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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, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                 to
 Commission File No. 000-23467
 Penwest Pharmaceuticals Co.
 (Exact name of registrant as specified in its charter)
 Washington
    
    91-1513032(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 39 Old Ridgebury Road, Suite 11,
Danbury, Connecticut
    
    06810-5120(Address of principal executive offices)
    
    (Zip Code)
 (877) 736-9378  (Registrants telephone number, including area code.)
 þ o
  o þ o
 o þ
  Class
    
    OutstandingCommon stock, par value $.001
    
    22,835,925




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##### 



PENWEST PHARMACEUTICALS CO.
TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Condensed Financial Statements (Unaudited)Condensed Balance Sheets
    
    3Condensed Statements of Operations
    
    4Condensed Statements of Cash Flows
    
    5Notes to Condensed Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    25Item 4.
    
    Controls and Procedures
    
    25PART II  OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    26Item 6.
    
    Exhibits
    
    35Signature
    
    
    
    36Exhibit Index
    
    
    
    37Ex-31 Section 302 CEO and CFO CertificationEx-32 Section 906 CEO and CFO Certification
  ® ®
 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 31,2006
    
    
    2005(Unaudited)
    
    
    (Note 2)(In thousands,except share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    26,003
    
    
    $
    15,917Marketable securities
    
    
    31,700
    
    
    
    39,377Trade accounts receivable
    
    
    929
    
    
    
    942Inventories:Raw materials and other
    
    
    178
    
    
    
    44Finished goods
    
    
    85
    
    
    
    96Total inventories
    
    
    263
    
    
    
    140Prepaid expenses and other current assets
    
    
    873
    
    
    
    1,112Total current assets
    
    
    59,768
    
    
    
    57,488Fixed assets, net
    
    
    2,793
    
    
    
    2,990Patents, net
    
    
    3,359
    
    
    
    3,383Cash surrender value of life insurance policies
    
    
    3,195
    
    
    
    3,160Total assets
    
    $
    69,115
    
    
    $
    67,021LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,435
    
    
    $
    1,064Accrued expenses
    
    
    1,638
    
    
    
    1,722Accrued development costs
    
    
    372
    
    
    
    499Deferred compensation  current portion
    
    
    294
    
    
    
    291Total current liabilities
    
    
    3,739
    
    
    
    3,576Deferred revenue
    
    
    53
    
    
    
    57Deferred compensation
    
    
    2,984
    
    
    
    2,977Total liabilities
    
    
    6,776
    
    
    
    6,610Shareholders equity:Preferred stock, par value $.001, authorized 1,000,000 shares, none outstanding
Common stock, par value $.001, authorized 60,000,000 shares, issued and
outstanding 22,779,799 shares at March 31, 2006 and 21,889,940 shares at
December 31, 2005
    
    
    23
    
    
    
    22Additional paid in capital
    
    
    209,868
    
    
    
    201,659Accumulated deficit
    
    
    (147,418
    )
    
    
    (141,116
    )Accumulated other comprehensive loss
    
    
    (134
    )
    
    
    (154
    )Total shareholders equity
    
    
    62,339
    
    
    
    60,411Total liabilities and shareholders equity
    
    $
    69,115
    
    
    $
    67,021
  3




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PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF OPERATIONS
 Three Months EndedMarch 31,2006
    
    
    2005(Unaudited)(In thousands, exceptper share data)Revenues:Royalties and licensing fees
    
    $
    931
    
    
    $
    982Product sales
    
    
    34
    
    
    
    Total revenues
    
    
    965
    
    
    
    982Cost of revenues
    
    
    22
    
    
    
    8Gross profit
    
    
    943
    
    
    
    974Operating expenses:Selling, general and administrative
    
    
    3,463
    
    
    
    5,292Research and product development
    
    
    4,344
    
    
    
    5,065Total operating expenses
    
    
    7,807
    
    
    
    10,357Loss from operations
    
    
    (6,864
    )
    
    
    (9,383
    )Investment income
    
    
    561
    
    
    
    436Loss before income tax expense
    
    
    (6,303
    )
    
    
    (8,947
    )Income tax expense
    
    
    
    
    
    
    Net loss
    
    $
    (6,303
    )
    
    $
    (8,947
    )Net loss per common share
    
    $
    (0.28
    )
    
    $
    (0.41
    )Weighted average shares of common stock outstanding
    
    
    22,246
    
    
    
    21,656
  4




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PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2006
    
    
    2005(Unaudited)(In thousands)Operating activities:Net loss
    
    $
    (6,303
    )
    
    $
    (8,947
    )Adjustments to reconcile net loss to net cash used in operating activities
    
    
    2,174
    
    
    
    1,425Net cash used in operating activities
    
    
    (4,129
    )
    
    
    (7,522
    )Investing activities:Acquisitions of fixed assets, net
    
    
    (37
    )
    
    
    (66
    )Patent costs
    
    
    (132
    )
    
    
    (82
    )Proceeds from maturities of marketable securities
    
    
    8,075
    
    
    
    6,153Proceeds from sales of marketable securities
    
    
    1,600
    
    
    
    23,850Purchases of marketable securities
    
    
    (2,014
    )
    
    
    (18,426
    )Net cash provided by investing activities
    
    
    7,492
    
    
    
    11,429Financing activities:Issuance of common stock, net
    
    
    6,723
    
    
    
    99Net cash provided by financing activities
    
    
    6,723
    
    
    
    99Net increase in cash and cash equivalents
    
    
    10,086
    
    
    
    4,006Cash and cash equivalents at beginning of period
    
    
    15,917
    
    
    
    14,249Cash and cash equivalents at end of period
    
    $
    26,003
    
    
    $
    18,255
  5




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PENWEST PHARMACEUTICALS CO.
 
 NOTES TO CONDENSED
FINANCIAL STATEMENTS

(Unaudited)
 1. Business
   2. Basis of Presentation
   3. Summary of Significant Accounting Policies
 Revenue Recognition
 Royalties and licensing fees
 6




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Product sales 
 Research and Development Expenses
  Income Taxes
  Impairment of Long-Lived Assets
  Share-Based Compensation
  7




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  
    
    the stock option exercise price;
    
    the expected term of the option;
    
    the grant date price of our common stock, which is issuable upon exercise of the option;
    
    the expected volatility of our common stock;
    
    expected dividends on our common stock (we do not anticipate paying
dividends for the foreseeable future); and
    
    the risk free interest rate for the expected option term.
    4. Recent Accounting Pronouncements
 ,
 8




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




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Three Months EndedMarch 31, 2005(unaudited)(in thousands, except pershare data)Net loss reported
    
    $
    (8,947
    )Stock-based compensation expense included in
reported net loss
    
    
    2,537Stock-based compensation under fair value
method
    
    
    (1,604
    )Net loss  pro forma after stockbased
compensation under fair value method
    
    $
    (8,014
    )Net loss per share, basic and diluted  as
reported
    
    $
    (0.41
    )Net loss per share, basic and diluted  pro
forma after stock-based compensation under
fair value method
    
    $
    (0.37
    )
     10




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   Weighted-AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual Terms
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    in Years
    
    
    ValueBALANCE, DECEMBER 31, 2005
    
    
    3,015,563
    
    
    $
    10.88Options Exercisable
    
    
    2,120,947
    
    
    $
    9.99Granted
    
    
    345,250
    
    
    $
    22.44Exercised
    
    
    (864,513
    )
    
    $
    7.78Forfeited
    
    
    (6,801
    )
    
    $
    12.53Expired
    
    
    (625
    )
    
    $
    16.39BALANCE, MARCH 31, 2006
    
    
    2,488,874
    
    
    $
    13.55
    
    
    
    6.3
    
    
    $
    20,879,431Options Exercisable
    
    
    1,457,052
    
    
    $
    11.75
    
    
    
    4.5
    
    
    $
    14,698,936
   Three Months EndedMarch 31,2006
    
    2005Expected dividend yield
    
    None
    
    NoneRisk free interest rate
    
    
    4.6
    %
    
    
    4.0
    %Expected volatility
    
    
    55
    %
    
    
    50
    %Expected life of options
    
    5.8 years
    
    7.5 years
  Weighted-AverageGrant-Date
    
    
    Aggregate IntrinsicShares
    
    
    Fair Value
    
    
    ValueRestricted stock outstanding at December
31, 2005
    
    
    68,000
    
    
    $
    11.37
    
    
    $
    1,308,660Granted
    
    
    24,000
    
    
    $
    19.41Vested
    
    
    (35,500
    )
    
    $
    10.91Restricted stock outstanding at March 31, 2006
    
    
    56,500
    
    
    $
    15.05
    
    
    $
    1,233,678
    11




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  6. Income Taxes
  7. Compensation Charge
  8. Supplemental Executive Retirement Plan and Deferred Compensation Plan
   Three Months EndedMarch 31,2006
    
    
    2005(unaudited)(in thousands)Interest cost
    
    $
    30
    
    
    $
    30Amortization of prior service cost
    
    
    
    
    
    
    1Net periodic benefit cost
    
    $
    30
    
    
    $
    31
  12




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   9. Comprehensive Loss
  Three Months EndedMarch 31,2006
    
    
    2005(unaudited)(in thousands)Net loss
    
    $
    (6,303
    )
    
    $
    (8,947
    )Changes in unrealized net gains and losses on
marketable securities
    
    
    20
    
    
    
    (79
    )Comprehensive loss
    
    $
    (6,283
    )
    
    $
    (9,026
    )
  10. Licensing Agreements
  Endo Pharmaceuticals Inc.
    13




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   Mylan Pharmaceuticals Inc.
  Prism Pharmaceuticals, Inc.
   11. Contingencies
  14




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




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  Oxymorphone ER.
  Additional Product Candidates.
 
    
    Nalbuphine ER(PW4142). We are developing nalbuphine ER, a controlled release
formulation of nalbuphine hydrochloride, for the treatment of pain. Nalbuphine ER, which we
are developing using our Geminex dual drug delivery technology, is designed to be taken as
a tablet twice daily. We expect that nalbuphine ER, if approved, would compete in the
moderate pain market with products such as tramadol, codeine and propoxyphene. We have
completed a Phase I pharmacokinetic study of nalbuphine ER that confirmed that our
formulation achieved the targeted blood levels and a Phase IIa trial in which nalbuphine ER
positively reduced mean pain intensity in a dose-dependent manner over the 12-hour study
period when compared to placebo. We recently completed market research, which we believe
confirms this drug should be positioned in the moderate chronic pain market. We are now
determining the appropriate pain population in which to conduct further clinical studies.
We plan to meet with the FDA to discuss the regulatory approval pathway for nalbuphine ER
in the second half of 2006, including a proposed Phase IIb
study, and to commence the Phase IIb study in the appropriate patient
population by early 2007.
 16




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
    
    Torsemide ER(PW2132). We are developing torsemide ER, a loop diuretic, for the
management of chronic edema, a condition involving excess fluid accumulation, resulting
from congestive heart failure, or CHF. Torsemide ER, a controlled release formulation of
torsemide developed using our Geminex dual drug delivery technology, is designed to be
taken as a tablet once daily. We expect that torsemide ER, if approved, would compete with
furosemide and other loop diuretics. We are developing this product using a 505(b)(2)
regulatory strategy referencing torsemide. We have completed Phase I pharmacokinetic
studies of torsemide ER that confirmed that our formulation achieved the targeted plasma
profiles and completed a Phase IIa study that confirmed the proof of concept that torsemide
ER would cause prolonged urinary sodium excretion in CHF patients. We are discussing with
the FDA the possibility that only one pivotal safety and efficacy trial would be necessary
for approval of torsemide ER based on the FDAs previous finding that torsemide is safe and
effective. During 2006, we will determine the design of that pivotal
study, which we believe
will have a comparator and placebo arm. During 2006, we also expect to determine whether to continue
development of torsemide ER on our own, or to seek a collaborator to complete the
development work and market the product.
    
    Venlafaxine ER(PW4112).We are developing venlafaxine ER, using our TIMERx technology,
as a once daily tablet for the treatment of depression. We are developing this product
using a 505(b)(2) regulatory strategy referencing Wyeths Effexor XR. We expect that
venlafaxine ER, if approved, would compete in a segment of the market for antidepressants,
which includes Effexor XR. We have completed Phase I pharmacokinetic studies that confirmed
that our formulation achieved the targeted blood levels. We have confirmed with the FDA the
design of the pivotal trials required for the development of this product. We believe the
FDA will only require three additional Phase I pharmacokinetic trials that could be
conducted in 2006. If the trials are successful, we expect that we will submit the NDA to
the FDA in early 2007. We are currently seeking a collaborator to market this product.
      
    
    the successful commercialization of oxymorphone ER;
 
    
    royalties from Mylans sales of Pfizers 30 mg generic version of Procardia XL;
 
    
    the level of our investment in research and development activities; and
 
    
    the successful development and commercialization of product candidates other than oxymorphone
ER in our portfolio.
 17




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Critical Accounting Policies and Estimates
   Share-Based Compensation
   
    
    the stock option exercise price;
    
    the expected term of the option;
    
    the grant date price of our common stock, which is issuable upon exercise of the option;
 18




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
    
    the expected volatility of our common stock;
    
    expected dividends on our common stock (we do not anticipate paying
dividends for the foreseeable future); and
    
    the risk free interest rate for the expected option term.
    Results of Operations for the Three Month Periods Ended March 31, 2006 and 2005
 Three months
    
    
    Percentage
    
    
    Three monthsended March 31,
    
    
    Increase
    
    
    ended March 31,2006
    
    
    (decrease)
    
    
    2005(in thousands, except percentages)Royalties and Licensing Fees
    
    $
    931
    
    
    
    (5
    )%
    
    $
    982Product Sales
    
    
    34
    
    
    
    100
    %
    
    
    Total Revenues
    
    $
    965
    
    
    
    (2
    )%
    
    $
    982
 Revenues
  19




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Selling, General and Administrative Expense
  Research and Product Development Expense
  Three monthsended
    
    
    Percentage
    
    
    Three monthsMarch 31,
    
    
    Increase
    
    
    ended March 31,2006
    
    
    (Decrease)
    
    
    2005(in thousands, except percentages)PW2101
    
    $
    
    
    
    
    (100
    )%
    
    $
    1,326Nalbuphine ER
    
    
    305
    
    
    
    16
    %
    
    
    262Torsemide ER
    
    
    92
    
    
    
    109
    %
    
    
    44Venlafaxine ER
    
    
    261
    
    
    
    27
    %
    
    
    205Phase I Products and Internal Costs
    
    
    3,189
    
    
    
    15
    %
    
    
    2,776Research and New Technology Development
    
    
    497
    
    
    
    10
    %
    
    
    452Total Research and Product Development Expense
    
    $
    4,344
    
    
    
    (14
    )%
    
    $
    5,065
  
    
    PW2101 These expenses reflect our direct external expenses relating to the
development of PW2101. These expenses consist primarily of payments to third parties in
connection with clinical trials of PW2101, the manufacturing of PW2101, including our
development work related to the qualification of an alternative manufacturing site, and the
preparation of the NDA for PW2101. These expenses approximated 26% of our research and
development expenses for the three month period ended March 31, 2005. We received a
nonapprovable letter on this drug in 2005, and we discontinued development work on PW2101
in the second quarter of 2005. We do not expect to incur additional research and
development expenses with respect to PW2101 in future periods.
    
    Nalbuphine ER These expenses reflect our direct external expenses relating to the
development of nalbuphine ER. These expenses consist primarily of payments to third parties
in connection with clinical trials of nalbuphine ER and approximated 7% and 5% of our
research and development expenses in the three month periods ended March 31, 2006 and 2005,
respectively. The expenses for this compound have increased in the 2006 period from the
2005 period, as we have advanced the drug from Phase I through Phase IIa clinical trials.
During the remainder of 2006, we expect our research and product development expenses
relating to nalbuphine ER to increase as we manufacture clinical supplies, and conduct
animal toxicology work and additional Phase I studies.
 20




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
    
    Torsemide ER These expenses reflect our direct external expenses relating to the
development of torsemide ER. These expenses consist primarily of payments to third parties
in connection with clinical trials of torsemide ER and approximated 2% and 1% of our
research and development expenses in the three month periods ended March 31, 2006 and 2005,
respectively. The expenses for this compound increased in the 2006 period from the 2005
period, as the drug has advanced from Phase I into Phase IIa clinical trials. During 2006,
we expect to determine whether to continue development of this product on our own or
whether to seek a collaborator to complete the development work. If we continue development
of torsemide ER on our own, we expect our research and product development expenses
relating to toresemide ER to increase as we manufacture registration batches and commence
the pivotal trial.
    
    Venlafaxine ER These expenses reflect our direct external expenses relating to the
development of venlafaxine ER. These expenses consist primarily of payments to third
parties in connection with the manufacture of venlafaxine ER, including the costs of the
active drug and approximated 6% and 4% of our research and development expenses in the
three month periods ended March 31, 2006 and 2005, respectively. The expenses for this
compound have increased in the 2006 period from the 2005 period, as the drug has advanced
from Phase I clinical trials into full clinical development. During the remainder of 2006,
we expect our research and product development expenses relating to venlafaxine ER to
increase as we complete the manufacturing of registration batches and conduct the pivotal
studies, which we believe will consist of three additional Phase I studies. We are
currently seeking a marketing collaborator for this product.
    
    Phase I Products and Internal Costs These expenses primarily reflect our expenses
such as salaries and benefits of our product development personnel, including our
formulation, clinical and regulatory groups, and other costs primarily related to our
laboratory facilities that are not allocated to specific programs. These expenses also
reflect both our direct external expenses and our allocated internal expenses relating to
the development of Phase I product candidates. Our direct external expenses primarily
reflect payments to third parties for the drug active and proof-of-principle biostudies
conducted on our Phase I products. These costs increased in the three month period ended
March 31, 2006 over the comparable period in 2005, primarily as a result of the recording
of $433,000 in compensation expense related to employee stock options, resulting from our
adoption of SFAS 123R effective January 1, 2006. We continually evaluate the Phase I
product candidates we are developing, and may terminate or accelerate development of
product candidates based on study results, product development risk, commercial
opportunity, perceived time to market and other factors.
    
    Research and New Technology Development These expenses reflect both our direct
external expenses and our allocated internal expenses relating to the development of new
drug delivery technologies. These direct external expenses consist primarily of payments to
third parties in connection with outside laboratory and consulting fees. Our internal
expenses primarily include salaries and benefits of our research and new technology
development group, and other costs such as depreciation on purchased equipment, and the
amortization or any write-downs of patent costs, other than product patent write-offs
charged directly to a product development project. These expenses increased in the three
month period ended March 31, 2006 over the comparable period in 2005, primarily due to
legal expenses and amortization associated with our intellectual property.
  Tax Rates
  21




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Share-Based Compensation
  Liquidity and Capital Resources
 Sources of Liquidity
   Cash Flows
  22




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Funding Requirements
   
    
    whether oxymorphone ER is approved on a timely basis, or at all;
    
    the costs and timing of adding product candidates or technologies;
    
    whether we resume our participation in the funding of the development and marketing of
oxymorphone ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular with respect to oxymorphone ER;
    
    the structure and terms of any future collaborative or development agreements;
    
    the progress of our collaborative and independent development projects, funding
obligations with respect to the projects, and the related costs to us of clinical studies
for our products;
    
    royalties received from Mylan;
    
    the prosecution, defense and enforcement of potential patent claims and other
intellectual property rights; and
    
    the level of capital expenditures.
    23




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Contractual Obligations
   Less than
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating Leases
    
    $
    1,087
    
    
    $
    680
    
    
    $
    407
    
    
    $
    
    
    
    $
    Purchase Obligations
    
    
    1,285
    
    
    
    1,285
    
    
    
    
    
    
    
    
    
    
    
    Deferred Compensation, including current portion
    
    
    3,278
    
    
    
    294
    
    
    
    588
    
    
    
    588
    
    
    
    1,808Total
    
    $
    5,650
    
    
    $
    2,259
    
    
    $
    995
    
    
    $
    588
    
    
    $
    1,808
 
    
    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 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. If any of the following risks actually
occurs, our business, financial condition or results of operations would likely suffer, possibly
materially. In that case, the trading price of our common stock could fall.
 We have not been profitable and expect to continue to incur substantial losses
    
    
    the successful commercialization of oxymorphone ER;
    
    royalties from Mylans sale of Pfizers 30 mg generic version of Procardia XL;
    
    the level of our investment in research and development activities; and
    
    the successful development and commercialization of product candidates other than oxymorphone ER.
 We may require additional funding, which may be difficult to obtain
   
    
    whether oxymorphone ER is approved on a timely basis, or at all;
    
    the costs and timing of adding additional products or technologies;
    
    whether we resume our participation in the funding of the development and marketing of
oxymorphone ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular with respect to oxymorphone ER;
    
    the structure and terms of any future collaborative or development agreements;
    
    the progress of our collaborative and internal development projects, funding
obligations with respect to the projects, and the related costs to us of clinical studies
for our product candidates;
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
    
    royalties received from Mylan;
    
    the prosecution, defense and enforcement of potential patent claims and other
intellectual property rights; and
    
    the level of our investments in capital expenditures.
   We depend heavily on the success of our lead product candidate, oxymorphone ER, and if the NDA
for oxymorphone ER is not approved on a timely basis or at all, it would have a material adverse
effect on our business, financial condition and results of operations
  If oxymorphone ER or one of our other product candidates is approved by the FDA, it may not be
widely accepted by physicians, patients, third-party payors, or the medical community in general
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
    
    the safety and efficacy of oxymorphone ER as compared to competitive products;
    
    the advantages and disadvantages of oxymorphone ER compared to alternative therapies;
    
    Endos ability to educate the medical community about the safety and effectiveness of oxymorphone ER;
    
    the strength of marketing distribution support;
    
    Endos ability to manufacture and maintain suitable inventory for sale on an ongoing basis;
    
    the cost-effectiveness of the product and the ability to receive third party reimbursement;
    
    the reimbursement policies of government and third party payors; and
    
    the market price of oxymorphone ER.
  We are dependent on our collaborator Endo to conduct clinical trials of, obtain regulatory
approvals for, and manufacture, market, and sell oxymorphone ER, and are, and in the future expect
to be, dependent on other collaborators with respect to manufacturing, marketing, and selling
additional 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.
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
    
    Our collaborators may reduce marketing or sales efforts, or discontinue marketing or
sales of our products. This would reduce our revenues received on the products.
    
    Our collaborators may terminate their collaborations with us. This could make it
difficult for us to attract new collaborators or adversely affect perception of us in the
business and financial communities.
    
    Our collaborators may pursue higher priority programs or change the focus of their
development programs, which could affect the collaborators commitment to us.
Pharmaceutical and biotechnology companies historically have re-evaluated their priorities
from time to time, including following mergers and consolidations, which have been common
in recent years in these industries.
 We face significant competition, which may result in others discovering, developing or
commercializing products before or more successfully than we do
  
    
    significantly greater financial, technical and human resources than we have and may be
better equipped to develop, manufacture and commercialize products;
    
    more extensive experience than we have in conducting preclinical studies and clinical
trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical
products;
    
    competing products that have already received regulatory approval or are in late-stage development; and
    
    collaborative arrangements in our target markets with leading companies and research institutions.
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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
      
    
    be delayed in obtaining marketing approval for our products;
    
    not be able to obtain marketing approval for our products; or
    
    obtain approval for indications that are not as broad as intended.
  Our drug delivery technologies rely on the ability to control the release of the active drug
ingredient and our business would be harmed if it was determined that there were circumstances
under which the active ingredient from one of our extended release products would be released
rapidly into the blood stream
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in vitro in vitro
 in vitro
 We are subject to extensive government regulation including the requirement of approval before
our products may be marketed. Even if we obtain marketing approval, our products will be subject to
ongoing regulatory review
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Oxymorphone ER contains a narcotic ingredient. As a result of reports of misuse or abuse of
prescription narcotics, the sale of oxymorphone ER may be subject to new regulations, including the
development and implementation of risk management programs which may prove difficult or expensive
to comply with, and we and Endo may face lawsuits
  Our controlled release products that are generic versions of approved products that are
covered by one or more patents may be subject to litigation, which could delay FDA approval and
commercial launch of our products
  Our success depends on our protecting our patents and patented rights
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We may become involved in patent litigation or other intellectual property proceedings
relating to our products or processes, which could result in liability for damages or stop our
development and commercialization efforts
  
    
    We or our collaborators may initiate litigation or other proceedings against third
parties to enforce our patent rights.
    
    We or our collaborators may initiate litigation or other proceedings against third
parties to seek to invalidate the patents held by such third parties or to obtain a
judgment that our products or processes do not infringe such third parties patents.
    
    If our competitors file patent applications that claim technology also claimed by us,
we or our collaborators may participate in interference or opposition proceedings to
determine the priority of invention.
    
    If third parties initiate litigation claiming that our processes or products infringe
their patent or other intellectual property rights, we and our collaborators will need to
defend against such proceedings.
   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 our products on a timely basis;
    
    we may not be able to initiate or continue clinical trials of products that are under development; and
    
    we may be delayed in submitting applications for regulatory approvals of our products.
   We are dependent upon a limited number of suppliers for the gums used in our TIMERx material
  If we or our collaborators fail to obtain an adequate level of reimbursement by third party
payors for our products, we may not be able to successfully commercialize controlled release
products
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We will be exposed to product liability claims and may not be able to obtain adequate product
liability insurance
   The market price of our common stock may be volatile
  Specific provisions of our Shareholder Rights Plan, Certificate of Incorporation and Bylaws
and of Washington law make a takeover of Penwest or a change in control or management of Penwest
more difficult
  
 Item 6. Exhibits
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SIGNATURE
  PENWEST PHARMACEUTICALS CO.Date: May 8, 2006
    
    /s/ Jennifer L. GoodJennifer L. GoodPresident and Chief Operating Officer(Principal Financial Officer)
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EXHIBIT INDEX
 ExhibitNumber
    
    Description31
    
    Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Exchange Act Rules 13a-14 or
15d-14, 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
 37