##### 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, 2005or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period
from        to
 Commission File No. 000-23467
 Penwest Pharmaceuticals Co.
 
 (Exact name of registrant as specified in its charter)
 Washington
    
    91-1513032(State of Incorporation)
    
    (I.R.S. Employer Identification No.)39 Old Ridgebury Road, Suite 11,
Danbury, Connecticut
    
    06810-5120(Address of principal executive offices)
    
    (Zip Code)
 (877) 736-9378  (Registrants telephone number, including area code.)
 þ o
 þ o
  Class
    
    OutstandingCommon stock, par value $.001
    
    21,738,560
   - 1 -




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PENWEST PHARMACEUTICALS CO.
TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Condensed Financial Statements (Unaudited)Condensed Balance Sheets
    
    
    3Condensed Statements of Operations
    
    
    4Condensed Statements of Cash Flows
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II  OTHER INFORMATIONItem 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 6. Exhibits
    
    
    30Signature
    
    
    31Exhibit Index
    
    
    32EX-31.1 Section 302 Certification of CEOEX-31.2 Section 302  Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO
   2




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PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements (Unaudited)
 PENWEST PHARMACEUTICALS CO.
 
 CONDENSED BALANCE SHEETS
 June 30,

    
    December 31,2005
    
    2004(Unaudited)
    
    (Note 2)(In thousands,except share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,048
    
    
    $
    14,249Marketable securities
    
    
    44,658
    
    
    
    60,121Trade accounts receivable
    
    
    1,257
    
    
    
    1,126Inventories:Raw materials and other
    
    
    32
    
    
    
    134Finished goods
    
    
    135
    
    
    
    509Total inventories
    
    
    167
    
    
    
    643Prepaid expenses and other current assets
    
    
    597
    
    
    
    1,143Total current assets
    
    
    68,727
    
    
    
    77,282Fixed assets, net
    
    
    3,267
    
    
    
    3,674Patents, net
    
    
    3,337
    
    
    
    3,504Cash surrender value of life insurance policies
    
    
    3,140
    
    
    
    3,062Total assets
    
    $
    78,471
    
    
    $
    87,522LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    510
    
    
    $
    2,396Accrued expenses
    
    
    2,013
    
    
    
    1,966Accrued development costs
    
    
    1,671
    
    
    
    974Up-front
licensing payments


4,000



Deferred compensation  current portion
    
    
    291
    
    
    
    Total current liabilities
    
    
    8,485
    
    
    
    5,336Deferred revenue
    
    
    64
    
    
    
    71Deferred compensation
    
    
    2,948
    
    
    
    3,314Total liabilities
    
    
    11,497
    
    
    
    8,721Shareholders 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 21,736,854 shares at June 30, 2005 and 21,692,730 shares at
December 31, 2004
    
    
    22
    
    
    
    22Additional paid in capital
    
    
    199,941
    
    
    
    197,097Accumulated deficit
    
    
    (132,851
    )
    
    
    (118,218
    )Accumulated other comprehensive loss
    
    
    (138
    )
    
    
    (100
    )Total shareholders equity
    
    
    66,974
    
    
    
    78,801Total liabilities and shareholders equity
    
    $
    78,471
    
    
    $
    87,522
  3




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PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF OPERATIONS
 Three Months EndedJune 30,2005
    
    2004(Unaudited)(In thousands, exceptper share data)Revenues:Royalties and licensing fees
    
    $
    1,296
    
    
    $
    1,266Product sales
    
    
    
    
    
    
    Total revenues
    
    
    1,296
    
    
    
    1,266Cost of revenues
    
    
    14
    
    
    
    29Gross profit
    
    
    1,282
    
    
    
    1,237Operating expenses:Selling, general and administrative
    
    
    2,472
    
    
    
    2,528Research and product development
    
    
    4,965
    
    
    
    6,422Total operating expenses
    
    
    7,437
    
    
    
    8,950Loss from operations
    
    
    (6,155
    )
    
    
    (7,713
    )Investment income
    
    
    469
    
    
    
    204Loss before income tax expense
    
    
    (5,686
    )
    
    
    (7,509
    )Income tax expense
    
    
    
    
    
    
    Net loss
    
    $
    (5,686
    )
    
    $
    (7,509
    )Net loss per common share
    
    $
    (0.26
    )
    
    $
    (0.41
    )Weighted average shares of common stock outstanding
    
    
    21,676
    
    
    
    18,484
 Six Months EndedJune 30,2005
    
    2004(Unaudited)(In thousands, exceptper share data)Revenues:Royalties and licensing fees
    
    $
    2,278
    
    
    $
    2,527Product sales
    
    
    
    
    
    
    222Total revenues
    
    
    2,278
    
    
    
    2,749Cost of revenues
    
    
    22
    
    
    
    78Gross profit
    
    
    2,256
    
    
    
    2,671Operating expenses:Selling, general and administrative
    
    
    7,764
    
    
    
    4,864Research and product development
    
    
    10,030
    
    
    
    10,511Total operating expenses
    
    
    17,794
    
    
    
    15,375Loss from operations
    
    
    (15,538
    )
    
    
    (12,704
    )Investment income
    
    
    905
    
    
    
    417Loss before income tax expense
    
    
    (14,633
    )
    
    
    (12,287
    )Income tax expense
    
    
    
    
    
    
    Net loss
    
    $
    (14,633
    )
    
    $
    (12,287
    )Net loss per common share
    
    $
    (0.68
    )
    
    $
    (0.67
    )Weighted average shares of common stock outstanding
    
    
    21,666
    
    
    
    18,447
  4




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PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2005
    
    2004(Unaudited)(In thousands)Operating activities:Net loss
    
    $
    (14,633
    )
    
    $
    (12,287
    )Adjustments to reconcile net loss to net cash used in operating activities
    
    
    6,994
    
    
    
    344Net cash used in operating activities
    
    
    (7,639
    )
    
    
    (11,943
    )Investing activities:Proceeds from sale of discontinued operations
    
    
    
    
    
    
    1,250Acquisitions of fixed assets, net
    
    
    (111
    )
    
    
    (908
    )Patent costs
    
    
    (182
    )
    
    
    (280
    )Proceeds from maturities of marketable securities
    
    
    20,760
    
    
    
    13,682Proceeds from sales of marketable securities
    
    
    23,850
    
    
    
    8,550Purchases of marketable securities
    
    
    (29,064
    )
    
    
    (16,805
    )Net cash provided by investing activities
    
    
    15,253
    
    
    
    5,489Financing activities:Issuance of common stock, net
    
    
    185
    
    
    
    1,273Net cash provided by financing activities
    
    
    185
    
    
    
    1,273Net increase (decrease) in cash and cash equivalents
    
    
    7,799
    
    
    
    (5,181
    )Cash and cash equivalents at beginning of period
    
    
    14,249
    
    
    
    8,241Cash and cash equivalents at end of period
    
    $
    22,048
    
    
    $
    3,060
  5




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PENWEST PHARMACEUTICALS CO.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 1. Business
   2. Basis of Presentation
     3. Summary of Significant Accounting Policies
 Revenue Recognition
 Royalties
and licensing fees
 6




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




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PENWEST PHARMACEUTICALS CO.
 NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Stock-Based Compensation
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(unaudited)
    
    (unaudited)(in thousands, except
    
    (in thousands, exceptper share data)
    
    per share data)Net loss  as reported
    
    $
    (5,686
    )
    
    $
    (7,509
    )
    
    $
    (14,633
    )
    
    $
    (12,287
    )Stock-based compensation expense included in reported net loss
    
    
    123
    
    
    
    78
    
    
    
    2,648
    
    
    
    136Stock-based compensation under fair value method
    
    
    (905
    )
    
    
    (925
    )
    
    
    (2,498
    )
    
    
    (1,756
    )Net loss  pro forma after stockbased compensation under
fair value method
    
    $
    (6,468
    )
    
    $
    (8,356
    )
    
    $
    (14,483
    )
    
    $
    (13,907
    )Net loss per share, basic and diluted  as reported
    
    $
    (0.26
    )
    
    $
    (0.41
    )
    
    $
    (0.68
    )
    
    $
    (0.67
    )Net loss per share, basic and diluted  pro forma after
stock-based compensation under fair value method
    
    $
    (0.30
    )
    
    $
    (0.45
    )
    
    $
    (0.67
    )
    
    $
    (0.75
    )
  4. Income Taxes
  5. Compensation Charge
  8




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PENWEST PHARMACEUTICALS CO.
 NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 6. Supplemental Executive Retirement Plan and Deferred Compensation Plan
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(unaudited)
    
    (unaudited)(in thousands)
    
    (in thousands)Service cost
    
    $
    
    
    
    $
    (8
    )
    
    $
    
    
    
    $
    (16
    )Interest cost
    
    
    31
    
    
    
    31
    
    
    
    61
    
    
    
    63Amortization of net obligation at transition
    
    
    
    
    
    
    10
    
    
    
    1
    
    
    
    20Amortization of prior service cost
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Net periodic benefit cost
    
    $
    31
    
    
    $
    34
    
    
    $
    62
    
    
    $
    68
   7. Comprehensive Loss
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(unauditied)
    
    (unauditied)(in thousands)
    
    (in thousands)Net loss
    
    $
    (5,686
    )
    
    $
    (7,509
    )
    
    $
    (14,633
    )
    
    $
    (12,287
    )Change in unrealized net gains and losses on marketable securities
    
    
    41
    
    
    
    (178
    )
    
    
    (38
    )
    
    
    (145
    )Comprehensive loss
    
    $
    (5,645
    )
    
    $
    (7,687
    )
    
    $
    (14,671
    )
    
    $
    (12,432
    )
 9




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PENWEST PHARMACEUTICALS CO.
 NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  8. Licensing Agreements
  Endo Pharmaceuticals, Inc.
    Mylan Pharmaceuticals Inc.
  10




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PENWEST PHARMACEUTICALS CO.
 NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Prism Pharmaceuticals, Inc.
    9. Contingencies
  10. Subsequent Event
  11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  
    
    Oxymorphone ER.Oxymorphone ER is an extended release

formulation of oxymorphone incorporating TIMERx technology
that we are developing with Endo. Oxymorphone ER, a narcotic
analgesic, is being developed for twice-a-day dosing in
patients with moderate to severe pain requiring continuous,
around-the-clock opioid therapy for an extended period of
time.Endo, which is responsible for conducting the clinical trials
and seeking regulatory approval of the product, submitted a
New Drug Application, or NDA, for oxymorphone ER to the United
States Food and Drug Administration, or FDA, in December 2002.
In October 2003, Endo received an approvable letter for
oxymorphone ER. In the letter, the FDA requested that Endo
address certain questions, provide additional clarification
and information, and conduct some form of additional clinical
trials to further confirm the safety and efficacy of
oxymorphone ER, before the FDA would approve Endos NDA for
oxymorphone ER. In November 2004, Endo announced that the FDA
had granted under the FDAs Special Protocol Assessment, or
SPA, process, final approval of a protocol for a 12-week,
multicenter double-blinded, placebo-controlled Phase III trial
of oxymorphone ER in patients with chronic low back pain and
without recent treatment with opioid analgesics, designed to
provide the additional safety and efficacy data for
oxymorphone ER requested by the FDA. The clinical trial is
also intended to address the FDAs concern regarding data from
patients who do not complete the trial.Endo expects to recruit approximately 250 patients for this
trial. Endo commenced patient enrollment for the trial in
November 2004 and has stated that it expects to announce the
results of the trial in the fourth quarter of 2005. Endo has
also reported that, based on the expected duration of the
trial and the number of patients to be enrolled, and assuming
the data is favorable, Endo expects to submit a complete
response letter to the FDA in early 2006. We expect that Endo
will receive a further action letter from the FDA within six
months of the submission of the complete response letter.
    
    PW2132.PW2132 is a drug candidate intended for the
treatment of edema related to congestive heart failure, which
we formulated using our Geminex technology. Geminex is a
dual drug delivery system that is designed to provide
independent release of different active ingredients contained
in a drug. We conducted a pilot scale biostudy of PW2132 in
approximately 20 healthy volunteers in the fourth quarter of
2004. In the study, PW2132 achieved the blood level curves we
had targeted as endpoints of the study and that we believe may
improve the efficacy of the drug. Based on the results of the
pilot biostudy, in April 2005, we held a pre-IND meeting with
the FDA and filed an Investigational New Drug Application, or
IND, for PW2132. During the second quarter of 2005, we
commenced a Phase IIa trial on this compound. The trial is a
single-dose efficacy study conducted in approximately 50
patients. The trial is intended as a proof-of-concept of the
product. We completed dosing of the trial in July 2005, and
we expect to announce results from this trial in the fourth
quarter of 2005. We currently intend to outlicense this
compound for development and marketing if the data is
positive.
    
    In addition, we are currently conducting pilot scale
Phase I biostudies of several product candidates primarily for
drugs to treat diseases of the central nervous system. In
these studies, we are seeking to obtain proof of principle
 12




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data in humans. If the pilot scale biostudies of any of these product candidates meet the
anticipated product profile and the commercial returns appear attractive, we will most likely
seek to advance the product candidate into further clinical trials on our own. The decision to
develop the product candidate on our own will be based on our available resources after
consideration of a number of factors, including the size of the potential market, competitors in
the potential market, the availability of intellectual property protection, the regulatory
pathway, the expected timing and cost of the development program, and the development status of
our other product candidates.
    
    
    the successful commercialization of TIMERx controlled release products, including in
particular oxymorphone ER;
    
    royalties from Mylans sales of Pfizer 30 mg generic version of Procardia XL; and
    
    the level of our investment in research and development activities.
  Critical Accounting Policies and Estimates
  13




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Results of Operations for the Three and Six Months Ended June 30, 2005 and 2004
 Three months
    
    
    
    
    
    Three months
    
    Six months
    
    
    
    
    
    Six monthsended
    
    
    
    
    
    ended
    
    ended
    
    
    
    
    
    endedJune 30,
    
    Percentage
    
    June 30,
    
    June 30,
    
    Percentage
    
    June 30,2005
    
    Increase
    
    2004
    
    2005
    
    (Decrease)
    
    2004(in thousands, except percentages)
    
    (in thousands, except percentages)Royalties and Licensing Fees
    
    $
    1,296
    
    
    
    2
    %
    
    $
    1,266
    
    
    $
    2,278
    
    
    
    (10
    )%
    
    $
    2,527Product Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    )%
    
    
    222Total Revenues
    
    $
    1,296
    
    
    
    2
    %
    
    $
    1,266
    
    
    $
    2,278
    
    
    
    (17
    )%
    
    $
    2,749
 Revenues
    Selling, General and Administrative Expense
  Research and Product Development Expense
  14




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Three months
    
    
    
    
    
    Three months
    
    Six months
    
    
    
    
    
    Six monthsended
    
    Percentage
    
    ended
    
    ended
    
    Percentage
    
    endedJune 30,
    
    Increase
    
    June 30,
    
    June 30,
    
    Increase
    
    June 30,2005
    
    (Decrease)
    
    2004
    
    2005
    
    (Decrease)
    
    2004(in thousands, except percentages)
    
    (in thousands, except percentages)PW2101
    
    $
    516
    
    
    
    (83
    )%
    
    $
    3,068
    
    
    $
    1,842
    
    
    
    (62
    )%
    
    $
    4,811PW2132
    
    
    1,055
    
    
    
    2053
    %
    
    
    49
    
    
    
    1,099
    
    
    
    1149
    %
    
    
    88Phase I Products and Internal Costs
    
    
    3,058
    
    
    
    37
    %
    
    
    2,235
    
    
    
    6,301
    
    
    
    57
    %
    
    
    4,018Research and New Technology
Development
    
    
    336
    
    
    
    (69
    )%
    
    
    1,070
    
    
    
    788
    
    
    
    (51
    )%
    
    
    1,594Total Research and Product
Development Expense
    
    $
    4,965
    
    
    
    (23
    )%
    
    $
    6,422
    
    
    $
    10,030
    
    
    
    (5
    )%
    
    $
    10,511
  
    
    PW2101 These expenses reflect our direct external expenses relating to the development of
PW2101. These expenses consist primarily of payments to third parties in connection with
clinical trials of PW2101, the manufacturing of PW2101 prior to regulatory approval for
clinical use and potential commercial use, and our development work related to the
qualification of an alternative manufacturing site for PW2101.
    
    PW2132 These expenses reflect our direct external expenses relating to the
development of PW2132. These expenses consists primarily of payments to third parties in
connection with clinical trials of PW2132.
    
    Phase I Products and Internal Costs These expenses reflect both our direct external
expenses and our internal expenses relating to the development of Phase I product candidates,
and also include other unallocated research and development expenses. Our direct external
expenses primarily reflect payments to third parties for the active drug and
proof-of-principle biostudies conducted for our Phase I products. Our internal expenses
include expenses such as salaries and benefits of our product development personnel including
our formulation, clinical and regulatory groups, and other costs primarily related to our
laboratory facilities.
    
    Research and New Technology Development These expenses reflect both our direct external
expenses and our allocated internal expenses relating to the development of new drug delivery
technologies. These direct external expenses consist primarily of payments to third parties in
connection with outside laboratory and consulting fees. Our internal expenses primarily
include salaries and benefits of our research and new technology development group, and other
costs such as depreciation on purchased equipment, and the amortization or any write-downs of
patent costs other than product patent write-offs charged directly to a product development
project.
 PW2101.
 PW2132
 Phase I Products and Internal Costs.
 15




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Research and New Technology Development Expenses.
  Tax Rates
  Liquidity and Capital Resources
 Sources of Liquidity
     16




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Cash Flows
  Funding Requirements
   
    
    whether oxymorphone ER is approved on a timely basis, or at all;
    
    the costs and timing of adding product candidates or technologies;
    
    whether we resume our participation in the funding of the development and marketing of oxymorphone ER;
    
    the timing and amount of payments received under collaborative agreements, including in particular with respect to
oxymorphone ER;
    
    the structure and terms of any future collaborative or development agreements;
    
    the progress of our collaborative and independent development projects, funding obligations with respect to the projects,
and the related costs to us of clinical studies for our products;
    
    royalties received from Mylan; and
    
    the prosecution, defense and enforcement of potential patent claims and other intellectual property rights.
  17




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Contractual Obligations
  Less than
    
    1-3
    
    4-5
    
    After 5Total
    
    One Year
    
    Years
    
    Years
    
    YearsOperating Leases
    
    $
    863
    
    
    $
    622
    
    
    $
    241
    
    
    $
    
    
    
    $
    Purchase Obligations
    
    
    1,798
    
    
    
    1,773
    
    
    
    25
    
    
    
    
    
    
    
    Total
    
    $
    2,661
    
    
    $
    2,395
    
    
    $
    266
    
    
    $
    
    
    
    $
    
     SERP
    
    DCP
    
    TotalYear 1
    
    $
    151
    
    
    $
    140
    
    
    $
    291Year 2
    
    
    151
    
    
    
    140
    
    
    
    291Year 3
    
    
    151
    
    
    
    140
    
    
    
    291Year 4
    
    
    151
    
    
    
    140
    
    
    
    291Year 5
    
    
    151
    
    
    
    140
    
    
    
    291Years 6-10
    
    
    756
    
    
    
    560
    
    
    
    1,316
  18




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Net Operating Loss Carryforwards
  Forward-Looking Statements
  Risk Factors
  We have not been profitable and expect to continue to incur substantial losses
    19




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##### Table of Contents




    
    the successful commercialization of TIMERx controlled release products, including in
particular oxymorphone ER;
    
    royalties from Mylans sale of Pfizers 30 mg generic version of Procardia XL; and
    
    the level of our investment in research and development activities.
 We may require additional funding, which may be difficult to obtain
   
    
    whether oxymorphone ER is approved on a timely basis, or at all;
    
    the costs and timing of adding additional products or technologies;
    
    whether we resume our participation in the funding of the development and marketing of

oxymorphone ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular with respect to oxymorphone ER;
    
    the structure and terms of any future collaborative or development agreements;
    
    the progress of our collaborative and independent development projects, funding
obligations with respect to the projects, and the related costs to us of clinical studies
for our products;
    
    royalties received from Mylan; and
    
    the prosecution, defense and enforcement of potential patent claims and other intellectual property rights.
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We are dependent on collaborators to conduct clinical trials of, obtain regulatory approvals for,
and manufacture, market, and sell our TIMERx controlled release products, including, in
particular, Endo with respect to oxymorphone ER
     
    
    Our collaborators may be pursuing alternative technologies or developing alternative
products, either on their own or in collaboration with others, that may be competitive with
the product as to which they are collaborating with us, which could affect our
collaborators commitment to the collaboration with us.
    
    Our collaborators may reduce marketing or sales efforts, or discontinue marketing or
sales of our products. This would reduce our revenues received on the products.
    
    Our collaborators may terminate their collaborations with us. This could make it
difficult for us to attract new collaborators or adversely affect perception of us in the
business and financial communities.
    
    Our collaborators may pursue higher priority programs or change the focus of their
development programs, which could affect the collaborators commitment to us. Pharmaceutical
and biotechnology companies historically have re-evaluated their priorities from time to
time, including following mergers and consolidations, which have been common in recent years
in these industries.
 We face significant competition, which may result in others discovering, developing or
commercializing products before or more successfully than we do
  
    
    significantly greater financial, technical and human resources than we have and may be
better equipped to develop, manufacture and commercialize products;
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
    
    more extensive experience than we have in conducting preclinical studies and clinical
trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical
products;
    
    competing products that have already received regulatory approval or are in late-stage development; and
    
    collaborative arrangements in our target markets with leading companies and research institutions.
       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
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
    
    be delayed in obtaining marketing approval for our products;
    
    not be able to obtain marketing approval for our products; or
    
    obtain approval for indications that are not as broad as intended.
  We are subject to extensive government regulation including the requirement of approval before
our products may be marketed. Even if we obtain marketing approval, our products will be subject
to ongoing regulatory review.
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Our controlled release products that are generic versions of branded controlled release products
that are covered by one or more patents may be subject to litigation, which could delay FDA
approval and commercial launch of our products
  The market may not be receptive to products incorporating our drug delivery technologies
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
    
    the timing of the receipt of marketing approvals and the countries in which such approvals are obtained;
    
    the safety and efficacy of the product as compared to competitive products;
    
    the relative convenience and ease of administration as compared to competitive products;
    
    the strength of marketing distribution support; and
    
    the cost-effectiveness of the product and the ability to receive third party reimbursement.
 Our success depends on our protecting our patents and patented rights
    We may become involved in patent litigation or other intellectual property proceedings relating
to our products or processes, which could result in liability for damages or stop our development
and commercialization efforts
  
    
    We or our collaborators may initiate litigation or other proceedings against third
parties to enforce our patent rights.
    
    We or our collaborators may initiate litigation or other proceedings against third
parties to seek to invalidate the patents held by such third parties or to obtain a judgment
that our products or processes do not infringe such third parties patents.
    
    If our competitors file patent applications that claim technology also claimed by us, we
or our collaborators may participate in interference or opposition proceedings to determine
the priority of invention.
    
    If third parties initiate litigation claiming that our processes or products infringe
their patent or other intellectual property rights, we and our collaborators will need to
defend against such proceedings.
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We have only limited manufacturing capabilities and will be dependent on third party
manufacturers
    
    
    our collaborators may not be able to meet commercial demands for our products on a timely
basis;
    
    our collaborators may not be able to initiate or continue clinical trials of products
that are under development; and
    
    our collaborators may be delayed in submitting applications for regulatory approvals of
our products.
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We are dependent upon a limited number of suppliers for the gums used in our TIMERx material
  If we or our collaborators fail to obtain an adequate level of reimbursement by third party
payors for our controlled release products, they may not be able to successfully commercialize
controlled release products
     We will be exposed to product liability claims and may not be able to obtain adequate product
liability insurance
   The market price of our common stock may be volatile
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Specific provisions of our Shareholder Rights Plan, Certificate of Incorporation and Bylaws and
of Washington law make a takeover of Penwest or a change in control or management of Penwest
more difficult
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk and Risk Management Policies
   
 Item 4. Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures.
 (b) Changes in Internal Control Over Financial Reporting.
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PART II  OTHER INFORMATION
 
 Item 4. Submission of Matters to a Vote on Security Holders
  a.
    
    Election of Class II Directors for a term of three years:
 For
    
    WithholdPeter F. Drake
    
    
    17,597,116
    
    
    
    658,807Anne M. VanLent
    
    
    16,701,834
    
    
    
    1,554,089
  b.
    
    Approval of our 2005 Stock Incentive Plan:
 For
    
    Against
    
    Abstain
    
    Broker Non-Votes12,234,296
    
    1,954,673
    
    74,223
    
    none
 c.
    
    Ratification of the selection of Ernst & Young LLP as our independent registered public
accounting firm for the current year:
 For
    
    Against
    
    Abstain
    
    Broker Non-Votes18,207,566
    
    27,001
    
    21,356
    
    none
 
 Item 6. Exhibits
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SIGNATURE
  PENWEST PHARMACEUTICALS CO.Date: August 5, 2005
    
    /s/ Jennifer L. GoodJennifer L. GoodSenior Vice President, Finance and Chief Financial Officer(Principal Financial Officer)
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EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1(1)+
    
    2005 Stock Incentive Plan10.2(1)+
    
    Form of Incentive Stock Option Agreement for grants under 2005
Stock Incentive Plan.10.3(1)+
    
    Form of Employee Nonstatutory Stock Option Agreement for grants
under 2005 Stock Incentive Plan.10.4(1)+
    
    Form of Nonstatutory Stock Option Agreement (Consultants and
Directors) for grants under 2005 Stock Incentive Plan.10.5(1)+
    
    Form of Director Restricted Stock Agreement for grants under
2005 Stock Incentive Plan.31.1
    
    Certification of Chief Executive Officer pursuant to Exchange
Act Rules 13a-14 or 15d-14, as adopted pursuant to Section 302
of Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Exchange
Act Rules 13a-14 or 15d-14, as adopted pursuant to Section 302
of Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive 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 2002.32.2
    
    Certification of Chief 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.+
    
    Management contract, or compensatory plan or arrangement.(1)
    
    Incorporated by reference to Exhibits to Penwests Current

Report on Form 8-K filed on June 7, 2005 (File No. 000-23467)
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