##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to
 Commission File Number 000-23467
 PENWEST PHARMACEUTICALS CO.
 (Exact name of registrant as specified in its charter)
 Washington(State or other jurisdiction of 
incorporation or organization)
    
    91-1513032(I.R.S. Employer
Identification No.)39 Old Ridgebury Road 
Suite 11
Danbury, Connecticut(Address of Principal Executive Offices)
    
    06810-5120(Zip Code)
 (877) 736-9378  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o o þ
  Class
Common Stock, par value $.001
    
    Outstanding31,759,545




---



##### 



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
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4.
    
    Controls and Procedures
    
    
    35PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    36Item 1A.
    
    Risk Factors
    
    
    38Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    51Item 6.
    
    Exhibits
    
    
    52Signature
    
    
    53Exhibit Index
    
    
    54EX-10.1 Settlement Agreement dated May 5, 2009EX-31 Section 302 Certification of Principal Executive Officer and Principal Financial OfficerEX-32 Section 906 Certification of Principal Executive Officer and Principal Financial Officer
   Forward-looking Statements
  2




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements (Unaudited)
 
 PENWEST PHARMACEUTICALS CO.
CONDENSED BALANCE SHEETS
 June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)
    
    
    (Note 2)(In thousands,except share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,174
    
    
    $
    16,692Marketable securities
    
    
    500
    
    
    
    Trade accounts receivable
    
    
    5,849
    
    
    
    4,894Inventories  finished goods
    
    
    216
    
    
    
    440Prepaid expenses and other current assets
    
    
    854
    
    
    
    1,365Total current assets
    
    
    19,593
    
    
    
    23,391Fixed assets, net
    
    
    1,835
    
    
    
    2,177Patents, net
    
    
    1,424
    
    
    
    1,819Deferred charges
    
    
    2,034
    
    
    
    2,244Other assets, net
    
    
    2,046
    
    
    
    2,223Total assets
    
    $
    26,932
    
    
    $
    31,854LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    851
    
    
    $
    745Accrued expenses
    
    
    1,953
    
    
    
    1,695Accrued development costs
    
    
    545
    
    
    
    385Loan payable  current portion
    
    
    5,483
    
    
    
    5,483Deferred compensation  current portion
    
    
    294
    
    
    
    291Total current liabilities
    
    
    9,126
    
    
    
    8,599Loan payable
    
    
    1,371
    
    
    
    4,112Accrued financing fees
    
    
    360
    
    
    
    360Deferred revenue
    
    
    959
    
    
    
    473Deferred compensation
    
    
    2,247
    
    
    
    2,384Total liabilities
    
    
    14,063
    
    
    
    15,928Shareholders 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
31,757,009 shares at June 30, 2009 and
31,697,250 shares at December 31, 2008
    
    
    32
    
    
    
    32Additional paid in capital
    
    
    249,305
    
    
    
    249,262Accumulated deficit
    
    
    (236,727
    )
    
    
    (233,627
    )Accumulated other comprehensive income
    
    
    259
    
    
    
    259Total shareholders equity
    
    
    12,869
    
    
    
    15,926Total liabilities and shareholders equity
    
    $
    26,932
    
    
    $
    31,854
  3




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
CONDENSED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited)(In thousands, except per share data)Revenues:Royalties
    
    $
    4,851
    
    
    $
    537
    
    
    $
    9,573
    
    
    $
    959Product sales
    
    
    158
    
    
    
    302
    
    
    
    338
    
    
    
    530Collaborative licensing and development revenue
    
    
    250
    
    
    
    477
    
    
    
    618
    
    
    
    566Total revenues
    
    
    5,259
    
    
    
    1,316
    
    
    
    10,529
    
    
    
    2,055Operating expenses:Cost of revenues
    
    
    468
    
    
    
    508
    
    
    
    1,122
    
    
    
    677Selling, general and administrative
    
    
    3,283
    
    
    
    3,071
    
    
    
    5,604
    
    
    
    7,395Research and product development
    
    
    3,425
    
    
    
    4,524
    
    
    
    6,431
    
    
    
    10,909Total operating expenses
    
    
    7,176
    
    
    
    8,103
    
    
    
    13,157
    
    
    
    18,981Loss from operations
    
    
    (1,917
    )
    
    
    (6,787
    )
    
    
    (2,628
    )
    
    
    (16,926
    )Investment income
    
    
    4
    
    
    
    180
    
    
    
    11
    
    
    
    379Interest expense
    
    
    (225
    )
    
    
    (321
    )
    
    
    (483
    )
    
    
    (678
    )Loss before income tax expense
    
    
    (2,138
    )
    
    
    (6,928
    )
    
    
    (3,100
    )
    
    
    (17,225
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (2,138
    )
    
    $
    (6,928
    )
    
    $
    (3,100
    )
    
    $
    (17,225
    )Basic and diluted net loss per common share
    
    $
    (0.07
    )
    
    $
    (0.22
    )
    
    $
    (0.10
    )
    
    $
    (0.61
    )Weighted average shares of common stock
outstanding  basic and diluted
    
    
    31,644
    
    
    
    31,486
    
    
    
    31,635
    
    
    
    28,299
  4




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
CONDENSED STATEMENTS OF CASH FLOWS
 Six months EndedJune 30,2009
    
    
    2008(Unaudited)(In thousands)Operating activities:Net loss
    
    $
    (3,100
    )
    
    $
    (17,225
    )Adjustments to reconcile net loss to net cash used in operating activities
    
    
    1,607
    
    
    
    2,169Net cash used in operating activities
    
    
    (1,493
    )
    
    
    (15,056
    )Investing activities:Acquisitions of fixed assets
    
    
    (16
    )
    
    
    (31
    )Patent costs
    
    
    (34
    )
    
    
    (201
    )Proceeds from sale of fixed assets
    
    
    6
    
    
    
    Reimbursements of patent costs by collaborator
    
    
    229
    
    
    
    Proceeds from maturities of marketable securities
    
    
    
    
    
    
    9,800Purchases of marketable securities
    
    
    (499
    )
    
    
    (7,859
    )Loan disbursed to collaborator
    
    
    
    
    
    
    (1,000
    )Net cash (used in) provided by investing activities
    
    
    (314
    )
    
    
    709Financing activities:Repayment of debt
    
    
    (2,741
    )
    
    
    (1,202
    )Issuance of common stock, net
    
    
    30
    
    
    
    23,187Net cash (used in) provided by financing activities
    
    
    (2,711
    )
    
    
    21,985Net (decrease) increase in cash and cash equivalents
    
    
    (4,518
    )
    
    
    7,638Cash and cash equivalents at beginning of period
    
    
    16,692
    
    
    
    15,680Cash and cash equivalents at end of period
    
    $
    12,174
    
    
    $
    23,318
  5




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
       8




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   4. Fair Value Measurement
       Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(Unaudited) (In thousands)Cash and cash equivalents
    
    $
    12,174
    
    
    $
    
    
    
    $
    
    
    
    $
    12,174Corporate debt securities
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    500Total
    
    $
    12,174
    
    
    $
    500
    
    
    $
    
    
    
    $
    12,674
  5. Other Assets
  June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited) (In thousands)Assets held in a trust for the Companys
Supplemental Executive Retirement Plan and
Deferred Compensation Plan (see Note 11):Cash surrender value of life insurance policies
    
    $
    1,969
    
    
    $
    1,924Money market account
    
    
    77
    
    
    
    2992,046
    
    
    
    2,223Loan receivable from collaborator (see Note 13)
    
    
    1,000
    
    
    
    1,0003,046
    
    
    
    3,223Allowance for loan receivable from collaborator
    
    
    (1,000
    )
    
    
    (1,000
    )Other assets, net
    
    $
    2,046
    
    
    $
    2,223
 9




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 6. Loan Payable
 Credit Facility
     (Unaudited)(In thousands)Less than one year
    
    $
    5,483One to two years
    
    
    1,371$
    6,854
  7. Shareholders Equity
  10




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Private Placement
    Share-Based Compensation
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited) (In thousands)Selling, general and administrative
    
    $
    266
    
    
    $
    526
    
    
    $
    (302
    )
    
    $
    1,207Research and product development
    
    
    151
    
    
    
    215
    
    
    
    315
    
    
    
    450Total
    
    $
    417
    
    
    $
    741
    
    
    $
    13
    
    
    $
    1,657
   8. Cost of Revenues
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited) (In thousands)Cost of royalties
    
    $
    95
    
    
    $
    45
    
    
    $
    207
    
    
    $
    65Cost of product sales
    
    
    143
    
    
    
    103
    
    
    
    325
    
    
    
    181Cost of collaborative licensing and development revenue
    
    
    230
    
    
    
    360
    
    
    
    590
    
    
    
    431Total cost of revenues
    
    $
    468
    
    
    $
    508
    
    
    $
    1,122
    
    
    $
    677
 11




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  9. Staff Reductions
  10. Income Taxes
  11. Supplemental Executive Retirement Plan and Deferred Compensation Plan
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited) (In thousands)Interest cost
    
    $
    30
    
    
    $
    30
    
    
    $
    60
    
    
    $
    59Amortization of prior service cost
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    1Net periodic benefit cost
    
    $
    29
    
    
    $
    30
    
    
    $
    59
    
    
    $
    60
  12




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  12. Comprehensive Income (Loss)
  June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited) (In thousands)Adjustment for funded status of post retirement plan
    
    $
    259
    
    
    $
    259
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited) (In thousands)Net loss
    
    $
    (2,138
    )
    
    $
    (6,928
    )
    
    $
    (3,100
    )
    
    $
    (17,225
    )Changes in unrealized net gains and losses on marketable securities
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (3
    )Adjustment for funded status of post retirement plan
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    1Comprehensive loss
    
    $
    (2,139
    )
    
    $
    (6,936
    )
    
    $
    (3,101
    )
    
    $
    (17,227
    )
 13. Collaborative and Licensing Agreements
  Endo Pharmaceuticals Inc.
    
    
    Endo has agreed to pay the Company royalties on U.S. sales of Opana ER calculated based
on a royalty rate starting at 22% of annual net sales of the product up to $150 million of
annual net sales, with the royalty rate then increasing, based on agreed-upon levels of
annual net sales achieved, from 25% up to a maximum of 30%.
    
    No royalty payments were due to the Company for the first $41 million of royalties that
would otherwise have been payable beginning from the time of the product launch in July 2006
(the Royalty Holiday). In the third quarter of 2008, this Royalty Holiday ended. The
Company recognized royalties from Endo related to sales of Opana ER in the amount of $8.8
million for the six month period ended June 30, 2009.
 13




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
    
    The Companys share of the development costs for Opana ER that it opted out of funding in
April 2003 totaled $28 million and will be recouped by Endo through a temporary 50%
reduction in royalties. Commencing in the third quarter of 2008, the Company began to
receive reduced royalty payments from Endo, with such temporary reductions to continue until
the $28 million is fully recouped. As of June 30, 2009, $13.8 million of the $28 million
has been recouped by Endo.
 
    
    Endo will pay the Company a percentage of any sublicense income it receives and milestone
payments of up to $90 million based upon the achievement of agreed-upon annual net sales
thresholds.
    ®
  14




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   15. Subsequent Events
  20




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  ® ®
    
    
    Maximizing the value of Opana ER, working closely with Endo.We are working with
Endo to take steps to protect and prosecute the intellectual property around Opana ER
and to explore licensing opportunities for Opana ER outside the United States. The
agreement with Valeant is a result of these efforts.
 21




---



##### Table of Contents




    
    Advancing the development of A0001 drug candidate.Through the completed Phase Ib
and the planned Phase IIa trials, we are seeking to establish proof of concept with
respect to both safety and efficacy.
    
    Monetizing the value of our proven drug delivery technologies and drug formulation
expertise by executing additional deals.Our goal is to enter into at least two new
collaborations in 2009. We believe that with two agreements this aspect of our business
can operate on a breakeven basis, fund a portion of our overhead and provide us with a
financial stake in products, should the collaborations advance into development and
commercialization. In June 2009, we entered into a new collaboration with Otsuka
Pharmaceuticals Co., Ltd.
    
    Managing overhead and other costs to ensure that our infrastructure is sized
appropriately to our priorities.In the six months ended June 30, 2009, we continued
to reduce expenses and closely managed our cash expenditures, including staff reductions
implemented in January 2009.
  Products
 Opana ER.
   22




---



##### Table of Contents



®
        A0001.
 23




---



##### Table of Contents



Nifedipine XL.
 Net Loss and Profitability
  24




---



##### Table of Contents




    
    the commercial success of Opana ER, and the amount of royalties from Endos sales of
Opana ER, which may be adversely affected by any potential generic competition;
    
    our ability to successfully defend our intellectual property protecting our products;
    
    our ability to access funding support for our development programs from third party
collaborators;
    
    the level of our investment in research and development activities, including the timing
and costs of conducting clinical trials of our products;
    
    the level of our general and administrative expenses;
    
    the successful development and commercialization of product candidates in our portfolio
and products being developed for collaborations; and
    
    royalties from Mylans sales of Pfizers generic version of Procardia XL 30 mg.
  Critical Accounting Policies and Estimates
  Recent Accounting Pronouncements
  25




---



##### Table of Contents



Results of Operations for the Three and Six Month Periods Ended June 30, 2009 and 2008
 Revenues
 Three months
    
    
    
    
    
    
    Three months
    
    
    Six months
    
    
    
    
    
    
    Six monthsended
    
    
    Percentage
    
    
    ended
    
    
    ended
    
    
    Percentage
    
    
    endedJune 30,
    
    
    increase
    
    
    June 30,
    
    
    June 30,
    
    
    increase
    
    
    June 30,2009
    
    
    (decrease)
    
    
    2008
    
    
    2009
    
    
    (decrease)
    
    
    2008(In thousands, except percentages)Royalties
    
    $
    4,851
    
    
    
    803
    %
    
    $
    537
    
    
    $
    9,573
    
    
    
    898
    %
    
    $
    959Product sales
    
    
    158
    
    
    
    (48
    )
    
    
    302
    
    
    
    338
    
    
    
    (36
    )
    
    
    530Collaborative
licensing and
development
revenue
    
    
    250
    
    
    
    (48
    )
    
    
    477
    
    
    
    618
    
    
    
    9
    
    
    
    566Total revenues
    
    $
    5,259
    
    
    
    300
    %
    
    $
    1,316
    
    
    $
    10,529
    
    
    
    412
    %
    
    $
    2,055
    26




---



##### Table of Contents



Cost of Revenues
 Three months
    
    
    Percentage
    
    
    Three months
    
    
    Six months
    
    
    Percentage
    
    
    Six monthsended
    
    
    increase
    
    
    ended
    
    
    ended
    
    
    increase
    
    
    endedJune 30, 2009
    
    
    (decrease)
    
    
    June 30, 2008
    
    
    June 30, 2009
    
    
    (decrease)
    
    
    June 30, 2008(In thousands, except percentages)Cost of royalties
    
    $
    95
    
    
    
    111
    %
    
    $
    45
    
    
    $
    207
    
    
    
    218
    %
    
    $
    65Cost of product sales
    
    
    143
    
    
    
    39
    
    
    
    103
    
    
    
    325
    
    
    
    80
    
    
    
    181Cost of collaborative
licensing and
development revenue
    
    
    230
    
    
    
    (36
    )
    
    
    360
    
    
    
    590
    
    
    
    37
    
    
    
    431Total cost of revenues
    
    $
    468
    
    
    
    (8
    )%
    
    $
    508
    
    
    $
    1,122
    
    
    
    66
    %
    
    $
    677
    Selling, General and Administrative Expenses
 Three months
    
    
    Percentage
    
    
    Three months
    
    
    Six months
    
    
    Percentage
    
    
    Six monthsended
    
    
    increase
    
    
    ended
    
    
    ended
    
    
    increase
    
    
    endedJune 30, 2009
    
    
    (decrease)
    
    
    June 30, 2008
    
    
    June 30, 2009
    
    
    (decrease)
    
    
    June 30, 2008(In thousands, except percentages)Selling, general
and administrative
expense
    
    $
    3,283
    
    
    
    7
    %
    
    $
    3,071
    
    
    $
    5,604
    
    
    
    (24
    )%
    
    $
    7,395
  27




---



##### Table of Contents



Research and Product Development Expenses
   Three months
    
    
    Percentage
    
    
    Three months
    
    
    Six months
    
    
    Percentage
    
    
    Six monthsended
    
    
    increase
    
    
    ended
    
    
    ended
    
    
    increase
    
    
    endedJune 30, 2009
    
    
    (decrease)
    
    
    June 30, 2008
    
    
    June 30, 2009
    
    
    (decrease)
    
    
    June 30, 2008(In thousands, except percentages)A0001 and Edison Payments
    
    $
    1,521
    
    
    
    5
    %
    
    $
    1,454
    
    
    $
    2,519
    
    
    
    (31
    )%
    
    $
    3,634Nalbuphine ER
    
    
    
    
    
    
    (100
    )
    
    
    519
    
    
    
    
    
    
    
    (100
    )
    
    
    1,635Other Phase I Products and Internal Costs
    
    
    1,904
    
    
    
    (25
    )
    
    
    2,551
    
    
    
    3,912
    
    
    
    (31
    )
    
    
    5,640Total Research and Product Development
Expense
    
    $
    3,425
    
    
    
    (24
    )%
    
    $
    4,524
    
    
    $
    6,431
    
    
    
    (41
    )%
    
    $
    10,909
  
    
    A0001 and Edison Payments These expenses reflect our direct external expenses relating
to the development of A0001, and for the three and six month periods ended June 30, 2008,
they also reflect our funding of Edisons research activities under the Edison agreement.
These expenses approximated 44% and 39%, respectively, of our R&D expenses for the three and
six month periods ended June 30, 2009.In May 2008, we submitted an IND for A0001 for the treatment of symptoms associated with
inherited mitochondrial respiratory chain diseases. In July 2008, we initiated a Phase Ia
placebo-controlled, single ascending dose trial designed to evaluate the safety and
tolerability of A0001 in healthy subjects, and to collect pharmacokinetic data. A0001 was well
tolerated by all subjects across all dose groups and there were no drug-related serious adverse
events. In June 2009, we completed a Phase Ib multiple ascending dose safety study of A0001 in
healthy subjects. In the Phase Ib trial, the drug was well tolerated by subjects and no
serious adverse events were reported. There was a dose-dependent increase in exposure
approaching steady state within two to four days following repeat dosing, and a maximum
tolerated dose was established. Based on these results, we plan to advance A0001 into Phase
IIa studies in patients with mitochondrial diseases in the fourth quarter of 2009. We intend
to commence two Phase IIa trials  one trial focused on patients with Friedreichs Ataxia and
another trial focused on patients with the A3243G mitochondrial DNA point mutation associated
with MELAS syndrome. The goal of these trials will be to determine if A0001 has biological
activity and we expect data from both of these trials in the first half of 2010. In parallel
with the Phase Ib trial, we have initiated long-term animal toxicology studies to support the
clinical program, which we expect to complete by the fourth quarter of 2009.
 28




---



##### Table of Contents



We expect our A0001 and Edison Payments expenses to decline for 2009 compared with our costs
for 2008, as the quarterly contract research payments to Edison were completed by the end of
2008. In the third quarter of 2009, Edison presented us with an additional compound. We
expect to make a decision on our selection of this compound by the end of the third quarter.
If we select this additional compound, we would be obligated to make a milestone payment to
Edison in the amount of $250,000, after the 50% reduction provided for under the May 5, 2009
agreement, as described above. We cannot reasonably estimate or know the nature, timing or
estimated costs of the efforts necessary to complete the development of A0001 due to the
numerous risks and uncertainties associated with developing and commercializing drugs.
    
    Nalbuphine ER These expenses reflect our direct external expenses relating to the
development of nalbuphine ER. In the three and six month periods ended June 30, 2008, these
expenses consisted primarily of payments to third parties in connection with clinical trials
of nalbuphine ER, which were underway. After the completion of the Phase IIa trial in the
first quarter of 2008, we determined to seek a collaborator for the further development and
commercialization of nalbuphine ER, and not to conduct any additional development work until
we enter into such a collaboration. As a result, we did not incur any R&D expenses in the
three and six month periods ended June 30, 2009, and we do not expect to incur any
additional R&D expenses for nalbuphine ER, unless we find a collaborator to continue the
development work.
    
    Other Phase I Products and Internal Costs These expenses reflect internal and
external expenses not separately reported under a product development program noted above
and include the areas of pharmaceutical development, clinical and regulatory. The types of
expenses included in internal expenses primarily are salary and benefits, share-based
compensation costs, depreciation on purchased equipment, and the amortization or any
write-downs of patent costs, other than product patent write-offs charged directly to a
separately reported product development program or amortization of patent costs relating to
commercialized products, which are included in cost of revenues. The types of expenses
included in external expenses are primarily related to preclinical studies,
proof-of-principle biostudies conducted on our Phase I product candidates and payments to
third parties for drug active. These costs decreased in the three and six month periods
ended June 30, 2009, compared with the three and six month periods ended June 30, 2008,
primarily as a result of lower compensation expenses due to staff reductions implemented in
March 2008 and in January 2009, allocations of internal costs related to our drug delivery
technology collaborations to cost of collaborative licensing and development revenues, and
lower Phase I product expenses, as we did not incur any external expenses on these product
candidates.
   29




---



##### Table of Contents



Share-Based Compensation
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In thousands)Selling, general and administrative
    
    $
    266
    
    
    $
    526
    
    
    $
    (302
    )
    
    $
    1,207Research and product development
    
    
    151
    
    
    
    215
    
    
    
    315
    
    
    
    450Total share-based compensation
    
    $
    417
    
    
    $
    741
    
    
    $
    13
    
    
    $
    1,657
   Tax Rates
  Liquidity and Capital Resources
 Sources of Liquidity
  Private Placement.
  30




---



##### Table of Contents



Senior Secured Credit Facility.
   Cash Flows
   Funding Requirements
   31




---



##### Table of Contents




    
    the commercial success of Opana ER, and the amount of royalties from Endos sales of
Opana ER, which may be adversely affected by any potential generic competition;
    
    the prosecution, defense and enforcement of our patents and other intellectual property
rights, such as our Orange Book listed patents for Opana ER, and the prosecution by us and
Endo of additional patent applications with respect to Opana ER;
    
    the timing and amount of payments received under collaborative agreements, including our
agreement with Mylan with respect to Pfizers generic version of Procardia XL 30 mg;
    
    the timing and amount of our internal costs of development for drug candidates for which
we acquire rights under the Edison agreement;
    
    the progress of our existing development projects and any development projects we may
undertake, funding obligations with respect to the projects and the related costs to us of
clinical studies for our product candidates;
    
    our ability to enter into new collaborations for Opana ER outside the United States and our
drug delivery technologies, and the structure and terms of any such agreements;
 32




---



##### Table of Contents




    
    our ability to access funding support for development programs from third party
collaborators;
    
    the level of our investment in capital expenditures for facilities or equipment;
    
    the timing and amount of our costs of the shareholder lawsuits filed against us and our
directors in connection with our proxy contest; and the costs of any future proxy contests
which may occur;
    
    our success in reducing our spending and managing our costs.
     Contractual Obligations
  Less Than
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    412
    
    
    $
    412
    
    
    $
    
    
    
    $
    
    
    
    $
    Purchase obligations
    
    
    3,193
    
    
    
    3,193
    
    
    
    
    
    
    
    
    
    
    
    Payments due under credit facility
    
    
    7,693
    
    
    
    5,938
    
    
    
    1,755
    
    
    
    
    
    
    
    Deferred compensation
    
    
    2,541
    
    
    
    294
    
    
    
    587
    
    
    
    587
    
    
    
    1,073Total
    
    $
    13,839
    
    
    $
    9,837
    
    
    $
    2,342
    
    
    $
    587
    
    
    $
    1,073
  33




---



##### Table of Contents




    
    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
    34




---



##### Table of Contents



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.
 35




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Impax ANDA Litigation
    Actavis ANDA Litigation
  36




---



##### Table of Contents



Sandoz ANDA Litigation
  ® ®
  Barr ANDA Litigation
   37




---



##### Table of Contents



Tang/Edelman Shareholder Claim
  Tang Capital Partners, et al. Penwest
Pharmaceuticals Co.
 Tang Capital Partners, et al. v. Penwest
Pharmaceuticals Co.),
 Tang Capital Partners, et al. v. Penwest
Pharmaceuticals Co.),
 
 Item 1A. Risk Factors
 Investing in our common stock involves a high degree of risk, and you should carefully
consider the risks and uncertainties described below in addition to the other information included
or incorporated by reference in this quarterly report on Form 10-Q . If any of the following risks
actually occurs, our business, financial condition or results of operations would likely suffer,
possibly materially. In that case, the trading price of our common stock could fall.
 We have a history of net losses and may not be able to achieve or maintain profitability on an
annual basis
  38




---



##### Table of Contents




    
    the commercial success of Opana ER, and the amount of royalties from Endos sales of
Opana ER, which may be adversely affected by any potential generic competition;
    
    our ability to successfully defend our intellectual property protecting our products;
    
    our ability to access funding support for development programs from third party
collaborators;
    
    the level of our investment in research and development activities, including the timing
and costs of conducting clinical trials of our products;
    
    the level of our general and administrative expenses;
    
    the successful development and commercialization of product candidates in our portfolio
and products being developed for collaborations; and
    
    royalties from Mylans sales of Pfizers generic version of Procardia XL 30 mg.
 We may require additional funding, which may be difficult to obtain
    39




---



##### Table of Contents




    
    the commercial success of Opana ER, and the amount of royalties from Endos and Valeants
sales of Opana ER, which may be adversely affected by any potential generic competition;
    
    the prosecution, defense and enforcement of our patents and other intellectual property
rights, such as our Orange Book listed patents for Opana ER, and the prosecution by us and
Endo of additional patent applications with respect to Opana ER;
    
    the timing and amount of payments received under collaborative agreements including our
agreement with Mylan with respect to Pfizers generic version of Procardia XL 30 mg;
    
    the timing and amount of our internal costs of development for drug candidates for which
we acquire rights under the Edison agreement;
    
    the progress of our existing development projects and any development projects we may
undertake, funding obligations with respect to the projects and the related costs to us of
clinical studies for our product candidates;
    
    our ability to enter into collaborations for Opana ER outside the United States and our
drug delivery technologies, and the structure and terms of any such agreements;
    
    our ability to access funding support for development programs from third party
collaborators;
    
    the level of our investment in capital expenditures for facilities and equipment;
    
    the timing and amount of our costs in connection with our proxy contest and the
shareholder lawsuits filed against us and our directors; and
    
    our success in reducing our spending and managing our costs.
  Our ability to generate revenues depends heavily on the success of Opana ER
   
    
    the safety and efficacy of Opana ER as compared to competitive products;
 40




---



##### Table of Contents




    
    Endos ability to educate the medical community about the benefits, safety profile and
efficacy of Opana ER;
    
    the effectiveness of Endos sales and marketing activities;
    
    Endos ability to manufacture and maintain suitable inventory for sale on an ongoing
basis;
    
    the reimbursement policies of government and third party payors with respect to Opana ER;
    
    the pricing of Opana ER;
    
    the level of stocking of Opana ER by wholesalers and retail pharmacies;
    
    the required risk evaluation management strategy currently being considered by FDA; and
    
    the availability of generic versions of Opana ER and the timing of generic competition.
     Our success depends on our ability, or our collaborators ability, to protect our patents and
other intellectual property rights.
 ,
  41




---



##### Table of Contents



We are dependent on our collaborators to manufacture and commercialize our products
     
    
    Our collaborators may be pursuing alternative technologies or developing alternative
products, either on their own or in collaboration with others, that may be competitive to
the product on which we are collaborating, which could affect our collaborators commitment
to our collaboration.
    
    Our collaborators may reduce marketing or sales efforts, or discontinue marketing or
sales of our products, which could reduce the revenues we receive on the products.
 42




---



##### Table of Contents




    
    Our collaborators may pursue higher priority programs or change the focus of their
commercialization programs, which could affect the collaborators commitment to us.
Pharmaceutical and biotechnology companies re-evaluate their priorities from time to time,
including following mergers and consolidations, which have been common in recent years in
these industries.
    
    Disputes may arise between us and our collaborators from time to time regarding
contractual or other matters. In 2006, we were engaged in a dispute with Endo with regard
to the sharing of marketing expenses during the period prior to when Opana ER reaches
profitability, which we subsequently resolved. Any other such disputes with Endo or other
collaborators could be time consuming and expensive, and could impact our anticipated rights
under our agreements with those collaborators.
 We have limited experience in developing, manufacturing, marketing and selling pharmaceutical
products
   The Drug Enforcement Agency, or DEA, limits the availability of the active drug substances used in
Opana ER. As a result, Endos procurement quota may not be sufficient to meet commercial demand
   Misuse and/or abuse of Opana ER, which contains a narcotic ingredient, could subject us to
additional regulations, including compliance with risk management programs, which may prove
difficult or expensive for us to comply with, and we and Endo may face lawsuits
  We face significant competition, which may result in others discovering, developing or
commercializing products before us or more successfully than we do
  43




---



##### Table of Contents




    
    significantly greater financial, technical and human resources than we have and may be
better equipped to develop, manufacture and commercialize drug products;
    
    more extensive experience than we have in conducting preclinical studies and clinical
trials, obtaining regulatory approvals, and manufacturing and marketing pharmaceutical
products;
    
    competing products that have already received regulatory approval or are in late-stage
development; or
    
    collaborative arrangements in our target markets with leading companies and research
institutions.
   ®
  If our clinical trials are not successful or take longer to complete than we expect, we may not be
able to develop and commercialize our products such as A0001
  44




---



##### Table of Contents




    
    be delayed in obtaining marketing approval for our products;
    
    not be able to obtain marketing approval for our products; or
    
    not be able to obtain approval for indications that are as broad as intended.
    45




---



##### Table of Contents



Even if we are able to obtain regulatory approvals for any of our product candidates, if they
exhibit harmful side effects after approval, our regulatory approvals could be revoked or
otherwise negatively impacted, and we could be subject to costly and damaging product liability
claims
  Our controlled release drug delivery technologies rely on the ability to control the release of
the active drug substances, and our business would be harmed if it was determined that there were
circumstances under which the active drug substances from one of our extended release products
would be released rapidly into the blood stream
  ® in
vitro in vitro
 46




---



##### Table of Contents



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
     We may become involved in patent litigation or other proceedings relating to our products or
processes, which could result in liability for damages or termination of our development and
commercialization programs
  
    
    We or our collaborators may initiate litigation or other proceedings against third
parties to enforce our intellectual property rights.
    
    If our competitors file patent applications that claim technology also claimed by us, we
or our collaborators may participate in interference or opposition proceedings to determine
the priority of invention.
    
    If third parties initiate litigation claiming that our processes or products infringe
their patent or other intellectual property rights, we and our collaborators will need to
defend our rights in such proceedings.
 47




---



##### Table of Contents



We have only limited manufacturing capabilities and will be dependent on third party manufacturers
     
    
    we or our collaborators may not be able to meet commercial demands for Opana ER or our
other products;
    
    we may not be able to initiate or continue clinical trials for products that are under
development; and
    
    we may be delayed in submitting applications for regulatory approvals of our products.
  48




---



##### Table of Contents



We are dependent upon a limited number of suppliers for the gums used in our TIMERx materials
  If we or our collaborators fail to obtain an adequate level of reimbursement by governmental or
third party payors for Opana ER or any other products we develop, we may not be able to
successfully commercialize the affected product
    We will be exposed to product liability claims and may not be able to obtain adequate product
liability insurance
   If we are unable to retain our key personnel and continue to attract additional professional
staff, we may not be able to maintain or expand our business
 49




---



##### Table of Contents



The market price of our common stock may be volatile
  Specific provisions of our Shareholder Rights Plan, Articles of Incorporation and Bylaws and the
laws of Washington State make a takeover of Penwest or a change in control or management of our
Company more difficult
  Proxy contests pursued by dissident shareholders may be costly and disruptive to our business
operations
    50




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    WithheldJoseph Edelman
    
    
    28,093,570
    
    
    
    1,143,880Kevin C. Tang
    
    
    23,466,412
    
    
    
    62,037William James OShea
    
    
    4,671,195
    
    
    
    1,037,806Dr. Andrew D. Levin
    
    
    0
    
    
    
    0
    For
    
    Against
    
    Abstain26,163,182
    
    
    
    161,945
    
    
    
    2,912,323
   For
    
    Against
    
    Abstain12,322,499
    
    
    
    13,880,110
    
    
    
    3,034,840
   For
    
    Against
    
    Abstain19,779,209
    
    
    
    7,127,736
    
    
    
    2,330,504
   For
    
    Against
    
    Abstain19,495,521
    
    
    
    7,423,145
    
    
    
    2,318,784
 51




---



##### Table of Contents



For
    
    Against
    
    Abstain18,640,311
    
    
    
    8,275,790
    
    
    
    2,321,349
  
 Item 6. Exhibits
  52




---



##### Table of Contents



SIGNATURE
  PENWEST PHARMACEUTICALS CO.Date: August 10, 2009
    /s/ Jennifer L. GoodJennifer L. GoodPresident and Chief Executive Officer 53




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    Settlement Agreement dated May 5, 2009, by and between Edison Pharmaceuticals,
Inc. and the Company.31
    
    Certification of Principal Executive Officer and Principal Financial Officer
pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.32
    
    Certification of Principal Executive Officer and Principal Financial Officer
pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
 54