##### 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, 2008
 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
  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
    
    OutstandingCommon Stock, par value $.001
    
    31,654,967




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##### 



PENWEST PHARMACEUTICALS CO.
TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Condensed Financial Statements (Unaudited):Condensed Balance Sheets
    
    
    3Condensed Statements of Operations
    
    
    4Condensed Statements of Cash Flows
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    28Item 1A.
    
    Risk Factors
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    41Item 6.
    
    Exhibits
    
    
    41Signature
    
    
    42Exhibit Index
    
    
    43EX-10.1 2005 STOCK INCENTIVE PLAN, AS AMENDEDEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  Forward-looking Statements
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements (Unaudited)
 PENWEST PHARMACEUTICALS CO.
 
 CONDENSED BALANCE SHEETS
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)
    
    
    (Note 2)(In thousands,except share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,318
    
    
    $
    15,680Marketable securities
    
    
    5,359
    
    
    
    7,293Trade accounts receivable
    
    
    738
    
    
    
    781Inventories:Raw materials and other
    
    
    36
    
    
    
    37Finished goods
    
    
    552
    
    
    
    630Total inventories
    
    
    588
    
    
    
    667Prepaid expenses and other current assets
    
    
    834
    
    
    
    1,489Total current assets
    
    
    30,837
    
    
    
    25,910Fixed assets, net
    
    
    3,045
    
    
    
    3,582Patents, net
    
    
    2,541
    
    
    
    2,539Deferred charges
    
    
    2,389
    
    
    
    2,479Other assets, net
    
    
    2,303
    
    
    
    2,472Total assets
    
    $
    41,115
    
    
    $
    36,982LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    424
    
    
    $
    2,239Accrued expenses
    
    
    1,669
    
    
    
    1,602Accrued development costs
    
    
    973
    
    
    
    1,483Loan payable  current portion
    
    
    3,944
    
    
    
    2,405Deferred compensation  current portion
    
    
    290
    
    
    
    290Total current liabilities
    
    
    7,300
    
    
    
    8,019Loan payable
    
    
    6,854
    
    
    
    9,595Accrued financing fees
    
    
    360
    
    
    
    360Deferred revenue
    
    
    290
    
    
    
    183Deferred compensation
    
    
    2,458
    
    
    
    2,588Total liabilities
    
    
    17,262
    
    
    
    20,745Shareholders equityPreferred stock, par value $.001, authorized
1,000,000 shares, none outstanding
    
    
    
    
    
    
    Common stock, par value $.001, authorized
60,000,000 shares, issued and outstanding
31,646,899 shares at June 30, 2008 and
23,426,323 shares at December 31, 2007
    
    
    32
    
    
    
    23Additional paid in capital
    
    
    247,762
    
    
    
    222,927Accumulated deficit
    
    
    (224,119
    )
    
    
    (206,893
    )Accumulated other comprehensive income
    
    
    178
    
    
    
    180Total shareholders equity
    
    
    23,853
    
    
    
    16,237Total liabilities and shareholders equity
    
    $
    41,115
    
    
    $
    36,982
  3




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)(In thousands, except
    
    
    (In thousands, exceptper share data)
    
    
    per share data)Revenues:Royalties and licensing fees
    
    $
    670
    
    
    $
    546
    
    
    $
    1,101
    
    
    $
    1,265Product sales
    
    
    302
    
    
    
    166
    
    
    
    530
    
    
    
    289Research and development reimbursements
    
    
    344
    
    
    
    
    
    
    
    424
    
    
    
    Total revenues
    
    
    1,316
    
    
    
    712
    
    
    
    2,055
    
    
    
    1,554Cost of revenues:Cost of product sales
    
    
    148
    
    
    
    144
    
    
    
    246
    
    
    
    254Cost of research and development reimbursements.
    
    
    360
    
    
    
    
    
    
    
    431
    
    
    
    Total cost of revenues
    
    
    508
    
    
    
    144
    
    
    
    677
    
    
    
    254Gross profit
    
    
    808
    
    
    
    568
    
    
    
    1,378
    
    
    
    1,300Operating expenses:Selling, general and administrative
    
    
    3,071
    
    
    
    3,667
    
    
    
    7,395
    
    
    
    7,388Research and product development
    
    
    4,524
    
    
    
    6,042
    
    
    
    10,909
    
    
    
    10,426Total operating expenses
    
    
    7,595
    
    
    
    9,709
    
    
    
    18,304
    
    
    
    17,814Loss from operations
    
    
    (6,787
    )
    
    
    (9,141
    )
    
    
    (16,926
    )
    
    
    (16,514
    )Investment income
    
    
    180
    
    
    
    530
    
    
    
    379
    
    
    
    1,019Interest expense
    
    
    (321
    )
    
    
    (347
    )
    
    
    (678
    )
    
    
    (417
    )Loss before income tax expense
    
    
    (6,928
    )
    
    
    (8,958
    )
    
    
    (17,225
    )
    
    
    (15,912
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (6,928
    )
    
    $
    (8,958
    )
    
    $
    (17,225
    )
    
    $
    (15,912
    )Net loss per common share
    
    $
    (0.22
    )
    
    $
    (0.39
    )
    
    $
    (0.61
    )
    
    $
    (0.69
    )Weighted average shares of common stock outstanding
    
    
    31,486
    
    
    
    23,185
    
    
    
    28,299
    
    
    
    23,164
  4




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PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2008
    
    
    2007(Unaudited)(In thousands)Operating activities:Net loss
    
    $
    (17,225
    )
    
    $
    (15,912
    )Adjustments to reconcile net loss to net cash used in operating activities
    
    
    2,169
    
    
    
    619Net cash used in operating activities
    
    
    (15,056
    )
    
    
    (15,293
    )Investing activities:Acquisitions of fixed assets, net
    
    
    (31
    )
    
    
    (399
    )Patent costs
    
    
    (201
    )
    
    
    (141
    )Proceeds from maturities of marketable securities
    
    
    9,800
    
    
    
    25,304Purchases of marketable securities
    
    
    (7,859
    )
    
    
    (17,403
    )Loan disbursed to collaborator
    
    
    (1,000
    )
    
    
    Net cash provided by investing activities
    
    
    709
    
    
    
    7,361Financing activities:Proceeds from loan payable
    
    
    
    
    
    
    12,000Repayment of debt
    
    
    (1,202
    )
    
    
    Debt issuance costs
    
    
    
    
    
    
    (112
    )Issuance of common stock, net
    
    
    23,187
    
    
    
    849Net cash provided by financing activities
    
    
    21,985
    
    
    
    12,737Net increase in cash and cash equivalents
    
    
    7,638
    
    
    
    4,805Cash and cash equivalents at beginning of period
    
    
    15,680
    
    
    
    16,182Cash and cash equivalents at end of period
    
    $
    23,318
    
    
    $
    20,987
  5




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 1. Business
  ® ®
  2. Basis of Presentation
    3. Recent Accounting Pronouncements
  6




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
      4. Other Assets
  June 30,
    
    
    December 31,2008
    
    
    2007(unaudited)(in thousands)Assets held in a trust for the Companys
Supplemental Executive Retirement Plan and
Deferred Compensation Plan (see Note 9):Cash surrender value of life insurance policies
    
    $
    2,222
    
    
    $
    2,468Money market account
    
    
    81
    
    
    
    42,303
    
    
    
    2,472Loan receivable from collaborator (see Note 11)
    
    
    1,000
    
    
    
    3,303
    
    
    
    2,472Allowance for loan receivable from collaborator
    
    
    (1,000
    )
    
    
    Other assets, net
    
    $
    2,303
    
    
    $
    2,472
 7




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 5. Loans Payable
 Credit Facility
     (unaudited)(in thousands)Less than one year
    
    $
    3,944One to two years
    
    
    5,483Two to three years
    
    
    1,371$
    10,798
  8




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 6. Fair Value Measurement
       Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(unaudited) (in thousands)Corporate debt securities
    
    $
    2,693
    
    
    $
    
    
    
    $
    
    
    
    $
    2,693Government sponsored enterprises
    
    
    2,666
    
    
    
    
    
    
    
    
    
    
    
    2,666Total
    
    $
    5,359
    
    
    $
    
    
    
    $
    
    
    
    $
    5,359
  7. Shareholders Equity
 Private Placement
    9




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Share-Based Compensation
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(unaudited)(in thousands)Research and product development
    
    $
    215
    
    
    $
    198
    
    
    $
    450
    
    
    $
    (84
    )Selling, general and administration
    
    
    526
    
    
    
    927
    
    
    
    1,207
    
    
    
    1,526Total stock based compensation
    
    $
    741
    
    
    $
    1,125
    
    
    $
    1,657
    
    
    $
    1,442
   Rights Agreement
     8. Income Taxes
  9. Supplemental Executive Retirement Plan and Deferred Compensation Plan
  10




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(unaudited)(in thousands)Interest cost
    
    $
    30
    
    
    $
    30
    
    
    $
    59
    
    
    $
    59Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Net periodic benefit cost
    
    $
    30
    
    
    $
    30
    
    
    $
    60
    
    
    $
    60
   10. Comprehensive Income (Loss)
  June 30,
    
    
    December 31,2008
    
    
    2007(unaudited)(in thousands)Unrealized gains on marketable securities
    
    $
    4
    
    
    $
    7Adjustment for funded status of post retirement plan
    
    
    174
    
    
    
    173Accumulated other comprehensive income
    
    $
    178
    
    
    $
    180
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(unaudited)
    
    
    (unaudited)(in thousands)
    
    
    (in thousands)Net loss
    
    $
    (6,928
    )
    
    $
    (8,958
    )
    
    $
    (17,225
    )
    
    $
    (15,912
    )Changes in unrealized net gains and losses on
marketable securities
    
    
    (8
    )
    
    
    
    
    
    
    (3
    )
    
    
    7Adjustment for funded status of post retirement plan
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    1Comprehensive loss
    
    $
    (6,936
    )
    
    $
    (8,957
    )
    
    $
    (17,227
    )
    
    $
    (15,904
    )
 11. Collaboration and Licensing Agreements
  11




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 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 will be 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). If the Company was not subject to the Royalty Holiday, the
Company would have recognized royalties from Endo of approximately $8.1 million and $15.4
million, respectively, for the three and six month periods ended June 30, 2008.
Cumulatively, through June 30, 2008, approximately $35.1 million has been applied against
the Royalty Holiday. The Company expects to begin to recognize royalties from Endo related
to sales of Opana ER in the third quarter of 2008.
    
    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.
    
    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. This temporary reduction in royalties will not apply until the
threshold for the Royalty Holiday has been met.
   12




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Edison Pharmaceuticals, Inc.
    Mylan Pharmaceuticals Inc.
  Drug Delivery Technology Collaborations
  13




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




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
    13. Subsequent Events
 Sandoz Paragraph IV Patent Certification Notice
  15




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  ® ®
   Products
 Opana ® ER. ®
   16




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17




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##### Table of Contents



Nalbuphine ER.
  A0001.
   PW4153.
  18




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##### Table of Contents




    
    the commercial success of Opana ER, and the timing and amount of royalties from Endos
sales of Opana ER which may be affected by any potential generic entry;
    
    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 timing and amount of payments to Edison in connection with the Edison agreement, as
well as our costs of development for drug candidates to which we acquire rights under the
Edison agreement;
    
    the successful development and commercialization of product candidates in our portfolio;
    
    the level of investment for acquisitions or in-licensing of compounds or technologies
intended to support our growth; and
    
    royalties from Mylans sales of Pfizers generic version of Procardia XL 30 mg.
  Critical Accounting Policies and Estimates
  Recent Accounting Pronouncements
  19




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Results of Operations for the Three and Six Month Periods Ended June 30, 2008 and 2007
 Revenues
 Three months
    
    
    
    
    
    
    Three months
    
    
    Six months
    
    
    
    
    
    
    Six monthsended
    
    
    Percentage
    
    
    ended
    
    
    ended
    
    
    Percentage
    
    
    endedJune 30,
    
    
    Increase
    
    
    June 30,
    
    
    June 30,
    
    
    Increase
    
    
    June 30,2008
    
    
    (decrease)
    
    
    2007
    
    
    2008
    
    
    (decrease)
    
    
    2007(in thousands, except percentages)
    
    
    (in thousands, except percentages)Royalties and licensing fees
    
    $
    670
    
    
    
    23
    %
    
    $
    546
    
    
    $
    1,101
    
    
    
    (13
    )%
    
    $
    1,265Product sales
    
    
    302
    
    
    
    82
    
    
    
    166
    
    
    
    530
    
    
    
    83
    
    
    
    289Research and development
reimbursements
    
    
    344
    
    
    
    n/a
    
    
    
    
    
    
    
    424
    
    
    
    n/a
    
    
    
    Total revenue
    
    $
    1,316
    
    
    
    85
    %
    
    $
    712
    
    
    $
    2,055
    
    
    
    32
    %
    
    $
    1,554
     Cost of Revenues
 Three months
    
    
    Percentage
    
    
    Three months
    
    
    Six months
    
    
    Percentage
    
    
    Six monthsended
    
    
    increase
    
    
    ended
    
    
    ended
    
    
    increase
    
    
    endedJune 30, 2008
    
    
    (decrease)
    
    
    June 30, 2007
    
    
    June 30, 2008
    
    
    (decrease)
    
    
    June 30, 2007(In thousands, except percentages)
    
    
    (In thousands, except percentages)Cost of product sales
    
    $
    148
    
    
    
    3
    %
    
    $
    144
    
    
    $
    246
    
    
    
    (3
    )%
    
    $
    254Cost of research and
development
reimbursements
    
    
    360
    
    
    
    n/a
    
    
    
    
    
    
    
    431
    
    
    
    n/a
    
    
    
    Total cost of revenues
    
    $
    508
    
    
    
    253
    %
    
    $
    144
    
    
    $
    677
    
    
    
    167
    %
    
    $
    254
   20




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Selling, General and Administrative Expenses
 Three months
    
    Percentage
    
    Three months
    
    Six months
    
    Percentage
    
    Six monthsended
    
    increase
    
    ended
    
    ended
    
    increase
    
    endedJune 30, 2008
    
    (decrease)
    
    June 30, 2007
    
    June 30, 2008
    
    (decrease)
    
    June 30, 2007(In thousands, except percentages)
    
    (In thousands, except percentages)Selling, general
and administrative
expenses
    
    $
    3,071
    
    
    
    (16
    )%
    
    $
    3,667
    
    
    $
    7,395
    
    
    
    n/a
    
    
    $
    7,388
    Research and Product Development Expenses
      21




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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 30,2008
    
    
    (Decrease)
    
    
    2007
    
    
    2008
    
    
    (Decrease)
    
    
    2007(in thousands, except percentages)
    
    
    (in thousands, except percentages)Nalbuphine ER
    
    $
    519
    
    
    
    (79
    )%
    
    $
    2,522
    
    
    $
    1,635
    
    
    
    (53
    )%
    
    $
    3,487Edison Program
    
    
    1,454
    
    
    
    n/a
    
    
    
    
    
    
    
    3,634
    
    
    
    n/a
    
    
    
    PW4153
    
    
    104
    
    
    
    112
    
    
    
    49
    
    
    
    149
    
    
    
    2
    
    
    
    146Other Phase I Products and Internal Costs
    
    
    2,447
    
    
    
    (30
    )
    
    
    3,471
    
    
    
    5,491
    
    
    
    (19
    )
    
    
    6,793Total Research and Product Development
Expense
    
    $
    4,524
    
    
    
    (25
    )%
    
    $
    6,042
    
    
    $
    10,909
    
    
    
    5
    %
    
    $
    10,426
  
    
    Nalbuphine ER These expenses reflect our direct external expenses relating to the
development of nalbuphine ER. These expenses approximated 11% and 15%, respectively, of our
R&D expenses for the three and six month periods ended June 30, 2008 and consisted primarily
of payments to third parties in connection with clinical trials of nalbuphine ER. The
expenses for this program decreased in the 2008 periods as compared to the 2007 periods, as
the 2007 periods reflect costs we incurred in connection with a Phase I safety trial that we
completed in 2007, a Phase IIa trial that we completed in January 2008 and costs for the
purchase of drug active. For the remainder of 2008, the level of our spending related to
nalbuphine ER will depend on the terms of any collaboration agreement we enter into and the
timing of the Phase IIb trial, which will be subject to the availability of resources.
    
    Edison Program These expenses reflect our funding of Edisons research activities
under the Edison agreement as well as our direct external expenses relating to the
development of A0001. These expenses approximated 32% and 33%, respectively, of our R&D
expenses for the three and six month periods ended June 30, 2008 and included quarterly
research and development payments to Edison totaling $2.0 million. We anticipate that these
expenses will continue to increase in 2008 as we make further quarterly research and
development payments for the remainder of 2008 as well as a milestone payment to Edison
noted above, and increase our activity with respect to the development of A0001, including
conducting a Phase Ia clinical trial that was commenced in July 2008. The quarterly
research and development payments to Edison end in January 2009.
    
    PW4153 These expenses reflect our direct external expenses relating to the development
of PW4153. These expenses approximated 2% and 1%, respectively, of our R&D expenses for the
three and six month periods ended June 30, 2008 and consisted primarily of payments to third
parties in connection with clinical trials and other development work. We anticipate that
these expenses will increase in 2008 as we conduct the Phase Ia clinical trial of PW4153
that we commenced in July 2008.
    
    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, stock-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
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primarily related to preclinical studies,
proof-of-principle biostudies conducted on our Phase I product candidates and payments to
third parties for drug active.
   Share-Based Compensation
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(unaudited)(in thousands)Research and product development
    
    $
    215
    
    
    $
    198
    
    
    $
    450
    
    
    $
    (84
    )Selling, general and administration
    
    
    526
    
    
    
    927
    
    
    
    1,207
    
    
    
    1,526Total stock based compensation
    
    $
    741
    
    
    $
    1,125
    
    
    $
    1,657
    
    
    $
    1,442
   Tax Rates
  Liquidity and Capital Resources
 Sources of Liquidity
  Private Placement.
 23




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Senior Secured Credit Facility.
   Cash Flows
    24




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Funding Requirements
     
    
    the commercial success of Opana ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular our agreement with Endo with respect to Opana ER and our agreement with Mylan
with respect to Pfizers generic version of Procardia XL 30 mg;
    
    the timing and amount of payments to Edison in connection with the Edison agreement, as
well as our internal costs of development for drug candidates for which we acquire rights
under the Edison agreement;
    
    the progress of our development projects, funding obligations with respect to the
projects, and the related costs to us of clinical studies for our product candidates;
    
    our ability to access funding support for our development programs from third party
collaborators;
    
    the level of investment for the acquisition or in-licensing of technologies or compounds
intended to support our growth;
    
    our ability to enter into additional collaborations for our product candidates and
technologies, and the structure and terms of any such future collaborative agreements;
    
    the prosecution, defense and enforcement of our patents and other intellectual property
rights, such as our Orange Book listed patents for Opana ER;
    
    the level of our investment in capital expenditures for facilities or equipment; and
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
    
    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
    
    $
    1,029
    
    
    $
    741
    
    
    $
    288
    
    
    $
    
    
    
    $
    Purchase obligations
    
    
    2,938
    
    
    
    2,938
    
    
    
    
    
    
    
    
    
    
    
    Payments due under credit facility
    
    
    12,617
    
    
    
    4,925
    
    
    
    7,692
    
    
    
    
    
    
    
    Deferred compensation, including current portion
    
    
    2,748
    
    
    
    294
    
    
    
    587
    
    
    
    587
    
    
    
    1,280Edison collaboration
    
    
    1,667
    
    
    
    1,667
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    20,999
    
    
    $
    10,565
    
    
    $
    8,567
    
    
    $
    587
    
    
    $
    1,280
  
    
    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.
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Net Operating Loss Carryforwards
  
 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.
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(b) Changes in Internal Control Over Financial Reporting.
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Impax ANDA Litigation
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Actavis ANDA Litigation.
  
 Item 1A. Risk Factors
 Investing in our common stock involves a high degree of risk, and you should carefully
consider the risks and uncertainties described below in addition to the other information included
or incorporated by reference in this quarterly report. If any of the following risks actually
occurs, our business, financial condition or results of operations would likely suffer, possibly
materially. In that case, the trading price of our common stock could fall. An updated
description of the risk factors associated with our business is set forth below. This description
includes any material changes to and supersedes the description of the risk factors associated with
our business previously disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the
three months ended March 31, 2008.
 We have not been profitable and expect to continue to incur substantial losses
    
    
    the commercial success of Opana ER, and the timing and amount of royalties from Endos
sales of Opana ER which may be affected by any potential generic entry;
    
    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;
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
    
    the level of our investment in research and development activities, including the timing
and costs of conducting clinical trials of our products;
    
    the timing and amount of payments to Edison in connection with the Edison agreement, as
well as our costs of development for drug candidates to which we acquire rights under the
Edison agreement;
    
    the successful development and commercialization of product candidates in our portfolio;
    
    the level of investment for acquisitions or in-licensing of compounds or technologies
intended to support our growth; 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
   
    
    the commercial success of Opana ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular our agreement with Endo with respect to Opana ER and our agreement with Mylan
with respect to Pfizers generic version of Procardia XL 30 mg;
    
    the timing and amount of payments to Edison in connection with the Edison agreement, as
well as our internal costs of development for product candidates for which we acquired
rights under this agreement;
    
    the progress of other collaborative and independent development projects, funding
obligations with respect to the projects, and the related costs to us of clinical studies
for our product candidates;
    
    the level of investment for the acquisition or in-licensing of technologies or compounds
intended to support our growth;
    
    our ability to enter into additional collaborations for our product candidates and
technologies, and the structure and terms of any such future collaborative agreements;
    
    the prosecution, defense and enforcement of our patents and other intellectual property
rights, such as our Orange Book listed patents for Opana ER;
    
    the level of our investments in capital expenditures for facilities and equipment; and
    
    our success in reducing our spending and managing our costs.
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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;
    
    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; and
    
    the availability of generic versions of Opana ER and the timing of generic competition.
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Our success depends on our ability to protect our patents and other intellectual property rights
    We are dependent on our collaborators to manufacture and commercialize our products
    32




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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. This 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. In January 2007, we resolved our dispute as part of an amendment to the
strategic alliance agreement between us and Endo. 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
   33




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We face significant competition, which may result in others discovering, developing or
commercializing products before us 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 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.
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If our clinical trials are not successful or take longer to complete than we expect, we may not be
able to develop and commercialize our products
      
    
    be delayed in obtaining marketing approval for our products;
    
    not be able to obtain marketing approval for our products; or
    
    not be able to obtain approval for indications that are as broad as intended.
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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
  ®
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##### Table of Contents



in vitro in vitro
 We are subject to extensive government regulation including the requirement of approval before our
products may be marketed. Even if we obtain marketing approval, our products will be subject to
ongoing regulatory review
     The recently enacted Food and Drug Administration Amendment Act of 2007, or FDAAA, may make it
more difficult and costly for us to obtain regulatory approval of our product candidates and to
produce, market and distribute products after approval.
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##### Table of Contents



Opana ER contains a narcotic ingredient. As a result of reported misuse and abuse of prescription
narcotics, the sale of Opana ER is subject to additional regulations, including compliance with
risk management programs, which may prove difficult or expensive to comply with; and we and Endo
may face lawsuits
  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.
   We have only limited manufacturing capabilities and will be dependent on third party manufacturers
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##### Table of Contents




    
    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.
   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
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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
  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
  40




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##### Table of Contents



Item 4.
    
    Submission of Matters to a Vote of Security Holders
  a.
    
    Election of directors by class:
 For
    
    
    WithheldClass IChristophe Bianchi
    
    
    22,966,592
    
    
    
    1,032,067Class IIPeter F. Drake
    
    
    22,879,284
    
    
    
    1,119,375David P. Meeker
    
    
    22,966,605
    
    
    
    1,032,054Anne M. VanLent
    
    
    22,959,205
    
    
    
    1,039,454Class IIIWilliam James OShea
    
    
    22,885,472
    
    
    
    1,113,187
   b.
    
    Ratification of the selection of Ernst & Young LLP as our independent registered public
accounting firm for the current year:
 For
    
    Against
    
    Abstain23,909,580
    
    28,232
    
    60,847
 c.
    
    Approval of the amendment to the 2005 Stock Incentive Plan to increase the number of shares
of common stock authorized for issuance under the plan from 1,650,000 to 4,150,000, and to
increase the maximum number of shares of common stock with respect to which restricted stock
awards and other stock unit awards that either require no purchase by a participant or vest on
the basis of the passage of time alone that may be granted under the 2005 plan from 1,000,000
to 1,500,000:
 For
    
    Against
    
    Abstain
    
    Broker Non-Votes12,250,416
    
    3,106,759
    
    7,996
    
    8,633,488
 
 Item 6.
    
    Exhibits
  41




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SIGNATURE
  PENWEST PHARMACEUTICALS CO.Date: August 6, 2008
    /s/ Benjamin L. PalleikoBenjamin L. PalleikoSenior Vice President, Corporate Development and
Chief Financial Officer
(Principal Financial Officer) 42




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description4.1
    
    
    Amendment No 3. to Rights Agreement, dated as of April 18, 2008, between the
Registrant and Mellon Investor Services LLC (incorporated herein by reference
to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on April
23, 2008 (File No. 000-23467)).10.1
    
    
    2005 Stock Incentive Plan, as amended.31.1
    
    
    Certification of Principal Executive Officer pursuant to Exchange Act Rules
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of Sarbanes-Oxley
Act of 2002.31.2
    
    
    Certification of 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 2002.32.1
    
    
    Certification of Principal 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 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.
 43