##### 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, 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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    OutstandingCommon Stock, par value $.001
    
    31,628,877




---



##### 



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
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    25Item 4.
    
    Controls and Procedures
    
    25PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    26Item 1A.
    
    Risk Factors
    
    27Item 6.
    
    Exhibits
    
    38Signature
    
    
    
    39Exhibit Index
    
    40EX-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
  ® ® ® ®
 Forward-looking Statements
  2




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements (Unaudited)
 PENWEST PHARMACEUTICALS CO.
 
 CONDENSED BALANCE SHEETS
 March 31, 2008,
    
    
    December 31,2008
    
    
    2007(Unaudited)
    
    
    (Note 2)(In thousands,except share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,685
    
    
    $
    15,680Marketable securities
    
    
    5,213
    
    
    
    7,293Trade accounts receivable
    
    
    710
    
    
    
    781Inventories:Raw materials and other
    
    
    36
    
    
    
    37Finished goods
    
    
    646
    
    
    
    630Total inventories
    
    
    682
    
    
    
    667Prepaid expenses and other current assets
    
    
    1,415
    
    
    
    1,489Total current assets
    
    
    40,705
    
    
    
    25,910Fixed assets, net
    
    
    3,297
    
    
    
    3,582Patents, net
    
    
    2,552
    
    
    
    2,539Deferred charges
    
    
    2,434
    
    
    
    2,479Other assets, net
    
    
    2,459
    
    
    
    2,472Total assets
    
    $
    51,447
    
    
    $
    36,982LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,167
    
    
    $
    2,239Accrued expenses
    
    
    3,442
    
    
    
    1,602Accrued development costs
    
    
    1,053
    
    
    
    1,483Loan payable  current portion
    
    
    3,174
    
    
    
    2,405Deferred compensation  current portion
    
    
    290
    
    
    
    290Total current liabilities
    
    
    10,126
    
    
    
    8,019Loan payable
    
    
    8,224
    
    
    
    9,595Accrued financing fees
    
    
    360
    
    
    
    360Deferred revenue
    
    
    173
    
    
    
    183Deferred compensation
    
    
    2,596
    
    
    
    2,588Total liabilities
    
    
    21,479
    
    
    
    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
31,621,036 shares at March 31, 2008 and
23,426,323 shares at December 31, 2007
    
    
    32
    
    
    
    23Additional paid in capital
    
    
    246,941
    
    
    
    222,927Accumulated deficit
    
    
    (217,191
    )
    
    
    (206,893
    )Accumulated other comprehensive income
    
    
    186
    
    
    
    180Total shareholders equity
    
    
    29,968
    
    
    
    16,237Total liabilities and shareholders equity
    
    $
    51,447
    
    
    $
    36,982
  3




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF OPERATIONS
 Three Months EndedMarch 31,2008
    
    
    2007(Unaudited)(In thousands, exceptper share data)Revenues:Royalties and licensing fees
    
    $
    432
    
    
    $
    719Product sales
    
    
    228
    
    
    
    123Research and development reimbursements
    
    
    79
    
    
    
    Total revenues
    
    
    739
    
    
    
    842Cost of revenues:Cost of product sales
    
    
    98
    
    
    
    110Cost of research and development reimbursements
    
    
    71
    
    
    
    Total cost of revenues
    
    
    169
    
    
    
    110Gross profit
    
    
    570
    
    
    
    732Operating expenses:Selling, general and administrative
    
    
    4,324
    
    
    
    3,721Research and product development
    
    
    6,385
    
    
    
    4,384Total operating expenses
    
    
    10,709
    
    
    
    8,105Loss from operations
    
    
    (10,139
    )
    
    
    (7,373
    )Investment income
    
    
    200
    
    
    
    489Interest expense
    
    
    (358
    )
    
    
    (70
    )Loss before income tax expense
    
    
    (10,297
    )
    
    
    (6,954
    )Income tax expense
    
    
    
    
    
    
    Net loss
    
    $
    (10,297
    )
    
    $
    (6,954
    )Net loss per common share
    
    $
    (0.41
    )
    
    $
    (0.30
    )Weighted average shares of common stock outstanding
    
    
    25,113
    
    
    
    23,142
  4




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2008
    
    
    2007(Unaudited)(In thousands)Operating activities:Net loss
    
    $
    (10,297
    )
    
    $
    (6,954
    )Adjustments to reconcile net loss to net cash used in operating activities
    
    
    1,809
    
    
    
    (1,628
    )Net cash used in operating activities
    
    
    (8,488
    )
    
    
    (8,582
    )Investing activities:Acquisitions of fixed assets, net
    
    
    (22
    )
    
    
    (249
    )Patent costs
    
    
    (96
    )
    
    
    (25
    )Loan disbursed to collaborator
    
    
    (1,000
    )
    
    
    Proceeds from maturities of marketable securities
    
    
    4,650
    
    
    
    16,261Purchases of marketable securities
    
    
    (2,531
    )
    
    
    (4,091
    )Net cash provided by investing activities
    
    
    1,001
    
    
    
    11,896Financing activities:Proceeds from loan payable
    
    
    
    
    
    
    12,000Repayment of debt
    
    
    (601
    )
    
    
    Debt issuance costs
    
    
    
    
    
    
    (65
    )Issuance of common stock
    
    
    25,093
    
    
    
    94Net cash provided by financing activities
    
    
    24,492
    
    
    
    12,029Net increase in cash and cash equivalents
    
    
    17,005
    
    
    
    15,343Cash and cash equivalents at beginning of period
    
    
    15,680
    
    
    
    16,182Cash and cash equivalents at end of period
    
    $
    32,685
    
    
    $
    31,525
  5




---



##### Table of Contents



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




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
      4. Other Assets
  March 31,
    
    
    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
    
    $
    2,197
    
    
    $
    2,468Money market account
    
    
    262
    
    
    
    42,459
    
    
    
    2,472Loan receivable from collaborator (see
Note 11)
    
    
    1,000
    
    
    
    3,459
    
    
    
    2,472Allowance for loan receivable from
collaborator
    
    
    (1,000
    )
    
    
    Other assets,
net
    
    $
    2,459
    
    
    $
    2,472
 7




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 5. Loans Payable
 Credit Facility
     (unaudited)(in thousands)Less than one year
    
    $
    3,174One to two years
    
    
    5,483Two to three years
    
    
    2,741$
    11,398
  8




---



##### 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
    
    $
    3,893
    
    
    $
    
    
    
    $
    
    
    
    $
    3,893U.S. government agency obligations
    
    
    1,320
    
    
    
    
    
    
    
    
    
    
    
    1,320Total assets at fair value
    
    $
    5,213
    
    
    $
    
    
    
    $
    
    
    
    $
    5,213
  7. Shareholders Equity
 Private Placement
    9




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Share-Based Compensation
  Three Months EndedMarch 31,2008
    
    
    2007(unaudited)(in thousands)Research and product
development
    
    $
    234
    
    
    $
    (283
    )Selling, general and
administration
    
    
    681
    
    
    
    600Total stock based
compensation
    
    $
    915
    
    
    $
    317
  Rights Agreement
    8. Income Taxes
  9. Supplemental Executive Retirement Plan and Deferred Compensation Plan
  10




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   Three Months EndedMarch 31,2008
    
    
    2007(unaudited)(in thousands)Interest cost
    
    $
    29
    
    
    $
    29Amortization of prior service cost
    
    
    1
    
    
    
    1Net periodic benefit cost
    
    $
    30
    
    
    $
    30
   10. Comprehensive Income (Loss)
  March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)(in thousands)Unrealized gains on marketable securities
    
    $
    12
    
    
    $
    7Adjustment for funded status of post retirement plan
    
    
    174
    
    
    
    173Accumulated other comprehensive income
    
    $
    186
    
    
    $
    180
  Three Months EndedMarch 31,2008
    
    
    2007(unaudited)(in thousands)Net loss
    
    $
    (10,297
    )
    
    $
    (6,954
    )Changes in unrealized net gains and losses on marketable securities
    
    
    5
    
    
    
    7Adjustment for funded status of post retirement plan
    
    
    1
    
    
    
    Comprehensive loss
    
    $
    (10,291
    )
    
    $
    (6,947
    )
 11. Collaboration and Licensing Agreements
  11




---



##### Table of Contents



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 $7.3 million for the
three month period ended March 31, 2008. Cumulatively, through March 31, 2008, approximately
$26.9 million has been applied against the Royalty Holiday. The Company expects to begin to
recognize royalties from Endo related to sales of Opana ER commencing in the second half 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.
  Edison Pharmaceuticals, Inc.
   12




---



##### Table of Contents



PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   Mylan Pharmaceuticals Inc.
  Otsuka Pharmaceutical Co., Ltd.
  12. Contingencies
  Impax ANDA Litigation
  13




---



##### Table of Contents



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




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  ® ®
    Products
 Opana ® ER. ®
  15




---



##### Table of Contents



Nalbuphine ER.
  16




---



##### Table of Contents



A0001.
   Additional Product Candidates.
  
    
    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;
 17




---



##### Table of Contents




    
    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 Procardia XL 30 mg.
  Critical Accounting Policies and Estimates
  Recent Accounting Pronouncements
  Results of Operations for the Three Month Periods Ended March 31, 2008 and 2007
 Revenues
 Three months
    
    
    
    
    
    
    Three monthsended
    
    
    Percentage
    
    
    endedMarch 31,
    
    
    Increase
    
    
    March 31,2008
    
    
    (decrease)
    
    
    2007(in thousands, except percentages)Royalties and licensing fees
    
    $
    432
    
    
    
    (39.9
    )%
    
    $
    719Product sales
    
    
    228
    
    
    
    85.4
    %
    
    
    123Research and development reimbursements
    
    
    79
    
    
    
    n/a
    
    
    
    Total revenues
    
    $
    739
    
    
    
    (12.2
    )%
    
    $
    842
   18




---



##### Table of Contents



Cost of Revenues
 Three months
    
    
    Percentage
    
    
    Three monthsended
    
    
    increase
    
    
    endedMarch 31, 2008
    
    
    (decrease)
    
    
    March 31, 2007(In thousands, except percentages)Cost of product sales
    
    $
    98
    
    
    
    (10.9
    )%
    
    $
    110Cost of research and development reimbursements
    
    
    71
    
    
    
    n/a
    
    
    
    Total cost of revenues
    
    $
    169
    
    
    
    53.6
    %
    
    $
    110
   Selling, General and Administrative Expenses
 Three months
    
    Percentage
    
    Three monthsended
    
    increase
    
    endedMarch 31, 2008
    
    (decrease)
    
    March 31, 2007(In thousands, except percentages)Selling, general and administrative expenses
    
    $
    4,324
    
    
    
    16.2
    %
    
    $
    3,721
   Research and Product Development Expenses
  19




---



##### Table of Contents



Three months
    
    
    
    
    
    
    Three monthsended
    
    
    Percentage
    
    
    endedMarch 31,
    
    
    Increase
    
    
    March 31,2008
    
    
    (decrease)
    
    
    2007(in thousands, except percentages)Nalbuphine ER
    
    $
    1,116
    
    
    
    15.6
    %
    
    $
    965Edison Program
    
    
    2,180
    
    
    
    n/a
    
    
    
    Phase I Products and Internal Costs
    
    
    3,089
    
    
    
    (9.7
    )%
    
    
    3,419Total Research and Product Development Expense
    
    $
    6,385
    
    
    
    45.6
    %
    
    $
    4,384
  
    
    Nalbuphine ER These expenses reflect our direct external expenses relating to the
development of nalbuphine ER. These expenses approximated 17% of R&D expenses for the three
month period ended March 31, 2008 and consisted primarily of payments to third parties in
connection with clinical trials of nalbuphine ER. The expenses for this program increased in
the 2008 period as compared to the 2007 period, as we completed a Phase IIa proof of concept
efficacy and safety trial in the 2008 period that we commenced in
June 2007. 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 expense relating to the preclinical
development work that we are conducting on A0001. These expenses approximated 34% of our R&D
expenses for the three month period ended March 31, 2008 and include a quarterly research
and development payment to Edison of $1.0 million. We anticipate that these expenses will
increase in 2008 as we continue to make quarterly research and development payments for the
full year of 2008 and increase our activity with respect to the development of A0001,
including conducting a Phase I clinical trial we plan to commence in the second half of
2008. The quarterly research and development payments to Edison end in January 2009, unless
extended at our option as provided for in the Edison agreement.
    
    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 primarily related to
 20




---



##### Table of Contents



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 EndedMarch 31,2008
    
    
    2007(unaudited)(in thousands)Research and product
development
    
    $
    234
    
    
    $
    (283
    )Selling, general and
administration
    
    
    681
    
    
    
    600Total stock based
compensation
    
    $
    915
    
    
    $
    317
  Tax Rates
  Liquidity and Capital Resources
 Sources of Liquidity
  Private Placement.
 21




---



##### Table of Contents



Senior Secured Credit Facility.
   Cash Flows
    22




---



##### Table of Contents



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 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;
    
    the structure and terms of any 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, including our costs associated
with the IMPAX and Actavis litigation and any other litigation in which we may become
involved;
    
    the level of our investment in capital expenditures for facilities or equipment; and
    
    our success in reducing our spending and managing our costs.
   23




---



##### Table of Contents



Contractual Obligations
  Less Than
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    1,209
    
    
    $
    790
    
    
    $
    419
    
    
    $
    
    
    
    $
    Purchase obligations
    
    
    2,018
    
    
    
    2,018
    
    
    
    
    
    
    
    
    
    
    
    Payments due under credit facility
    
    
    13,514
    
    
    
    4,246
    
    
    
    9,268
    
    
    
    
    
    
    
    Deferred compensation, including current portion
    
    
    2,886
    
    
    
    294
    
    
    
    587
    
    
    
    587
    
    
    
    1,418Edison collaboration
    
    
    2,667
    
    
    
    2,667
    
    
    
    
    
    
    
    
    
    
    
    Placement agent fees and other expenses of
private placement
    
    
    1,986
    
    
    
    1,986
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    24,280
    
    
    $
    12,001
    
    
    $
    10,274
    
    
    $
    587
    
    
    $
    1,418
  
    
    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.
   24




---



##### Table of Contents



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.
 25




---



##### Table of Contents



(b) Changes in Internal Control Over Financial Reporting.
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Impax ANDA Litigation
  Actavis ANDA Litigation.
  26




---



##### Table of Contents



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 I, Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2007.
 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;
    
    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 Procardia XL 30 mg.
 We may require additional funding which may be difficult to obtain
   27




---



##### Table of Contents




    
    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 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;
    
    the structure and terms of any 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, including our costs associated
with the IMPAX and Actavis litigation and any other litigation in which we become involved;
    
    the level of our investments in capital expenditures for facilities and equipment; and
    
    our success in reducing our spending and managing our costs.
  Our ability to generate revenues depends heavily on the success of Opana ER
  28




---



##### Table of Contents




    
    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.
     Our success depends on our ability to protect our patents and other intellectual property rights
  29




---



##### Table of Contents



We are dependent on our collaborators to manufacture and commercialize our products
     
    
    Our collaborators may be pursuing alternative technologies or developing alternative
products, either on their own or in collaboration with others, that may be competitive to
the product on which we are collaborating, which could affect our collaborators commitment
to our collaboration.
    
    Our collaborators may reduce marketing or sales efforts, or discontinue marketing or
sales of our products. 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.
 30




---



##### Table of Contents




    
    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
   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.
  31




---



##### Table of Contents



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
   32




---



##### Table of Contents




    
    be delayed in obtaining marketing approval for our products;
    
    not be able to obtain marketing approval for our products; or
    
    not be able to obtain approval for indications that are as broad as intended.
     33




---



##### Table of Contents



Even if we are able to obtain regulatory approvals for any of our product candidates, if they
exhibit harmful side effects after approval, our regulatory approvals could be revoked or
otherwise negatively impacted, and we could be subject to costly and damaging product liability
claims
  Our controlled release drug delivery technologies rely on the ability to control the release of
the active drug substances and our business would be harmed if it was determined that there were
circumstances under which the active drug substances from one of our extended release products
would be released rapidly into the blood stream
  ® in vitro in vitro
 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
   34




---



##### Table of Contents



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.
  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
  35




---



##### Table of Contents




    
    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
    
    
    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.
  36




---



##### Table of Contents



We are dependent upon a limited number of suppliers for the gums used in our TIMERx materials
  If we or our collaborators fail to obtain an adequate level of reimbursement by governmental or
third party payors for Opana ER or any other products we develop, we may not be able to
successfully commercialize the affected product
    We will be exposed to product liability claims and may not be able to obtain adequate product
liability insurance
   37




---



##### Table of Contents



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, Certificate 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
  
 Item 6. Exhibits
  38




---



##### Table of Contents



SIGNATURE
  PENWEST PHARMACEUTICALS CO.Date: May 7, 2008
    /s/ Benjamin L. PalleikoBenjamin L. PalleikoSenior Vice President, Corporate Development and
Chief Financial Officer
(Principal Financial Officer) 39




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description4.1
    
    Amendment to Rights Agreement dated as of March 5, 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 March 6, 2008
(File No. 000-23467)).4.2
    
    Amendment No. 2 to Rights Agreement dated as of March 20, 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 March
20, 2008 (File No. 000-23467)).10.1
    
    Securities Purchase Agreement dated March 5, 2008, between the Registrant
and the Purchasers party thereto (incorporated herein by reference to Exhibit 10.1
to the Registrants Current Report on Form 8-K filed on March 6, 2008 (File
No. 000-23467)).10.2
    
    Form of Warrant issued by the Registrant to each of the purchasers under the
Securities Purchase Agreement, dated March 5, 2008 (incorporated herein by
reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed
on March 6, 2008 (File No. 000-23467)).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.
 40