##### 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 March 31, 2010
 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 001-34267
 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.)2981 Route 22
Suite 2
Patterson, New York(Address of Principal Executive Offices)
    
    12563-2335(Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    OutstandingCommon Stock, par value $.001
    
    31,877,826




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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
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    33Item 4. Controls and Procedures
    
    34PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    34Item 1A. Risk Factors
    
    38Item 5. Other Information
    
    50Item 6. Exhibits
    
    50Signature
    
    51Exhibit Index
    
    52EX-10.1EX-31EX-32
   Forward Looking Statements




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements (Unaudited)
 PENWEST PHARMACEUTICALS CO.


CONDENSED BALANCE SHEETS
 March 31,
    
    
    December 31,2010
    
    
    2009(In thousands, except shareamounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,292
    
    
    $
    11,246Marketable securities
    
    
    254
    
    
    
    240Trade accounts receivable
    
    
    8,213
    
    
    
    6,226Inventories, net
    
    
    282
    
    
    
    263Prepaid expenses and other current assets
    
    
    1,256
    
    
    
    1,289Total current assets
    
    
    21,297
    
    
    
    19,264Fixed assets, net
    
    
    1,375
    
    
    
    1,576Patents, net
    
    
    936
    
    
    
    996Deferred charges
    
    
    1,670
    
    
    
    1,740Deferred income taxes
    
    
    138
    
    
    
    Other assets, net
    
    
    2,310
    
    
    
    2,320Total assets
    
    $
    27,726
    
    
    $
    25,896LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    555
    
    
    $
    750Accrued expenses
    
    
    1,429
    
    
    
    2,178Accrued development costs
    
    
    321
    
    
    
    275Income taxes payable
    
    
    126
    
    
    
    Loan payable
    
    
    2,741
    
    
    
    4,112Deferred compensation
    
    
    291
    
    
    
    294Total current liabilities
    
    
    5,463
    
    
    
    7,609Deferred revenue
    
    
    740
    
    
    
    889Deferred compensation
    
    
    2,381
    
    
    
    2,376Total liabilities
    
    
    8,584
    
    
    
    10,874Commitments and contingencies (see Note 15)Shareholders 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 31,810,040 shares at March 31, 2010 and 31,778,416 shares at
December 31, 2009
    
    
    32
    
    
    
    32Additional paid-in capital
    
    
    250,232
    
    
    
    249,982Accumulated deficit
    
    
    (231,258
    )
    
    
    (235,127
    )Accumulated other comprehensive income
    
    
    136
    
    
    
    135Total shareholders equity
    
    
    19,142
    
    
    
    15,022Total liabilities and shareholders equity
    
    $
    27,726
    
    
    $
    25,896
  3




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PENWEST PHARMACEUTICALS CO.


CONDENSED STATEMENTS OF OPERATIONS
 Three Months EndedMarch 31,2010
    
    
    2009(Unaudited)(In thousands, exceptper share data)Revenues:Royalties
    
    $
    7,653
    
    
    $
    4,722Product sales
    
    
    202
    
    
    
    180Collaborative licensing and development revenue
    
    
    903
    
    
    
    368Total revenues
    
    
    8,758
    
    
    
    5,270Operating expenses:Cost of revenues
    
    
    916
    
    
    
    654Selling, general and administrative
    
    
    1,646
    
    
    
    2,321Research and product development
    
    
    2,208
    
    
    
    3,006Total operating expenses
    
    
    4,770
    
    
    
    5,981Income (loss) from operations
    
    
    3,988
    
    
    
    (711
    )Investment income
    
    
    1
    
    
    
    7Interest expense
    
    
    (119
    )
    
    
    (258
    )Income (loss) before income tax expense
    
    
    3,870
    
    
    
    (962
    )Income tax expense
    
    
    
    
    
    
    Net income (loss)
    
    $
    3,870
    
    
    $
    (962
    )Net income (loss) per common share:Basic
    
    $
    0.12
    
    
    $
    (0.03
    )Diluted
    
    $
    0.12
    
    
    $
    (0.03
    )Weighted average shares of common stock outstanding:Basic
    
    
    31,808
    
    
    
    31,719Diluted
    
    
    31,930
    
    
    
    31,719
  4




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PENWEST PHARMACEUTICALS CO.

CONDENSED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2010
    
    
    2009(Unaudited)(In thousands)Operating activities:Net income (loss)
    
    $
    3,870
    
    
    $
    (962
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities
    
    
    (2,443
    )
    
    
    651Net cash provided by (used in) operating activities
    
    
    1,427
    
    
    
    (311
    )Investing activities:Acquisitions of fixed assets
    
    
    
    
    
    
    (12
    )Patent costs
    
    
    
    
    
    
    (34
    )Purchases of marketable securities
    
    
    (252
    )
    
    
    (499
    )Proceeds from maturities of marketable securities
    
    
    240
    
    
    
    Net cash used in investing activities
    
    
    (12
    )
    
    
    (545
    )Financing activities:Repayment of debt
    
    
    (1,371
    )
    
    
    (1,371
    )Issuance of common stock
    
    
    2
    
    
    
    Net cash used in financing activities
    
    
    (1,369
    )
    
    
    (1,371
    )Net increase (decrease) in cash and cash equivalents
    
    
    46
    
    
    
    (2,227
    )Cash and cash equivalents at beginning of period
    
    
    11,246
    
    
    
    16,692Cash and cash equivalents at end of period
    
    $
    11,292
    
    
    $
    14,465
  5




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PENWEST PHARMACEUTICALS CO.

NOTES TO CONDENSED FINANCIAL STATEMENTS 
(Unaudited)
 1. Business
 a
 ® ®
   2. Basis of Presentation
  6




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




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 4. Per Share Data
 Income (Loss) Per Share
  Three Months EndedMarch 31,2010
    
    
    2009Numerator:Net income (loss)
    
    $
    3,870
    
    
    $
    (962
    )Denominator:Denominator for basic income (loss) per
common share  weighted average shares
    
    
    31,808
    
    
    
    31,719Dilutive effect of employee stock options
    
    
    122
    
    
    
    Denominator for diluted income (loss) per
common share  weighted average shares
    
    
    31,930
    
    
    
    31,719Income (loss) per common share-basic
    
    $
    0.12
    
    
    $
    (0.03
    )Income (loss) per common share-diluted
    
    $
    0.12
    
    
    $
    (0.03
    )
  Three Months EndedMarch 31,2010
    
    
    2009(In thousands of shares)Stock options outstanding
    
    
    1,851
    
    
    
    2,522Restricted stock outstanding (unvested)
    
    
    
    
    
    
    87Warrants to purchase common stock
    
    
    4,070
    
    
    
    4,0705,921
    
    
    
    6,679
 5. Fair Value Measurement
  Level 1:
 Level 2:
 Level 3:
  8




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Cash and cash equivalents
    
    $
    11,292
    
    
    $
    
    
    
    $
    
    
    
    $
    11,292Marketable securities
    
    
    
    
    
    
    254
    
    
    
    
    
    
    
    254Money market account
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    258Total
    
    $
    11,550
    
    
    $
    254
    
    
    $
    
    
    
    $
    11,804
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Cash and cash equivalents
    
    $
    11,246
    
    
    $
    
    
    
    $
    
    
    
    $
    11,246Marketable securities
    
    
    
    
    
    
    240
    
    
    
    
    
    
    
    240Money market account
    
    
    296
    
    
    
    
    
    
    
    
    
    
    
    296Total
    
    $
    11,542
    
    
    $
    240
    
    
    $
    
    
    
    $
    11,782
  6. Other Assets
  March 31,
    
    
    December 31,2010
    
    
    2009(Unaudited) (In thousands)Assets held in a trust for the Companys
Supplemental Executive Retirement Plan and
Deferred Compensation Plan (see Note 12):Cash surrender value of life insurance policies
    
    $
    2,052
    
    
    $
    2,024Money market account
    
    
    258
    
    
    
    2962,310
    
    
    
    2,320Loan receivable from collaborator (see Note 14)
    
    
    1,000
    
    
    
    1,0003,310
    
    
    
    3,320Allowance for loan receivable from collaborator
    
    
    (1,000
    )
    
    
    (1,000
    )Other assets, net
    
    $
    2,310
    
    
    $
    2,320
  9




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


7. Loan Payable
 Credit Facility
      8. Shareholders Equity
 Shelf Registration Statement
  Private Placement
   10




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Share-Based Compensation
  Three Months EndedMarch 31,2010
    
    
    2009(Unaudited) (In thousands)Selling, general and administrative
    
    $
    148
    
    
    $
    (568
    )Research and product development
    
    
    100
    
    
    
    164Total
    
    $
    248
    
    
    $
    (404
    )
  Rights Agreement
   11




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  9. Cost of Revenues
 Three Months EndedMarch 31,2010
    
    
    2009(Unaudited)(In thousands)Cost of royalties
    
    $
    94
    
    
    $
    113Cost of product sales
    
    
    187
    
    
    
    181Cost of collaborative licensing and development revenue
    
    
    635
    
    
    
    360Total cost of revenues
    
    $
    916
    
    
    $
    654
  10. Restructuring Charges
   11. Income Taxes
  12




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   12. Supplemental Executive Retirement Plan and Deferred Compensation Plan
   Three Months EndedMarch 31,2010
    
    
    2009(Unaudited) (In thousands)Interest cost
    
    $
    28
    
    
    $
    30Amortization of prior service cost
    
    
    1
    
    
    
    Net periodic benefit cost
    
    $
    29
    
    
    $
    30
   13. Comprehensive Income (Loss)
  March 31,
    
    
    December 31,2010
    
    
    2009(Unaudited)(In thousands)Adjustment for funded status of post retirement plan
    
    $
    136
    
    
    $
    135
 13




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Three Months EndedMarch 31,2010
    
    
    2009(Unaudited)(In thousands)Net income (loss)
    
    $
    3,870
    
    
    $
    (962
    )Amortization of prior service cost
    
    
    1
    
    
    
    Comprehensive income (loss)
    
    $
    3,871
    
    
    $
    (962
    )
 14. 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 to the Company beginning from the time of the product
launch in July 2006 (the Royalty Holiday). In the third quarter of 2008, the Royalty
Holiday ended. The Company recognized royalties from Endo related to sales of Opana ER of
$7.2 million and $4.4 million for the three month periods ending March 31, 2010 and 2009,
respectively.
    
    The Companys share of the development costs for Opana ER that it opted out of funding in
April 2003 totaled $28 million and was 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
was fully recouped. In the three month period ended March 31, 2010, Endo recouped the
remaining balance of unfunded development costs of $3.7 million and as a result, the
temporary 50% reduction in the royalty rate has ended.
    
    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




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




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
        16




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Mylan Pharmaceuticals Inc.
     Drug Delivery Technology Collaborations
   15. Contingencies
  17




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




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  ® ® ® ®
  Sandoz ANDA Litigation
 ® ® ® ®
 ® ®
 Barr ANDA Litigation
 ® ® ® ® ® ®
 19




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 ®
 ® ®
  Roxane ANDA Litigation
 ® ® ®
 ® ®
 Watson ANDA Litigation
 ® ® ®
 ®
 Tang/Edelman Shareholder Claim
  20




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   Tang
Capital Partners, et al Penwest
Pharmaceuticals Co
 Tang
Capital Partners, et al Penwest Pharmaceuticals Co
  21




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
 a
 ® ®
   Endo.
 22




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®
    Edison.
 23




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Mylan.
  Restructuring Charges.
  24




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Net Loss and Profitability
  
    
    the commercial success of Opana ER, and the amount of royalties on 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;
    
    our ability to access funding support for our development programs from third party
collaborators;
    
    our ability to enter into drug delivery technology collaborations;
    
    the level of our investment in research and development activities, including the timing
and costs of conducting clinical trials of A0001;
    
    the level of our general and administrative expenses; and
    
    the successful development and commercialization of product candidates in our portfolio
and products being developed for collaborations.
  Critical Accounting Policies and Estimates
  25




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Recent Accounting Pronouncements
  Results of Operations for the Three Month Periods Ended March 31, 2010 and 2009
 Revenues
 Three months
    
    
    
    
    
    
    Three monthsended
    
    
    Percentage
    
    
    endedMarch 31,
    
    
    increase
    
    
    March 31,2010
    
    
    (decrease)
    
    
    2009(In thousands, except percentages)Royalties
    
    $
    7,653
    
    
    
    62
    %
    
    $
    4,722Product sales
    
    
    202
    
    
    
    12
    
    
    
    180Collaborative licensing and development revenue
    
    
    903
    
    
    
    145
    
    
    
    368Total revenues
    
    $
    8,758
    
    
    
    66
    %
    
    $
    5,270
    Cost of Revenues
 Three months
    
    
    Percentage
    
    
    Three monthsended
    
    
    increase
    
    
    endedMarch 31, 2010
    
    
    (decrease)
    
    
    March 31, 2009(In thousands, except percentages)Cost of
royalties
    
    $
    94
    
    
    
    (17
    )%
    
    $
    113Cost of product sales
    
    
    187
    
    
    
    3
    
    
    
    181Cost of collaborative licensing and development revenue
    
    
    635
    
    
    
    76
    
    
    
    360Total cost of revenues
    
    $
    916
    
    
    
    40
    %
    
    $
    654
  26




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Selling, General and Administrative Expenses
 Three months
    
    
    Percentage
    
    
    Three monthsended
    
    
    increase
    
    
    endedMarch 31, 2010
    
    
    (decrease)
    
    
    March 31, 2009(In thousands, except percentages)Selling, general and administrative expenses
    
    $
    1,646
    
    
    
    (29
    )%
    
    $
    2,321
   Research and Product Development Expenses
   Three months
    
    
    Percentage
    
    
    Three monthsended
    
    
    increase
    
    
    endedMarch 31, 2010
    
    
    (decrease)
    
    
    March 31, 2009(In thousands, except percentages)A0001 costs
    
    $
    676
    
    
    
    (32
    )%
    
    $
    998Other phase I products and internal costs
    
    
    1,532
    
    
    
    (24
    )
    
    
    2,008Total research and product development expense
    
    $
    2,208
    
    
    
    (27
    )%
    
    $
    3,006
 27




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
    
    A0001These expenses reflect our direct external expenses relating to the development of
A0001. These expenses approximated 31% of our R&D expenses for the three month period ended
March 31, 2010.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 following repeat dosing, and a maximum tolerated dose was established. In December
2009 and February 2010, we initiated two Phase IIa studies in patients with mitochondrial
diseases, with one trial focused on patients with FA 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 a discernible impact in the treatment of patients with
these disorders using various biochemical, functional and clinical measures. We expect data
from both of these trials by the end of the third quarter of 2010. In parallel with the Phase
Ib trial, we also conducted long-term animal toxicology studies to support longer dosing in the
clinical program, which we completed in the fourth quarter of 2009.
    
    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 month period ended March
31, 2010, compared with the three month period ended March 31, 2009 primarily as a result of
lower compensation expenses in the three month period ended March 31, 2010 due to staff
reductions implemented in the first and fourth quarters of 2009, and lower share-based
compensation expense. We did not incur any expenses relating to Phase I product
candidates during the three month period ended March 31, 2010.
   Share-Based Compensation
  28




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Three Months EndedMarch 31,2010
    
    
    2009(In thousands)Selling, general and
administrative
    
    $
    148
    
    
    $
    (568
    )Research and product
development
    
    
    100
    
    
    
    164Total share-based
compensation
    
    $
    248
    
    
    $
    (404
    )
  Tax Rates
  Liquidity and Capital Resources
 Sources of Liquidity
  Senior Secured Credit Facility.
   29




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Cash Flows
   Funding Requirements
       30




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
    
    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 timing and amount of payments received under our drug delivery technology
collaborative agreements;
    
    the results of our Phase IIa clinical trials of A0001, and the cost of any future
pre-clinical studies and clinical trials that we may conduct, our ability to enter into
collaborations for A0001, or otherwise to access funding and support for pre-clinical
studies and clinical trials of A0001;
    
    our and Endos ability to enter into new collaborations for Opana ER outside the United
States, and the structure and terms of any such agreements;
    
    our ability to access funding support for development programs from third party
collaborators;
    
    our ability to enter into drug delivery technology collaborations, and the structure and
terms of such collaborations;
    
    the level of our investment in capital expenditures for facilities or equipment; and
    
    our success in reducing our spending and managing our costs.
     31




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Contractual Obligations
  Less Than
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    169
    
    
    $
    169
    
    
    $
    
    
    
    $
    
    
    
    $
    Purchase obligations
    
    
    4,027
    
    
    
    4,027
    
    
    
    
    
    
    
    
    
    
    
    Payments due under credit facility
    
    
    3,186
    
    
    
    3,186
    
    
    
    
    
    
    
    
    
    
    
    Deferred compensation
    
    
    2,671
    
    
    
    291
    
    
    
    582
    
    
    
    582
    
    
    
    1,216Total
    
    $
    10,053
    
    
    $
    7,673
    
    
    $
    582
    
    
    $
    582
    
    
    $
    1,216
   
    
    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.
   32




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Net Operating Loss Carryforwards
    
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
 Market Risk and Risk Management Policies
    33




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Item 4.
    
    Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures.
 (b) Changes in Internal Control Over Financial Reporting.
 
 PART II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
 Impax ANDA Litigation
 ® ® ® ®
 ®
 34




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®
 Actavis ANDA Litigation
 ® ® ® ®
 ® ®
 ® ® ® ®
  Sandoz ANDA Litigation
 ® ® ® ®
 35




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® ®
 Barr ANDA Litigation
 ® ® ® ® ® ® ®
 ® ®
  Roxane ANDA Litigation
 ® ® ®
 ® ®
 36




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##### Table of Contents



Watson ANDA Litigation
 ® ® ®
 ®
 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.),
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##### Table of Contents



Item 1A.
    
    Risk Factors
 Our business faces many risks. If any of the events or circumstances described in the
following risks actually occurs, our business, financial condition or results of operations could
suffer and the trading price of our common stock could decline. The following risks should be
considered, together with all of the other information in this annual report before deciding to
invest in our securities.
 We have a history of net losses and may not be able to achieve or maintain profitability on an
annual basis
     
    
    the commercial success of Opana ER, and the amount of royalties on 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;
    
    our ability to access funding support for development programs from third party collaborators;
    
    our ability to enter into drug delivery technology collaborations;
 
    
    the level of our investment in research and development activities, including the
timing and costs of conducting clinical trials of A0001;
 
    
    the amount of our general and administrative expenses; and
 
    
    the successful development and commercialization of product candidates in our
portfolio, and products being developed for collaborations.
 We may require additional funding, which may be difficult to obtain
  38




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
    
    the commercial success of Opana ER, and the amount of royalties we receive on sales of
Opana ER, which may be adversely affected by any potential generic competition;
 
    
    the timing and amount of payments received under our drug delivery technology
collaboration agreements;
 
    
    the results of our Phase IIa clinical trials of A0001, and the cost of any future
pre-clinical studies and clinical trials that we may conduct, our ability to enter into
collaborations for A0001, or otherwise access to funding and support for pre-clinical
studies and clinical trials of A0001;
 
    
    our and Endos ability to enter into collaborations for Opana ER outside the United
States, and the structure and terms of any such agreements;
 
    
    our ability to access funding support for development programs from third party
collaborators;
 
    
    our ability to enter into drug delivery technology collaborations, and the structure and
terms of such collaborations;
    
    the level of our investment in capital expenditures for facilities and equipment; and
    
    our success in continuing to reduce our spending and managing our costs.
   Our ability to generate revenues depends heavily on the success of Opana ER
  39




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
    
    the safety and efficacy of Opana ER as compared to competing products;
 
    
    Endos ability to educate the medical community about the benefits, safety and efficacy
of Opana ER;
 
    
    the effectiveness of Endos sales and marketing activities;
 
    
    the potential impact of tamper resistant opioids newly available in the market;
 
    
    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 the
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
 ,
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We are dependent on our collaborators to develop, manufacture and commercialize our products
    41




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
    
    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.
 
    
    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 dispute 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 Administration, 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 may face lawsuits as a result
  We face significant competition, which may result in others discovering, developing or
commercializing products before us or more successfully than we do
 42




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
    
    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
  43




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
    
    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.
  We may not be able to obtain orphan drug exclusivity for our products. If our competitors are able
to obtain orphan drug exclusivity for their products, we may not be able to have our competitive
products approved by the applicable regulatory authority for a significant period of time
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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
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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.
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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 in development;
    
    we may not be able to initiate or continue clinical trials on our collaborations for
products that are under development; and
    
    we 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 materials
  We may lose business opportunities as a result of healthcare reform and the expansion of
managed-care organizations.
     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
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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
  The market price of our common stock may be volatile
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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
Penwest more difficult
  Proxy contests pursued by dissident shareholders may be costly and disruptive to our business
operations
    
 Item 5. Other Information
  
 Item 6. Exhibits
  50




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SIGNATURE
  PENWEST PHARMACEUTICALS CO.Date:  May 10, 2010
    /s/ Jennifer L. GoodJennifer L. GoodPresident and Chief Executive Officer 51




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EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    Form of Amended Executive Retention Agreements entered into by the Registrant
and each of its Executive Officers31
    
    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.
 
 
    
    Management contract or compensatory plan or arrangement. 52