##### 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, 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)
 (877) 736-9378  (Registrants telephone number, including area code)
 Not Applicable
 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
    
    31,946,576




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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
    
    
    23Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4.
    
    Controls and Procedures
    
    
    36PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    37Item 1A.
    
    Risk Factors
    
    
    41Item 6.
    
    Exhibits
    
    
    53Signature
    
    
    54Exhibit Index
    
    
    55EX-10.1EX-10.2EX-10.3EX-10.4EX-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
 June 30,
    
    
    December 31,2010
    
    
    2009(In thousands, except shareamounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,098
    
    
    $
    11,246Marketable securities
    
    
    1,309
    
    
    
    240Trade accounts receivable
    
    
    13,204
    
    
    
    6,226Inventories, net
    
    
    604
    
    
    
    263Prepaid expenses and other current assets
    
    
    980
    
    
    
    1,289Total current assets
    
    
    29,195
    
    
    
    19,264Fixed assets, net
    
    
    1,233
    
    
    
    1,576Patents, net
    
    
    876
    
    
    
    996Deferred charges
    
    
    1,591
    
    
    
    1,740Deferred income taxes
    
    
    310
    
    
    
    Other assets, net
    
    
    2,155
    
    
    
    2,320Total assets
    
    $
    35,360
    
    
    $
    25,896LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    587
    
    
    $
    750Accrued expenses
    
    
    1,269
    
    
    
    2,178Accrued development costs
    
    
    283
    
    
    
    275Income taxes payable
    
    
    110
    
    
    
    Loan payable
    
    
    1,371
    
    
    
    4,112Deferred compensation  current portion
    
    
    291
    
    
    
    294Total current liabilities
    
    
    3,911
    
    
    
    7,609Deferred revenue
    
    
    865
    
    
    
    889Deferred compensation
    
    
    2,238
    
    
    
    2,376Total liabilities
    
    
    7,014
    
    
    
    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 31,931,076 shares at June 30, 2010 and 31,778,416 shares at
December 31, 2009
    
    
    32
    
    
    
    32Additional paid-in capital
    
    
    251,065
    
    
    
    249,982Accumulated deficit
    
    
    (222,888
    )
    
    
    (235,127
    )Accumulated other comprehensive income
    
    
    137
    
    
    
    135Total shareholders equity
    
    
    28,346
    
    
    
    15,022Total liabilities and shareholders equity
    
    $
    35,360
    
    
    $
    25,896
  3




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2010
    
    2009
    
    2010
    
    2009(Unaudited)
    
    (Unaudited)(In thousands, except
    
    (In thousands, exceptper share data)
    
    per share data)Revenues:Royalties
    
    $
    12,717
    
    
    $
    4,851
    
    
    $
    20,370
    
    
    $
    9,573Product sales
    
    
    90
    
    
    
    158
    
    
    
    292
    
    
    
    338Collaborative licensing and development revenue
    
    
    832
    
    
    
    250
    
    
    
    1,735
    
    
    
    618Total revenues
    
    
    13,639
    
    
    
    5,259
    
    
    
    22,397
    
    
    
    10,529Operating expenses:Cost of revenues
    
    
    833
    
    
    
    468
    
    
    
    1,749
    
    
    
    1,122Selling, general and administrative
    
    
    2,453
    
    
    
    3,283
    
    
    
    4,099
    
    
    
    5,604Research and product development
    
    
    1,903
    
    
    
    3,425
    
    
    
    4,111
    
    
    
    6,431Total operating expenses
    
    
    5,189
    
    
    
    7,176
    
    
    
    9,959
    
    
    
    13,157Income (loss) from operations
    
    
    8,450
    
    
    
    (1,917
    )
    
    
    12,438
    
    
    
    (2,628
    )Investment income
    
    
    2
    
    
    
    4
    
    
    
    3
    
    
    
    11Interest expense
    
    
    (83
    )
    
    
    (225
    )
    
    
    (202
    )
    
    
    (483
    )Income (loss) before income tax expense
    
    
    8,369
    
    
    
    (2,138
    )
    
    
    12,239
    
    
    
    (3,100
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    8,369
    
    
    $
    (2,138
    )
    
    $
    12,239
    
    
    $
    (3,100
    )Net income (loss) per common share:Basic
    
    $
    0.26
    
    
    $
    (0.07
    )
    
    $
    0.38
    
    
    $
    (0.10
    )Diluted
    
    $
    0.26
    
    
    $
    (0.07
    )
    
    $
    0.38
    
    
    $
    (0.10
    )Weighted average shares of common stock outstanding:Basic
    
    
    31,866
    
    
    
    31,644
    
    
    
    31,837
    
    
    
    31,635Diluted
    
    
    32,064
    
    
    
    31,644
    
    
    
    31,997
    
    
    
    31,635
  4




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2010
    
    2009(Unaudited)(In thousands)Operating activities:Net income (loss)
    
    $
    12,239
    
    
    $
    (3,100
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities
    
    
    (6,706
    )
    
    
    1,607Net cash provided by (used in) operating activities
    
    
    5,533
    
    
    
    (1,493
    )Investing activities:Acquisitions of fixed assets
    
    
    
    
    
    
    (16
    )Patent costs
    
    
    
    
    
    
    (34
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    6Reimbursements of patent costs by collaborator
    
    
    
    
    
    
    229Purchases of marketable securities
    
    
    (1,558
    )
    
    
    (499
    )Proceeds from maturities of marketable securities
    
    
    490
    
    
    
    Net cash used in investing activities
    
    
    (1,068
    )
    
    
    (314
    )Financing activities:Repayment of debt
    
    
    (2,742
    )
    
    
    (2,741
    )Issuance of common stock
    
    
    129
    
    
    
    30Net cash used in financing activities
    
    
    (2,613
    )
    
    
    (2,711
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,852
    
    
    
    (4,518
    )Cash and cash equivalents at beginning of period
    
    
    11,246
    
    
    
    16,692Cash and cash equivalents at end of period
    
    $
    13,098
    
    
    $
    12,174
  5




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##### Table of Contents



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 Ended
    
    
    Six Months EndedJune
30
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Net income (loss)
    
    $
    8,369
    
    
    $
    (2,138
    )
    
    $
    12,239
    
    
    $
    (3,100
    )Denominator:Denominator for basic income (loss) per common share - weighted average
shares
    
    
    31,866
    
    
    
    31,644
    
    
    
    31,837
    
    
    
    31,635Dilutive effect of employee stock options
    
    
    198
    
    
    
    
    
    
    
    160
    
    
    
    Denominator for diluted income (loss) per common share  weighted average
shares
    
    
    32,064
    
    
    
    31,644
    
    
    
    31,997
    
    
    
    31,635Income (loss) per common share-basic
    
    $
    0.26
    
    
    $
    (0.07
    )
    
    $
    0.38
    
    
    $
    (0.10
    )Income (loss) per common share-diluted
    
    $
    0.26
    
    
    $
    (0.07
    )
    
    $
    0.38
    
    
    $
    (0.10
    )
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands of shares)Stock options outstanding
    
    
    1,500
    
    
    
    2,727
    
    
    
    1,548
    
    
    
    2,625Restricted stock outstanding (unvested)
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    92Warrants to purchase common stock
    
    
    4,070
    
    
    
    4,070
    
    
    
    4,070
    
    
    
    4,0705,570
    
    
    
    6,887
    
    
    
    5,618
    
    
    
    6,787
 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
    
    $
    13,098
    
    
    $
    
    
    
    $
    
    
    
    $
    13,098Marketable securities
    
    
    
    
    
    
    1,309
    
    
    
    
    
    
    
    1,309Money market account
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    77Total
    
    $
    13,175
    
    
    $
    1,309
    
    
    $
    
    
    
    $
    14,484
    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
  June 30,
    
    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
    
    $
    2,078
    
    
    $
    2,024Money market account
    
    
    77
    
    
    
    2962,155
    
    
    
    2,320Loan receivable from collaborator (see Note 14)
    
    
    1,000
    
    
    
    1,0003,155
    
    
    
    3,320Allowance for loan receivable from collaborator
    
    
    (1,000
    )
    
    
    (1,000
    )Other assets, net
    
    $
    2,155
    
    
    $
    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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2010
    
    2009
    
    2010
    
    2009(Unaudited) (In thousands)Selling, general and administrative
    
    $
    365
    
    
    $
    266
    
    
    $
    513
    
    
    $
    (302
    )Research and product development
    
    
    342
    
    
    
    151
    
    
    
    442
    
    
    
    315Total
    
    $
    707
    
    
    $
    417
    
    
    $
    955
    
    
    $
    13
   Rights Agreement
  11




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 9. Cost of Revenues
 Three Months Ended
    

    Six Months EndedJune 30,
    
    June 30,2010
    
    2009
    
    2010
    
    2009(Unaudited) (In thousands)Cost of royalties
    
    $
    104
    
    
    $
    95
    
    
    
    $
    198
    
    
    $
    207Cost of product sales
    
    
    142
    
    
    
    143
    
    
    
    
    329
    
    
    
    325Cost of collaborative licensing and development revenue
    
    
    587
    
    
    
    230
    
    
    
    
    1,222
    
    
    
    590Total cost of revenues
    
    $
    833
    
    
    $
    468
    
    
    
    $
    1,749
    
    
    $
    1,122
  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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2010
    
    2009
    
    2010
    
    2009(Unaudited) (In thousands)Interest cost
    
    $
    28
    
    
    $
    30
    
    
    $
    56
    
    
    $
    60Amortization of prior service cost
    
    
    
    
    
    
    (1
    )
    
    
    1
    
    
    
    (1
    )Net periodic benefit cost
    
    $
    28
    
    
    $
    29
    
    
    $
    57
    
    
    $
    59
   13. Comprehensive Income (Loss)
  June 30,
    
    December 31,2010
    
    2009(Unaudited) (In thousands)Adjustment for funded status of post retirement plan
    
    $
    136
    
    
    $
    135Unrealized gain on marketable securities
    
    
    1
    
    
    
    $
    137
    
    
    $
    135
 13




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2010
    
    2009
    
    2010
    
    2009(Unaudited) (In thousands)Net income (loss)
    
    $
    8,369
    
    
    $
    (2,138
    )
    
    $
    12,239
    
    
    $
    (3,100
    )Amortization of prior service cost
    
    
    
    
    
    
    (1
    )
    
    
    1
    
    
    
    (1
    )Comprehensive income (loss)
    
    $
    8,369
    
    
    $
    (2,139
    )
    
    $
    12,240
    
    
    $
    (3,101
    )
 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%. In the June 2010 amendment
however, the parties agreed that the royalty rate would be fixed at 22% during the period
from April 1, 2010 through December 31, 2012 (the 2010-2012 Royalty Period), provided that
with respect to the fourth quarter of 2012, the rate would be adjusted to a rate that would
result in the aggregate royalties paid to the Company for the 2010-2012 Royalty Period being
$7.3 million less than the aggregate royalties that would otherwise have been paid to the
Company if the royalty rate had not been fixed at 22%. The parties also agreed in the June
2010 amendment that the royalty rate on net sales of Opana ER would be fixed at 20% during
2013, provided that with respect to the fourth quarter of 2013, the rate would be adjusted
to a rate that would result in the aggregate royalties paid to the Company for 2013 being
$700,000 less than the aggregate royalties that would have been paid to the Company if the
royalties had not been fixed at 20%.
    
    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
$12.3 million and $4.4 million for the three month periods ending June 30, 2010 and 2009,
respectively, and $19.5 million and $4.4 million for the six month periods ended June 30,
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,
 14




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 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.
  ®
   15




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Edison Pharmaceuticals, Inc.
       16




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




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




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




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Sandoz ANDA Litigation
 ® ® ® ®
 ® ®
 ® ®
 .
 Barr ANDA Litigation
 ® ® ® ® ® ® ®
  20




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 ® ®
  Roxane ANDA Litigation
 ® ® ®
 ® ®
 Watson ANDA Litigation
 ® ® ®
 ®
 Tang/Edelman Shareholder Claim
  Tang Capital Partners, et al. Penwest Pharmaceuticals Co.
 21




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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. v.
Penwest Pharmaceuticals Co.)
  16. Subsequent Events
  22




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
 ® a-tocopherolquinone,
 ® ®
   Endo.
 23




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®
     24




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Edison.
   Mylan.
  Restructuring Charges.
 25




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Share Based Compensation Charge.
 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 or the marketing of
competitive products;
    
    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 enter into drug delivery technology collaborations and generate revenues
under drug delivery technology collaborations;
    
    our ability to access funding support for A0001 from third party collaborators;
    
    the level of our investment in research and development activities, including the timing
and costs of conducting clinical trials of A0001;
 26




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
    
    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
  Recent Accounting Pronouncements
  Results of Operations for the Three and Six Month Periods Ended June 30, 2010 and 2009
 Revenues
 Three months
    
    
    
    
    Three months
    
    Six months
    
    
    
    
    Six monthsended
    
    
    Percentage
    
    ended
    
    ended
    
    
    Percentage
    
    endedJune 30,
    
    
    increase
    
    June 30,
    
    June 30,
    
    
    increase
    
    June 30,2010
    
    
    (decrease)
    
    2009
    
    2010
    
    
    (decrease)
    
    2009(In thousands, except percentages)Royalties
    
    $
    12,717
    
    
    162%
    
    $
    4,851
    
    
    $
    20,370
    
    
    113%
    
    $
    9,573Product sales
    
    
    90
    
    
    (43)
    
    
    158
    
    
    
    292
    
    
    (14)
    
    
    338Collaborative
licensing and
development revenue
    
    
    832
    
    
    233
    
    
    250
    
    
    
    1,735
    
    
    181
    
    
    618Total revenues
    
    $
    13,639
    
    
    159%
    
    $
    5,259
    
    
    $
    22,397
    
    
    113%
    
    $
    10,529
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Cost of Revenues
 Three months
    
    
    
    
    Three months
    
    
    Six months
    
    
    
    
    Six monthsended
    
    
    Percentage
    
    ended
    
    
    ended
    
    
    Percentage
    
    endedJune 30,
    
    
    increase
    
    June 30,
    
    
    June 30,
    
    
    increase
    
    June 30,2010
    
    (decrease)
    
    2009
    
    2010
    
    (decrease)
    
    2009(In thousands, except percentages)Cost of royalties
    
    $
    104
    
    
    9%
    
    $
    95
    
    
    $
    198
    
    
    (4)%
    
    $
    207Cost of product sales
    
    
    142
    
    
    (1)
    
    
    143
    
    
    
    329
    
    
    1
    
    
    325Cost of collaborative
licensing and
development revenue
    
    
    587
    
    
    155
    
    
    230
    
    
    
    1,222
    
    
    107
    
    
    590Total cost of revenues
    
    $
    833
    
    
    78%
    
    $
    468
    
    
    $
    1,749
    
    
    56%
    
    $
    1,122
    Selling, General and Administrative Expenses
 Three months
    
    
    
    Three months
    
    
    Six months
    
    
    
    
    Six monthsended
    
    Percentage
    
    ended
    
    
    ended
    
    
    Percentage
    
    endedJune 30,
    
    increase
    
    June 30,
    
    
    June 30,
    
    
    increase
    
    June 30,2010
    
    (decrease)
    
    2009
    
    
    2010
    
    
    (decrease)
    
    2009(In thousands, except percentages)Selling,
general and
administrative
expense
    
    
    $  2,453
    
    
    (25)%
    
    
    $  3,283
    
    
    
    $  4,099
    
    
    (27)%
    
    
    $  5,604
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##### Table of Contents



Research and Product Development Expenses
   Three months
    
    
    
    Three months
    
    Six months
    
    
    
    Six monthsended
    
    Percentage
    
    ended
    
    ended
    
    Percentage
    
    endedJune 30,
    
    increase
    
    June 30,
    
    June 30,
    
    increase
    
    June 30,2010
    
    (decrease)
    
    2009
    
    2010
    
    (decrease)
    
    2009(In thousands, except percentages)A0001 costs
    
    $
    401
    
    
    (74)%
    
    $
    1,521
    
    
    $
    1,077
    
    
    (57)%
    
    $
    2,519Other phase I
products and
internal costs
    
    
    1,502
    
    
    (21)
    
    
    1,904
    
    
    
    3,034
    
    
    (22)
    
    
    3,912Total research and
product development
expense
    
    $
    1,903
    
    
    (44)%
    
    $
    3,425
    
    
    $
    4,111
    
    
    (36)%
    
    $
    6,431
  
    
    A0001These expenses reflect our direct external expenses relating to the development of
A0001. These expenses approximated 21% and 26%, respectively, of our R&D expenses for the
three and six month periods ended June 30, 2010. These expenses for the three and six month
periods ended June 30, 2010 decreased compared to the three and six month periods ended June
30, 2009 as we have not conducted any other development work for A0001 other than the two
Phase IIa trials in 2010.
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##### Table of Contents



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. We also
completed long-term animal toxicology studies to support longer dosing in the clinical program,
which we completed in the fourth quarter of 2009. 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
fourth quarter of 2010. The Company is currently seeking to license A0001 to a third party to
complete further development and assume responsibility for the commercialization, manufacturing
and marketing of this compound.
    
    Other Phase I Products and Internal Costs These expenses reflect internal and
external expenses not separately reported under a product development program noted above,
and include the areas of pharmaceutical development, clinical and regulatory. The types of
expenses included in internal expenses primarily are salary and benefits, share-based
compensation costs, depreciation on purchased equipment, and the amortization or any
write-downs of patent costs, other than product patent write-offs charged directly to a
separately reported product development program, or amortization of patent costs relating to
commercialized products, which are included in cost of revenues. The types of expenses
included in external expenses are primarily related to preclinical studies,
proof-of-principle biostudies conducted on our Phase I product candidates and payments to
third parties for drug active. These costs decreased in the three and six month periods
ended June 30, 2010, compared with the three and six month periods ended June 30, 2009
primarily as a result of lower compensation expenses in the three and six month periods
ended June 30, 2010 due to staff reductions implemented in the first and fourth quarters of
2009, and increased allocations of internal R&D costs relating to our drug delivery
technology collaborations to cost of revenues. These lower costs were partially offset by
the additional share-based compensation expense related to the accelerated vesting of stock
options due to the change in control of our board of directors in June 2010. We did not
incur any expenses relating to Phase I product candidates during the three and six month
periods ended June 30, 2010.
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Share-Based Compensation
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Unaudited) (In thousands)Selling, general and administrative
    
    $
    365
    
    
    $
    266
    
    
    $
    513
    
    
    $
    (302
    )Research and product development
    
    
    342
    
    
    
    151
    
    
    
    442
    
    
    
    315Total
    
    $
    707
    
    
    $
    417
    
    
    $
    955
    
    
    $
    13
   Tax Rates
  Liquidity and Capital Resources
 Sources of Liquidity
  Senior Secured Credit Facility.
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Cash Flows
   Funding Requirements
    32




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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 our ability to license A0001
or otherwise to access funding and support for the development 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.
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Contractual Obligations
  Less Than
    
    1-3
    
    4-5
    
    After 5Total
    
    One Year
    
    Years
    
    Years
    
    
    YearsOperating leases
    
    $
    113
    
    
    $
    113
    
    
    $
    
    
    
    $
    
    
    
    $
    Purchase obligations
    
    
    3,801
    
    
    
    3,801
    
    
    
    
    
    
    
    
    
    
    
    Payments due under credit facility
    
    
    1,755
    
    
    
    1,755
    
    
    
    
    
    
    
    
    
    
    
    Deferred compensation
    
    
    2,528
    
    
    
    291
    
    
    
    582
    
    
    
    582
    
    
    
    1,073Total
    
    $
    8,197
    
    
    $
    5,960
    
    
    $
    582
    
    
    $
    582
    
    
    $
    1,073
   
    
    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.
  34




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Net Operating Loss Carryforwards
    35




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk and Risk Management Policies
    
 Item 4. Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures.
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(b) Changes in Internal Control Over Financial Reporting.
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Impax ANDA Litigation
 ® ® ® ®
 ® ®
 ® ®
  37




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Actavis ANDA Litigation
 ® ® ® ®
 ® ®
 ® ® ® ®
  Sandoz ANDA Litigation
 ® ® ® ®
 ® ®
 38




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##### Table of Contents



® ®
  Barr ANDA Litigation
 ® ® ® ® ® ® ®
 ® ®
  Roxane ANDA Litigation
 ® ® ®
 ® ®
 39




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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 enter into drug delivery technology collaborations and generate revenues
under drug delivery collaborations;
    
    our ability to license or to access funding and support for A0001 from third party
collaborators;
    
    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
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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 our ability to license or
enter into collaborations for A0001 or otherwise access funding and
support for the development
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
   
    
    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;
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
    
    the potential impact of tamper resistant opioids being developed or 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
 ,
  43




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We are dependent on our collaborators to develop, manufacture and commercialize our products
     
    
    Our collaborators may be pursuing alternative technologies or developing alternative
products, either on their own or in collaboration with others, that may be competitive to
the product on which we are collaborating, which could affect our collaborators commitment
to our collaboration.
    
    Our collaborators may reduce marketing or sales efforts, or discontinue marketing or
sales of our products, which could reduce the revenues we receive on the products.
    
    Our collaborators may pursue higher priority programs or change the focus of their
commercialization
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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
  
    
    significantly greater financial, technical and human resources than we have and may
be better equipped to develop, manufacture and commercialize drug products;
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
    
    more extensive experience than we have in conducting preclinical studies and clinical
trials, obtaining regulatory approvals, and manufacturing and marketing pharmaceutical
products;
    
    competing products that have already received regulatory approval or are in late-stage
development; 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
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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
 We are subject to extensive government regulation, including the requirement of approval before
our products may be marketed. Even if we obtain marketing approval, our products will be subject
to ongoing regulatory review
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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
  Specific provisions of our 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
  52




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Item 6. Exhibits
  53




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SIGNATURE
  PENWEST PHARMACEUTICALS CO.Date:  August 6, 2010
    
    /s/ Jennifer L. GoodJennifer L. GoodPresident and Chief Executive Officer
 54




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EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    Manufacturing Services Agreement dated June 7, 2010 between the Registrant and Patheon Inc.10.2
    
    Fourth Amendment, dated April 18, 2010, to the Amended and Restated Strategic Alliance
Agreement, dated as of April 2, 2002, by and between the Registrant and Endo
Pharmaceuticals Inc.10.3
    
    Fifth Amendment, dated June 8, 2010, to the Amended and Restated Strategic Alliance
Agreement, dated as of April 2, 2002, by and between the Registrant and Endo
Pharmaceuticals Inc.10.4
    
    Settlement and License Agreement dated as of June 8, 2010 by and among the Registrant,
Endo Pharmaceuticals Inc. and IMPAX Laboratories, Inc.31
    
    Certification of Principal Executive Officer and Principal Financial Officer pursuant to
Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.32
    
    Certification of Principal Executive Officer and Principal Financial Officer pursuant to
Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of Sarbanes-Oxley Act of 2002.
 
  Confidential treatment requested as to certain portions, which portions are omitted and
filed separately with the Commission. 55