<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 March 31, 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 May 12, 1999.

                 Class                                     Outstanding
     -----------------------------                         -----------
     Common stock, par value $.001                          11,104,816




<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...... 12

Part II.    Other Information

    Item 6. Exhibits and Reports on Form 8-K................................ 14

Signature................................................................... 15

Exhibit Index............................................................... 15










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<PAGE>   3


                         PART I -- FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                            DECEMBER 31,      MARCH 31,
                                                                1998            1999
                                                            ------------      ---------
                                                                             (UNAUDITED)

<S>                                                           <C>             <C>     
ASSETS
Current assets:
  Cash and cash equivalents                                   $  1,476        $  1,391
  Trade accounts receivable, net                                 4,381           5,977
  Inventories:
    Raw materials and other                                      1,365           1,148
    Finished goods                                               7,439           5,849
                                                              --------        --------
                                                                 8,804           6,997
   Prepaid expenses and other current assets                       572             521
   Deferred income taxes                                           356             356
                                                              --------        --------
     Total current assets                                       15,589          15,242

Fixed assets, net                                               20,822          20,136
Other assets                                                     4,671           4,715
                                                              --------        --------
     Total assets                                             $ 41,082        $ 40,093
                                                              ========        ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses                      $  5,405        $  5,283
   Taxes payable                                                   336             352
   Loans payable                                                 2,200           2,800
                                                              --------        --------
     Total current liabilities                                   7,941           8,435
Deferred income taxes                                              932             850
Other long-term liabilities                                      2,177           2,202
                                                              --------        --------
     Total liabilities                                          11,050          11,487

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 11,043,331 shares and             11              11
   11,103,264 shares
  Additional paid-in capital                                    59,025          59,423
  Accumulated deficit                                          (28,478)        (30,019)
  Accumulated other comprehensive loss                            (526)           (809)
                                                              --------        --------
     Total shareholders' equity                                 30,032          28,606
                                                              --------        --------
     Total liabilities and shareholders' equity               $ 41,082        $ 40,093
                                                              ========        ========
</TABLE>





     See accompanying notes to condensed consolidated financial statements.



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<PAGE>   4

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

                                                               THREE MONTHS
                                                              ENDED MARCH 31
                                                         ----------------------
                                                           1998           1999
                                                         -------        -------
                                                               (UNAUDITED)

Revenues
  Product sales                                          $ 7,761        $ 9,737
  Royalties and licensing fees                                25             79
                                                         -------        -------
    Total revenues                                         7,786          9,816
Cost of product sales                                      5,916          6,944
                                                         -------        -------
    Gross profit                                           1,870          2,872
Operating expenses
  Selling, general and administrative                      2,357          2,596
  Research and product development                         1,205          1,737
                                                         -------        -------
    Total operating expenses                               3,562          4,333
                                                         -------        -------
Loss from operations                                      (1,692)        (1,461)
Interest expense                                             ---             64
                                                         -------        -------
Loss before income taxes                                  (1,692)        (1,525)
Income tax expense                                           338             16
                                                         -------        -------
Net loss                                                 $(2,030)       $(1,541)
                                                         =======        =======

Basic and diluted net loss per share                     $ (0.18)       $  (.14)
                                                         =======        =======

Weighted average shares of common stock outstanding       11,037         11,054
                                                         =======        =======







     See accompanying notes to condensed consolidated financial statements.




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<PAGE>   5



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

<TABLE>
<CAPTION>
                                                                      THREE MONTHS
                                                                     ENDED MARCH 31
                                                                  -------------------
                                                                    1998        1999
                                                                  -------     -------
                                                                      (UNAUDITED)

<S>                                                               <C>         <C>     
Net cash used in operating activities                             $(1,259)    $  (806)
Investing activities:
  Acquisitions of fixed assets, net                                  (668)       (109)
  Other                                                              (207)        (89)
                                                                  -------     -------
Net cash used in investing activities                                (875)       (198)
Financing activities:
  Borrowings from credit facility                                     ---       2,200
  Repayments of credit facility                                       ---      (1,600)
  Issuance of common stock                                            ---         398
  Increase in payable to Penford                                    1,934         ---
                                                                  -------     -------
Net cash provided by financing activities                           1,934         998
Effect of exchange rate changes on cash and cash equivalents          (15)        (79)
                                                                  -------     -------
Net decrease in cash and cash equivalents                            (215)        (85)
Cash and cash equivalents at beginning of period                      938       1,476
                                                                  -------     -------
Cash and cash equivalents at end of period                        $   723     $ 1,391
                                                                  =======     =======
</TABLE>



     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, 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 three month period ended March 31, 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 presentation. These reclassifications had no effect on
     previously reported results of operations.

3.   INCOME TAXES

           The effective tax rate for the three month period ended March 31,
     1999 was an expense of 1%. The effective rate is higher 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.




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<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 (deficit).

     The components of comprehensive loss, for the three-month periods ended
     March 31, 1998 and 1999 are as follows:

                                                     THREE MONTHS ENDED MARCH 31
                                                       1998               1999
                                                     --------           --------
                                                      (IN THOUSANDS OF DOLLARS)

    Net loss                                         $(2,030)           $(1,541)
    Foreign currency translation adjustments             (76)              (283)
                                                     --------           -------

    Comprehensive loss                               $(2,106)           $(1,824)
                                                     =======            =======

           Accumulated other comprehensive income equals the cumulative
     translation adjustment which is the only component of other comprehensive
     income 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 February
     1999, the case was heard in the court of appeals but no decision has been
     rendered. 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 Nifedipine 



                                       7
<PAGE>   8

     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 three months ended March 31, 1999, options to purchase
     59,933 shares were exercised, options to purchase 5,000 shares were granted
     and options to purchase 338,239 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 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.

     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 



                                       9
<PAGE>   10

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 March 31, 1999, the
Company's accumulated deficit was approximately $30.0 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, the
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 March 31, 1999 and 1998

     Total revenues increased 26.1% for the three months ended March 31, 1999 to
$9.8 million from $7.8 million for the three months ended March 31, 1998.
Product sales increased to $9.7 million for the three months ended March 31,
1999 compared to $7.8 million for the three months ended March 31, 1998
representing an increase of 25.5%. The increase in product sales was primarily
due to increased sales volumes of Emcocel(R). This increase in sales of Emcocel
was primarily due to two new large pharmaceutical customers which came on line
throughout the first quarter. The overall base business was also strong due to
customers replenishing low year end inventory levels. The launch of Slofedipine
XL in the United Kingdom in November 1998 also contributed to the increase in
total revenues. The Company anticipates that sales will slow in the upcoming
quarters as year end inventory levels have been replenished and the launch
quantities of TIMERx for Slofedipine XL have been filled. The Company believes
that Emcocel sales from the two new customers should remain strong as they
continue to bring more locations on line.



                                       10
<PAGE>   11

     Gross profit increased to $2.9 million or 29.3% of total revenues for the
three months ended March 31, 1999 from $1.9 million or 24.0% of total revenues
for the three months ended March 31, 1998. The increase in gross profit
percentage was primarily due to an improved product mix within product sales.
This improvement in gross profit percentage on product sales was due to
increased sales of formulated TIMERx, which has higher margins than traditional
excipients, as well as increasing margins on Emcocel products due to volume
manufacturing efficiencies.

     Selling, general and administrative expenses increased by 10.1% for the
three months ended March 31, 1999 to $2.6 million from $2.4 million for the
three months ended March 31, 1998. The increase in 1999 was primarily due to
higher compensation expenses related to the employment of additional personnel
and additional costs including professional fees associated with the Company
being publicly-held.

     Research and development expenses increased by 44.1% for the three months
ended March 31, 1999 to $1.7 million from $1.2 million for the three months
ended March 31, 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 March 31, 1999 was
an expense of 1%. The effective rate is higher 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.

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 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 (available in
minimum amounts of $100,000) bear interest at the Bank's Alternate Base Rate.
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 March 31, 1999, the Company had cash and cash equivalents of $1.4
million, and $2.8 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 March 31, 1999, the Company did not have any material
commitments for capital expenditures.

     The Company had negative cash flow from operations in each of the periods
presented primarily due to net losses for the period as well as increasing trade
receivables. 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.



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<PAGE>   12

     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 the timing and amount of payments received under existing and possible
future collaborative agreements; the structure of any future collaborative or
development agreements; the progress of the Company's collaborative and
independent development projects; revenues from the Company's traditional
excipients; the costs to the Company of bioequivalence studies for the Company's
products; the prosecution, defense and enforcement of patent claims and other
intellectual property rights; and 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 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.

     Under the Company's strategic alliance agreement with Endo, the Company
expects to expend approximately $7 million, primarily in 1999, 2000 and early
2001. The Company expects to rely on funds available under the Credit Facility
and cash from operations to fund expenditures. However, as noted above the
Company may be required to raise additional funds to continue its development
activities, including its 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.

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.

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 approximately 95% of its overall anticipated assessment of
programs, hardware or other equipment that could be significantly affected by
the Year 2000. The assessment completed to date 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 required


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remediation is expected to be completed in July 1999. The Company's
international information technology system primarily consists of personal
computers, some of which will require replacement. 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. Affected systems include the process control software used at the
Company's Finnish plant. The Company believes that this plant can be operated
without the process control software, however remediation plans are being
developed. 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 75% of the required remediation
and expects to complete replacement of all non-compliant equipment no later than
June 1999. The Company also needs to complete testing of its software and
hardware systems to ensure compliance. The Company estimates that it has tested
approximately 50% 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 none
of which 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 is 75% complete with this process. The
Company needs to obtain documentation from 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
significant. The Company has sent correspondence to all 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 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.

     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 effected
timely 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 August 1999.




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     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.

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 this 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.

                          PART II. -- OTHER INFORMATION

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.




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                                   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: May 14, 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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