (38)
Cash and cash equivalents at beginning of period            1,476           938
                                                          -------       -------
Cash and cash equivalents at end of period                $   467       $   900
                                                          =======       =======





     See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>   6


                          PENWEST PHARMACEUTICALS CO.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   BUSINESS

           Penwest Pharmaceuticals Co. (the "Company" or "Penwest") is engaged
     in the research, development, and commercialization of novel oral drug
     delivery products and technologies. Based on its extensive expertise in
     developing and manufacturing tableting ingredients for the pharmaceutical
     industry, the Company has developed TIMERx, a proprietary controlled
     release drug delivery technology and PROSOLV SMCC(TM), another drug
     delivery technology which improves the performance characteristics of
     tablets. The Company's product portfolio ranges from excipients that are
     sold in bulk to more technically advanced and patented excipients that are
     licensed to customers. The Company has manufacturing facilities in Iowa and
     Finland and has customers primarily throughout North America and Europe.

           The Company is subject to the risks and uncertainties associated with
     a drug delivery company actively engaged in research and development. These
     risks and uncertainties include, but are not limited to, a history of net
     losses, technological changes, dependence on collaborators and key
     personnel, the successful completion of development efforts and of
     obtaining regulatory approval, the successful commercialization of TIMERx
     controlled release products, compliance with government regulations, patent
     infringement litigation and competition from current and potential
     competitors, some with greater resources than the Company.

2.   BASIS OF PRESENTATION

           The accompanying unaudited condensed consolidated financial
     statements have been prepared in accordance with generally accepted
     accounting principles for interim financial information and with the
     instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
     they do not include all of the information and footnotes required by
     generally accepted accounting principles for complete financial statements.
     In the opinion of management, all adjustments considered necessary for a
     fair presentation for the interim periods presented have been included. All
     such adjustments are of a normal recurring nature. Operating results for
     the six month period ended June 30, 1999 are not necessarily indicative of
     the results that may be expected for the year ending December 31, 1999. For
     further information, refer to the consolidated financial statements and
     footnotes thereto included in Penwest Pharmaceuticals Co.'s Annual Report
     on Form 10-K for the year ended December 31, 1998.

           Certain prior year amounts have been reclassified to conform with the
     current year's presentation. These reclassifications had no effect on
     previously reported results of operations.

3.   INCOME TAXES

           The effective tax rates for the three month and six month periods
     ended June 30, 1999 were a benefit of 2% and 1%, respectively. The
     effective rates are lower than the federal statutory rate of a 34% benefit
     due primarily to a valuation allowance on deferred tax assets relating to
     the Company's net operating loss as well as state and foreign income taxes.
     The effective tax rates for the three month and six month periods ended
     June 30, 1998 were expenses of 3% and 11%, respectively. The effective
     rates are higher than the federal statutory rate of a 34% benefit due
     primarily to the effect of tax benefits utilized by Penford Corporation
     (the Company's former parent company) for which Penwest was not reimbursed,
     temporary differences resulting from accelerated depreciation reversing
     when losses are not expected to be available and foreign income taxes.

                                       6
<PAGE>   7



4.   COMPREHENSIVE LOSS

           As of January 1, 1998, the Company adopted Financial Accounting
     Standards Board Statement No. 130 "Reporting Comprehensive Income".
     Statement No. 130 establishes new rules for the reporting and display of
     comprehensive income (loss) and its components; however, the adoption of
     this Statement had no impact on the Company's Net loss or Shareholders'
     equity.

     The components of comprehensive loss, for the three-month and six-month
     periods ended June 30, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED JUNE 30            SIX MONTHS ENDED JUNE 30
                                                         1999             1998               1999              1998
                                                       -------          -------            -------           -------
                                                       (IN THOUSANDS OF DOLLARS)           (IN THOUSANDS OF DOLLARS)

     <S>                                               <C>               <C>               <C>               <C>
     Net loss                                          $(2,260)          $(1,986)          $(3,801)          $(4,016)
     Foreign currency translation adjustments             (157)              147              (440)               71
                                                       -------           -------           -------           -------

     Comprehensive loss                                $(2,417)          $(1,839)          $(4,241)          $(3,945)
                                                       =======           =======           =======           =======
</TABLE>

           Accumulated other comprehensive loss equals the cumulative
     translation adjustment which is the only component of other comprehensive
     loss included in the Company's financial statements.

5.   CONTINGENCIES

           In May 1997, one of the Company's collaborators, Mylan
     Pharmaceuticals, Inc. ("Mylan") filed an Abbreviated New Drug Application
     ("ANDA") with the U.S. Food and Drug Administration ("FDA") for the 30 mg
     dosage strength of Nifedipine XL, a generic version of Procardia XL, a
     controlled release formulation of nifedipine. Bayer AG ("Bayer") and ALZA
     Corporation ("ALZA") own patents listed for Procardia XL (the last of which
     expires in 2010). Pfizer, Inc. ("Pfizer") is the sponsor of the New Drug
     Application ("NDA") and markets the product. In connection with the ANDA
     filing, Mylan certified to the FDA that Nifedipine XL does not infringe
     these Bayer or ALZA patents and notified Bayer, ALZA and Pfizer of such
     certification. Bayer and Pfizer sued Mylan in the United States District
     Court for the Western District of Pennsylvania, alleging that Mylan's
     product infringes Bayer's patent. The Company has been informed by Mylan
     that ALZA does not believe that the notice given to it complied with the
     requirements of the Waxman-Hatch Act, and there can be no assurance that
     ALZA will not sue Mylan for patent infringement or take any other actions
     with respect to such notice. Mylan has advised the Company that it intends
     to contest vigorously the allegations made in the lawsuit. However, there
     can be no assurance that Mylan will prevail in this litigation or that it
     will continue to contest the lawsuit. An unfavorable outcome or protracted
     litigation for Mylan would materially adversely affect the Company's
     business, financial condition, cash flows and results of operations. Delays
     in the commercialization of Nifedipine XL could also occur because although
     the FDA granted tentative approval, it will not grant final marketing
     approval of Nifedipine XL until a final judgment on the patent suit is
     rendered in favor of Mylan by the district court, or in the event of an
     appeal, by the court of appeals, or until 30 months (or such longer or
     shorter period as the court may determine) have elapsed from the date of
     Mylan's certification, whichever is sooner.

           In 1993, Pfizer filed a "citizen's petition" with the FDA, claiming
     that its Procardia XL formulation constituted a unique delivery system and
     that a drug with a different release mechanism such as the TIMERx
     controlled release system cannot be considered the same dosage form and
     approved in an ANDA as bioequivalent to Procardia XL. In August 1997, the
     FDA rejected Pfizer's citizen's petition. In July 1997, Pfizer also sued
     the FDA in the District Court of the District of Columbia, claiming that
     the FDA's acceptance of Mylan's ANDA filing for Nifedipine XL was contrary
     to law, based primarily on the arguments stated in its citizen's petition.
     Mylan and the Company intervened as defendants in this suit. In April 1998
     the District Court of the District of Columbia rejected Pfizer's claim, and
     in May 1998, Pfizer appealed the District Court's decision. In July 1999,
     the US Court of Appeals for the District of Columbia ruled that the lawsuit
     was premature and that the courts won't consider lawsuits against an
     administrative agency until the FDA gives final clearance to the product.
     There can be no assurance that the FDA, Mylan and the Company will prevail
     in this litigation. An outcome in this litigation adverse to Mylan and the
     Company would result in Mylan being required to file a suitability petition
     in order to maintain the ANDA filing or to file an NDA with respect to
     Nifedipine XL, each of which would be expensive and time consuming. An
     adverse outcome also would result in Nifedipine XL becoming ineligible for
     an "AB" rating from the FDA. Failure to obtain an AB rating from the FDA
     would indicate that for certain purposes


                                       7



<PAGE>   8

     Nifedipine XL would not be deemed to be therapeutically equivalent to the
     referenced branded drug, would not be fully substitutable for the
     referenced branded drug and would not be relied upon by Medicaid and
     Medicare formularies for reimbursement. Any such failure would have a
     material adverse effect on the Company's business, financial condition,
     cash flows and results of operations. If any of such events occur, Mylan
     may terminate its efforts with respect to Nifedipine XL, which would have a
     material adverse effect on the Company's business, financial condition,
     cash flows and results of operations.

           In 1994, the Boots Company PLC ("Boots") filed in the European Patent
     Office (the "EPO") an opposition to a patent granted by the EPO to the
     Company relating to its TIMERx technology. In June 1996, the EPO dismissed
     Boots' opposition, leaving intact all claims included in the patent. Boots
     has appealed this decision to the EPO Board of Appeals. There can be no
     assurance that the Company will prevail in this matter. An unfavorable
     outcome could materially adversely affect the Company's business, financial
     condition, cash flows and results of operations.

           Substantial patent litigation exists in the pharmaceutical industry.
     Patent litigation generally involves complex legal and factual questions,
     and the outcome frequently is difficult to predict. An unfavorable outcome
     in any patent litigation affecting the Company could cause the Company to
     pay substantial damages, alter its products or processes, obtain licenses
     and/or cease certain activities. Even if the outcome is favorable to the
     Company, the Company could incur substantial litigation costs. Although the
     legal costs of defending litigation relating to a patent infringement claim
     (unless such claim relates to TIMERx, in which case such costs are the
     responsibility of the Company) are generally the contractual responsibility
     of the Company's collaborators, the Company could nonetheless incur
     significant unreimbursed costs in participating and assisting in the
     litigation.

           Testing, manufacturing, marketing and selling pharmaceutical products
     entail a risk of product liability. The Company faces the risk of product
     liability claims in the event that the use of its products is alleged to
     have resulted in harm to a patient or subject. Such risks exist even with
     respect to those products that are manufactured in licensed and regulated
     facilities or that otherwise possess regulatory approval for commercial
     sale. Product liability insurance coverage is expensive, difficult to
     obtain and may not be available in the future on acceptable terms, if at
     all. The Company is covered by primary product liability insurance in the
     amount of $1.0 million per occurrence and $2.0 million annually in the
     aggregate on a claims-made basis and by umbrella liability insurance in
     excess of $25.0 million which can also be used for product liability
     insurance. There can be no assurance that this coverage is adequate to
     cover potential liability claims and may not be adequate as the Company
     develops additional products. As the Company receives regulatory approvals
     for products under development, there can be no assurance that additional
     liability insurance coverage for any such products will be available in the
     future on acceptable terms, if at all. The Company's business, financial
     condition, cash flows and results of operations could be materially
     adversely affected by the assertion of a product liability claim.

6.   REVERSE STOCK SPLIT

           On June 19, 1998, the Company effected a 0.76-for-1 reverse stock
     split of its Common Stock. Accordingly, all share and per share data have
     been retroactively adjusted to give effect to the reverse stock split.

7.   DISTRIBUTION AND CAPITAL CONTRIBUTION

           On August 31, 1998, Penford Corporation ("Penford") distributed to
     the shareholders of record of Penford common stock on August 10, 1998 all
     of the shares of the Company's Common Stock (the "Distribution"). Pursuant
     to the Distribution, each Penford shareholder of record received three
     shares of the Company's Common Stock for every two shares of Penford common
     stock held by them. In connection with the Distribution (i) the Company's
     Common Stock was registered under the Securities Exchange Act of 1934, as
     amended, pursuant to the registration statement on Form 10 which was
     declared effective on July 31, 1998, (ii) the Company's Common Stock was
     listed with and began trading on the Nasdaq National Market on August 10,
     1998 and (iii) Penford obtained a private letter ruling from the Internal
     Revenue Service to the effect that, among other things, the Distribution
     qualified as tax-free under Sections 355 and 368 of the Internal Revenue
     Code of 1986, as amended, and that the receipt of shares of the Company's
     Common Stock in the Distribution would not result in the recognition of
     income, gain or loss to Penford's shareholders for federal income tax
     purposes.

           In connection with the Distribution, the Company and Penford have
     entered into agreements that govern various interim and ongoing
     relationships. These agreements include (i) a Separation and Distribution
     Agreement setting forth the agreement of the parties with respect to the
     principal corporate transactions which were required to effect the
     separation of Penford's pharmaceutical


                                       8


<PAGE>   9

     business from its specialty carbohydrate-based chemical business and the
     Distribution, including without limitation Penford's agreement to guarantee
     the Company's indebtedness under its credit facility; (ii) a Services
     Agreement pursuant to which Penford will continue on an interim basis to
     provide specified services to the Company until June 30, 1999 or until
     Penwest does not need the services, of which costs will be charged to the
     Company on an actual or allocated basis, plus a specified profit
     percentage; (iii) a Tax Allocation Agreement relating to, among other
     things, the allocation of tax liability between the Company and Penford in
     connection with the Distribution, all pre-distribution liabilities are the
     responsibility of Penford and all post distribution liabilities are those
     of the respective entities; (iv) an Excipient Supply Agreement pursuant to
     which Penford will manufacture and supply exclusively to the Company, and
     the Company will purchase exclusively from Penford, subject to certain
     exceptions, all the Company's requirements for two excipients marketed by
     the Company under quantity and pricing terms that the Company believes
     approximate fair market value; and (v) an Employee Benefits Agreement
     setting forth the parties' agreements as to the continuation of certain
     Penford benefit arrangements for the employees of the Company. Subsequent
     to the Distribution, no terminating liabilities were incurred by Penwest
     related to the Penford defined benefit plan.

           On August 31, 1998, in connection with the separation of its
     pharmaceutical business, Penford contributed to the capital of the Company
     all existing inter-company indebtedness of the Company which approximated
     $50.9 million.

8.   STOCK OPTIONS

           During the six months ended June 30, 1999, options to purchase 61,485
     shares were exercised, options to purchase 70,000 shares were granted and
     options to purchase 393,375 shares were canceled under the Company's stock
     option plans.

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

OVERVIEW

      Penwest Pharmaceuticals Co. ("Penwest" or the "Company"), is engaged in
the research, development and commercialization of novel oral drug delivery
technologies. The Company has extensive experience in developing and
manufacturing tableting ingredients for the pharmaceutical industry. The
Company's product portfolio ranges from excipients that are sold in bulk, to
more technically advanced and patented excipients that are licensed to
customers. On August 31, 1998 (the "Distribution Date"), Penwest became an
independent, publicly owned company when Penford Corporation ("Penford"), the
Company's former parent, distributed (the "Distribution") to the shareholders of
record of Penford common stock on August 10, 1998 all of the shares of the
Company's common stock. Pursuant to the Distribution, each Penford shareholder
of record received three shares of the Company's common stock for every two
shares of Penford common stock held by them.

     The Company's principal development focus to date has been the development
of controlled release drugs based on the TIMERx technology. The Company's
collaborator, Leiras Oy ("Leiras"), received marketing approval in Finland for
Cystrin CR (oxybutynin), a TIMERx formulation for the treatment of urge urinary
incontinence in October 1997 and began marketing the product in Finland in
January 1998. In addition, the Company's collaborator, Sanofi Winthrop
International S.A. ("Sanofi"), received marketing approval in the United Kingdom
in November 1998 for Slofedipine XL, a controlled release version of nifedipine
utilizing Penwest's TIMERx technology for the treatment of angina. In May 1997,
the Company's collaborator, Mylan Laboratories ("Mylan"), filed an ANDA with the
FDA for the 30 mg dosage strength of Nifedipine XL, the first generic version of
Procardia XL. Subsequent to the filing of Mylan's ANDA, Bayer AG ("Bayer") and
Pfizer, Inc. ("Pfizer") sued Mylan alleging patent infringement and Pfizer sued
the FDA claiming that the FDA's acceptance of Mylan's ANDA filing was contrary
to law. Pfizer's claim against the FDA was rejected by a district court in April
1998 and in May 1998 Pfizer appealed the district court's decision. In July
1999, the US Court of Appeals for the District of Columbia ruled that the
lawsuit was premature and that the courts wouldn't consider the lawsuit until
the FDA gives final clearance to the product. In March 1999, Mylan was notified
by the FDA that the ANDA for 30 mg dosage strength of Nifedipine XL had received
tentative approval. However, the Company does not expect that final marketing
approval will be granted until certain legal issues surrounding the patent
dispute between Mylan and Bayer and Pfizer have been resolved. There can be no
assurance that Mylan or the FDA will prevail in these matters or that they will
continue to contest these matters. An unfavorable outcome or protracted
litigation with respect to either of these matters would have a material adverse
effect on the Company's business, financial condition and results of operations.



                                       9


<PAGE>   10

     The Company is a party to collaborative agreements with Mylan, Leiras,
Sanofi and Endo Pharmaceuticals, Inc. ("Endo") with respect to the development
and commercialization of TIMERx controlled release products. Under these
collaborative agreements, the Company's collaborators are generally responsible
for conducting full scale bioequivalence studies and clinical trials, preparing
and submitting all regulatory applications and submissions and manufacturing,
marketing and selling the TIMERx controlled release products. There can be no
assurance that the Company's collaborations will be commercially successful. The
Company cannot control the amount and timing of resources which its
collaborators devote to the Company's programs or potential products. If any of
the Company's collaborators breach or terminate their agreements with the
Company or otherwise fail to conduct their collaborative activities in a timely
manner, the development and commercialization of product candidates would either
be terminated or delayed, or the Company would be required to undertake product
development and commercialization activities on its own and at its own expense,
which would increase the Company's capital requirements or require the Company
to limit the scope of its development and commercialization activities.

     Under most of these collaborative agreements, the Company has received
upfront fees and milestone payments. In connection with the receipt of certain
upfront fees, the Company was required to perform pilot bioequivalence studies
and only recognized such fees upon delivery of the results of such studies to
the collaborators. In addition, under most of these collaborative agreements,
the Company is entitled to receive additional milestone payments, royalties on
the sale of the products covered by such collaborative agreements and payments
for the purchase of formulated TIMERx material. Because the Company has little
control over the timing and the amount of each of these payments which are
dependent on the continued development and commercialization of the products
covered by such agreements, there can be no assurance as to the timing of
receipt of some or all of these payments or as to the amount of payments to be
received by the Company.

     The Company has incurred net losses since 1994. As of June 30, 1999, the
Company's accumulated deficit was approximately $32.3 million. The Company
expects net losses to continue at least into early 2000. A substantial portion
of the Company's revenues to date have been generated from the sales of the
Company's pharmaceutical excipients. The Company's future profitability will
depend on several factors, including the successful commercialization of TIMERx
controlled release products, and, to a lesser extent, an increase in sales of
its pharmaceutical excipients products. There can be no assurance that the
Company will achieve profitability or that it will be able to sustain any
profitability on a quarterly basis, if at all.

     The Company's results of operations may fluctuate from quarter to quarter
depending on the volume and timing of orders of the Company's pharmaceutical
excipients and on variations in payments under the Company's collaborative
agreements, including payments upon the achievement of specified milestones. The
Company's quarterly operating results may also fluctuate depending on other
factors, including variations in gross margins of the Company's products, mix of
products sold, competition, regulatory actions, litigation and currency exchange
rate fluctuations.

     The Company's business is conducted internationally and may be affected by
fluctuations in currency exchange rates, as well as by governmental controls and
other risks associated with international sales (such as export licenses,
collectibility of accounts receivable, trade restrictions and changes in
tariffs). The Company's international subsidiaries transact a substantial
portion of their sales and purchases in European currencies other than their
functional currency, which can result in the Company having gains or losses from
currency exchange rate fluctuations.

     The Company does not use derivatives to hedge the impact of fluctuations in
foreign currencies.

RESULTS OF OPERATIONS

     Three Months Ended June 30, 1999 and 1998

     Total revenues increased 10.4% for the three months ended June 30, 1999 to
$8.3 million from $7.6 million for the three months ended June 30, 1998. Product
sales increased to $8.3 million for the three months ended June 30, 1999
compared to $7.5 million for the three months ended June 30, 1998, representing
an increase of 10.5%. The increase in product sales was primarily due to
increased sales volumes of Emcocel(R). This increase in sales of Emcocel was due
to two new large pharmaceutical customers which came on line throughout the
first quarter of 1999 as well as increased sales to existing customers.




                                       10



<PAGE>   11

     Gross profit increased to $2.5 million, or 29.9% of total revenues for the
three months ended June 30, 1999 from $2.2 million, or 29.2% of total revenues
for the three months ended June 30, 1998. The increase in gross profit
percentage was primarily due to increasing margins on Emcocel products due to
volume manufacturing efficiencies.

     Selling, general and administrative expenses increased by 10.7% for the
three months ended June 30, 1999 to $3.0 million from $2.7 million for the three
months ended June 30, 1998. The increase in 1999 was primarily due to
compensation expenses related to the employment of additional personnel and
additional costs including professional fees associated with being a
publicly-held Company.

     Research and development expenses increased by 20.9% for the three months
ended June 30, 1999 to $1.8 million from $1.5 million for the three months ended
June 30, 1998. This increase was primarily due to increased spending under the
Company's collaborative agreement with Endo.

     The effective tax rate for the three month period ended June 30, 1999 was a
benefit of 2%. The effective rate is lower than the federal statutory rate of a
34% benefit due primarily to a valuation allowance on deferred tax assets
relating to the Company's net operating loss as well as state and foreign income
taxes. The effective tax rate for the three month period ended June 30, 1998 was
3% (expense) which is higher than the federal statutory rate of a 34% benefit
due primarily to the effect of tax benefits utilized by Penford Corporation (the
Company's former parent company) for which Penwest was not reimbursed, temporary
differences resulting from accelerated depreciation reversing when losses are
not expected to be available and foreign income taxes.

           Six months ended June 30, 1999 and 1998

Total revenues increased 18.4% for the six months ended June 30, 1999 to $18.2
million from $15.3 million for the six months ended June 30, 1998. Product sales
increased to $18.0 million for the six months ended June 30, 1999 compared to
$15.2 million for the six months ended June 30, 1998, representing an increase
of 18.1%. The increase in product sales was primarily due to increased sales
volumes of Emcocel. This increase in sales of Emcocel was primarily due to two
new large pharmaceutical customers which came on line throughout the first
quarter.

     Gross profit increased to $5.4 million or 29.5% of total revenues for the
six months ended June 30, 1999 from $4.1 million, or 26.6% of total revenues for
the six months ended June 30, 1998. The increase in gross profit percentage was
partly due to increasing margins on Emcocel products due to volume manufacturing
efficiencies, as well as increased sales of formulated TIMERx, which have
overall higher margins.

     Selling, general and administrative expenses increased by 10.4% for the six
months ended June 30, 1999 to $5.6 million from $5.0 million for the six months
ended June 30, 1998. The increase in 1999 was primarily due to compensation
expenses related to the employment of additional personnel and additional costs
including professional fees associated with being a publicly-held Company.

     Research and development expenses increased by 31.4% for the six months
ended June 30, 1999 to $3.5 million from $2.7 million for the six months ended
June 30, 1998. This increase was primarily due to increased spending under the
Company's collaborative agreement with Endo.

     The effective tax rate for the six month period ended June 30, 1999 was a
benefit of 1%. The effective rate is lower than the federal statutory rate of a
34% benefit due primarily to a valuation allowance on deferred tax assets
relating to the Company's net operating loss as well as state and foreign income
taxes. The effective tax rate for the six month period ended June 30, 1998 was
11% (expense) which is higher than the federal statutory rate of a 34% benefit
due primarily to the effect of tax benefits utilized by Penford Corporation (the
Company's former parent company) for which Penwest was not reimbursed, temporary
differences resulting from accelerated depreciation reversing when losses are
not expected to be available and foreign income taxes.

LIQUIDITY AND CAPITAL RESOURCES

     Prior to the Distribution Date, the Company received intercompany advances
from Penford to fund the Company's operations, capital expenditures and the
original acquisition of the Company's predecessor, which aggregated to $50.9
million. On the Distribution Date, Penford contributed the outstanding
intercompany indebtedness and certain other assets and liabilities to the
capital of the Company. Since the Distribution Date, the Company funded its
operations and capital expenditures from cash from operations



                                       11


<PAGE>   12

and advances under a credit facility. The Company has an available credit
facility which is a revolving loan facility of $15.0 million of unsecured
financing (the "Credit Facility"). On August 31, 2000, all outstanding amounts
under the Credit Facility will become automatically due and payable. Penford has
agreed that, through the period ending August 31, 2000, it will guarantee the
Company indebtedness under the Credit Facility. LIBOR Advances (available in
multiples of $1,000,000 for 1, 2 or 3 month LIBOR periods) under the Credit
Facility bear interest at a rate equal to LIBOR, plus 1.25%. Base Rate Advances
(as defined under the Credit Facility) (available in minimum amounts of
$100,000) bear interest at the Bank's Alternate Base Rate (as defined under the
Credit Facility). The Credit Facility also requires commitment fees to be paid
at .325% on unused portions of the commitment amount.

     The Credit Facility contains a number of non-financial covenants that are
applicable to Penwest including, without limitation, restrictions on the
incurrence of additional debt and on the payment of dividends. Any breach of
these covenants by the Company would constitute a default by the Company under
the Credit Facility. In addition, the Credit Facility provides that a breach by
Penford of its guarantee of the Company's indebtedness under the Credit Facility
or the occurrence of a default under any credit agreement with Penford under
which the lender is either the sole or a participating lender, including without
limitation, an event of default arising from the failure of Penford to satisfy
certain financial conditions requiring, among other things, the maintenance of a
minimum net worth and of certain financial ratios, would constitute a default by
the Company under the Credit Facility. Accordingly, the Company is substantially
dependent on Penford in order to access and maintain the Credit Facility. Any
default under the Credit Facility would have a material adverse effect on the
Company's business, financial condition and result of operations. Although
Penford has guaranteed the Company's indebtedness under the Credit Facility, in
no other respects is Penford providing financial support to the Company.

     As of June 30, 1999, the Company had cash and cash equivalents of $467,000
and $3.4 million of outstanding borrowings under the Credit Facility. The
Company has no committed sources of capital other than the Credit Facility and
no indebtedness to any third or related parties other than under the Credit
Facility. As of June 30, 1999, the Company did not have any material commitments
for capital expenditures. The Company has entered into a strategic alliance
agreement with Endo and the Company expects to expend approximately $7 million,
primarily in 1999, 2000 and early 2001 on the development of a drug. The Company
expects to rely on funds available under the Credit Facility and cash from
operations to fund expenditures. However, the Company may be required to raise
additional funds to continue its development activities under the Endo
agreement. However, either the Company or Endo may terminate the agreement upon
30 days' prior written notice, at which time the Company's funding obligations
would cease.

     The Company had negative cash flow from operations in each of the periods
presented primarily due to net losses for the periods as well as significantly
higher trade receivables over December 31, 1998. Funds expended for the
acquisition of fixed assets were primarily related to efforts at the Company's
manufacturing facility in Iowa to increase capacity. Funds expended for
intangible assets include costs to secure and defend patents on technology
developed by the Company and secure trademarks.

     The Company anticipates that its existing capital resources, together with
the funds available under the Credit Facility and internally generated funds,
will enable it to maintain currently planned operations through at least early
2000. However, this expectation is based on the Company's current operating
plan, which could change as a result of many factors and the Company could
require additional funding sooner than anticipated. The Company's requirements
for additional capital could be substantial and will depend on many factors,
including (i) the timing and amount of payments received under existing and
possible future collaborative agreements; (ii) the structure of any future
collaborative or development agreements; (iii) the progress of the Company's
collaborative and independent development projects; (iv) revenues from the
Company's traditional excipients; (v) the costs to the Company of bioequivalence
studies for the Company's products; (vi) the prosecution, defense and
enforcement of patent claims and other intellectual property rights; and (vii)
the development of manufacturing, marketing and sales capabilities. There can be
no assurance that the Company will be able to access the Credit Facility at such
times as it desires or needs capital.

     To the extent capital resources are insufficient to meet future
requirements, the Company will have to raise additional funds to continue the
development of its technologies. There can be no assurance that such funds will
be available on favorable terms, if at all. The Credit Facility restricts the
incurrence of additional indebtedness by the Company and provides that the
maximum amount available to Penwest under the Credit Facility, $15.0 million,
will be reduced by the amount of any net proceeds from any financing conducted
by the Company and that the Company will repay any outstanding amounts under the
Credit Facility in excess of the new maximum amount. To the extent that
additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to the
Company's shareholders. If adequate funds are not available, the Company may be
unable to comply with its obligations under its collaborative agreements, which
could result in the termination of such collaborative agreements. In addition,
the Company may be required to curtail operations significantly or obtain funds
through entering into


                                       12


<PAGE>   13

collaborative agreements on unfavorable terms. The Company's inability to raise
capital would have a material adverse effect on the Company's business,
financial condition and results of operations.

YEAR 2000

     The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any of the
Company's computer programs or hardware or other equipment that have
date-sensitive software or embedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.

     The Company's plan to resolve the Year 2000 issue involves the following
four phases: assessment, remediation, testing and contingency planning. The
Company has completed 100% of its overall assessment of programs, hardware or
other equipment that could be significantly affected by the Year 2000. The
assessment indicates that most of the Company's significant information
technology systems will not be affected. The Company recently installed a new
integrated computer system for all domestic operations that is Year 2000
compliant. The underlying hardware is also Year 2000 compliant according to
vendor certification. The assessment of the Company's North American
manufacturing facility is complete, and the required remediation was completed
in July 1999. The Company's international information technology system
primarily consists of personal computers, some of which required replacement,
which was completed in May 1999. The assessment also indicated that software and
hardware (embedded chips) used in production and manufacturing systems
(hereafter also referred to as operating equipment) in Nastola, Finland, which
produce the Company's European Emcocel products, are Year 2000 non-compliant.
However, the software that is expected to correct this problem will be installed
by December 1999. A failure in this plant could cause disruption to the
operations at the Finnish plant, which could have a material adverse effect on
the Company's business, financial position, results of operations or cash flows.

     The Company has also begun the remediation and testing phases with respect
to the Year 2000 issues it has identified relating to its information technology
systems. The Company has completed approximately 90% of the required remediation
and expects to complete replacement of all non-compliant equipment no later than
September 1999. The Company also must complete testing of its software and
hardware systems to ensure compliance. The Company estimates that it has tested
approximately 60% of such systems and expects completion of the testing phase
for all significant systems by September 1999.

     The Company does not have any system interfaces with third party vendors,
manufacturers or customers. The Company is in the process of identifying and
obtaining documentation from its significant suppliers and subcontractors who do
not share information systems with the Company to determine the extent to which
such suppliers and subcontractors will be affected by any significant Year 2000
issues. The Company estimates that it is 90% complete with this process. The
Company is also in the process of communicating with its significant customers.
To date, the Company is not aware of any supplier, manufacturer, subcontractor
or significant customers with a Year 2000 issue that could have a material
adverse effect on the Company's business, financial position, results of
operations or cash flows. The Company has sent correspondence to all of its
major suppliers, subcontractors and manufacturers and has received approximately
90% of the responses back.

     There can be no guarantee, however, that third parties of business
importance to the Company will successfully and timely evaluate and address
their own Year 2000 issues. The failure of any of these third parties to achieve
Year 2000 compliance in a timely fashion could have a material adverse effect on
the Company's business, financial position, results of operations or cash flows.

     The costs of the Company's worldwide Year 2000 compliance efforts are being
funded with cash flows from operations as well as the Company's Credit Facility.
Based upon the near-complete assessment efforts to date, the Company does not
anticipate that the costs of becoming Year 2000 compliant will have a material
adverse effect upon the Company's business, financial position, results of
operations or cash flows. The Company does not expect that the costs of
replacing or modifying the computer equipment and software will be substantially
different, in the aggregate, from the normal, recurring costs incurred by the
Company for systems development, implementation and maintenance in the ordinary
course of business. In this regard, in the ordinary course of replacing computer
equipment and software, the Company attempts to obtain replacements that are
Year 2000 compliant. For example, the Company recently installed a computer
system, which was purchased and installed irrespective of Year 2000 compliance
and cost approximately $4.0 million. The Company expects to incur total
worldwide costs of less than $100,000 to become Year 2000 compliant on its
hardware, software and operating equipment.



                                       13



<PAGE>   14

     The Company does not presently believe that the Year 2000 issue will pose
significant operational problems. However, if all Year 2000 issues are not
properly identified, or assessment, remediation and testing are not affected on
a timely basis with respect to Year 2000 problems that are identified, there can
be no assurance that the Year 2000 issue will not have a material adverse effect
on the Company's business, financial position, results of operations or cash
flows or adversely affect the Company's relationships with customers, suppliers
or others.

     The Company has not yet developed a contingency plan for dealing with
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from failure by the Company or certain third parties
to achieve Year 2000 compliance on a timely basis. The Company currently plans
to complete its analysis of the problems and costs associated with the failure
to achieve Year 2000 compliance and to establish a contingency plan in the event
of such failure by October 1999.

     The foregoing assessment of the impact of the Year 2000 issue on the
Company is based on management's best estimates as of the date of this Quarterly
Report on Form 10-Q, which are based on numerous assumptions as to future
events. There can be no assurance that these estimates will prove accurate and
actual results could differ materially from those estimated if these assumptions
prove inaccurate.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK AND RISK MANAGEMENT POLICIES

    The operations of the Company are exposed to financial market risks,
including changes in interest rates and foreign currency exchange rates. The
Company's interest rate risk consists of cash flow risk associated with
borrowing under its variable rate Credit Facility. The Company's international
subsidiaries transact a substantial portion of their sales and purchases in
European currencies other than their functional currency, which can result in
the Company having gains or losses from currency exchange rate fluctuations. The
company does not use derivatives to hedge the impact of fluctuations in foreign
currencies or interest rates. The Company does not believe that the potential
exposure is significant in light of the size of the Company and its business.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

     This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects", "intends", "may", and other
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by forward-looking statements
contained in this report and presented elsewhere by management from time to
time. These factors include the matters discussed in the Overview to Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations and the matters set forth under "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.




                                       14
<PAGE>   15



                          PART II. -- OTHER INFORMATION

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At the Company's Annual Meeting of Shareholders held on June 2, 1999, the
     following proposals were adopted by the vote specified below:

         a.   Election of Class II directors for a term of three years:

                                   FOR         FOR %      WITHHOLD    WITHHOLD %
                                   ---------   -----      --------    ----------

              Jere E. Goyan        9,887,687   89.05%     16,570      .15%
              Anne M. VanLent      9,887,540   89.05%     16,717      .15%

              The following directors did not stand for reelection as their
              terms in office continued after the Annual Meeting: Tod R.
              Hamachek, Robert Hennessey, John N. Staniforth, Paul E. Freiman,
              Rolf H. Henel and N. Stewart Rogers.

         b.   Ratification of selection of Ernst & Young LLP as independent
              auditors of the Company for the current year:

                                   FOR         AGAINST    ABSTAIN
                                   ---------   -------    -------

                                   9,879,258   12,774     12,225

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

         a.   Exhibits.

              See exhibit index below for a list of the exhibits filed as part
              of this Quarterly Report on Form 10-Q, which exhibit index is
              incorporated herein by reference.

         b.   Reports on Form 8-K.

              None.






                                       15
<PAGE>   16



                                   SIGNATURES


Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                    PENWEST PHARMACEUTICALS CO.


Date: August 13, 1999                  By: /s/ Tod R. Hamachek
                                       Tod R. Hamachek
                                       Chairman of the Board and Chief Executive
                                       Officer




                                  EXHIBIT INDEX

    EXHIBIT NUMBER                             DESCRIPTION
    --------------                             -----------

          27              Financial Data Schedule

          99              Pages 34 through 44 of the Company's Annual Report on
                          Form 10-K for the year ended December 31, 1998 as
                          filed with the Securities and Exchange Commission on
                          March 31, 1999 (which is not deemed filed except to
                          the extent that portions thereof are expressly
                          incorporated by reference herein).





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