<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                For the quarterly period ended September 30, 1999

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

For the transition period from _______________________ to ______________________


                          Commission File No. 000-23467


                           PENWEST PHARMACEUTICALS CO.
             (Exact name of registrant as specified in its charter)

                 Washington                             91-1513032
          ------------------------         ------------------------------------
          (State of Incorporation)         (I.R.S. Employer Identification No.)

        2981 Route 22, Patterson, NY                    12563-9970
  ----------------------------------------              ----------
  (Address of principal executive offices)              (Zip Code)


                                 (914) 878-3414
              -----------------------------------------------------
              (Registrant's telephone number, including area code.)



    Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                Yes [X]   No [ ]

    Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 10, 1999.

                     Class                                  Outstanding
         -----------------------------                      -----------
         Common stock, par value $.001                       11,127,958




<PAGE>   2




                           PENWEST PHARMACEUTICALS CO.

                                TABLE OF CONTENTS


                                                                            PAGE
                                                                            ----

Part I.     Financial Information

    Item 1. Financial Statements (Unaudited)

            Condensed Consolidated Balance Sheets............................ 3

            Condensed Consolidated Statements of Operations.................. 4

            Condensed Consolidated Statements of Cash Flows.................. 5

            Notes to Condensed Consolidated Financial Statements............. 6

    Item 2. Management's Discussion and Analysis of Financial Condition
            and Results of Operations........................................ 9

    Item 3. Quantitative and Qualitative Disclosures About Market Risk       14

Part II.    Other Information

    Item 6. Exhibits and Reports on Form 8-K.................................15

Signature....................................................................16

Exhibit Index................................................................16




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<PAGE>   3




                         PART I -- FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS



                           PENWEST PHARMACEUTICALS CO.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS EXCEPT SHARE AMOUNTS)



                                                     SEPTEMBER 30,  DECEMBER 31,
                                                         1999           1998
                                                     -------------  ------------
                                                      (UNAUDITED)     (NOTE 2)
ASSETS
Current assets:
  Cash and cash equivalents                             $   443       $ 1,476
  Trade accounts receivable, net                          6,230         4,381
  Inventories:
    Raw materials and other                               1,036         1,365
    Finished goods                                        6,039         7,439
                                                        -------       -------
                                                          7,075         8,804
   Prepaid expenses and other current assets                669           572
   Deferred income taxes                                    356           356
                                                        -------       -------
     Total current assets                                14,773        15,589

Fixed assets, net                                        18,985        20,822
Other assets                                              4,830         4,671
                                                        -------       -------
     Total assets                                       $38,588       $41,082
                                                        =======       =======

LIABILITIES AND SHAREHOLDERS'  EQUITY
Current liabilities:
   Accounts payable and accrued expenses                $ 5,458       $ 5,405
   Taxes payable                                            330           336
   Loans payable                                          5,200         2,200
                                                        -------       -------
     Total current liabilities                           10,988         7,941
Deferred income taxes                                       669           932
Other long-term liabilities                               2,295         2,177
                                                        -------       -------
     Total liabilities                                   13,952        11,050

Shareholders' equity:
  Preferred stock, par value $.001, authorized
   1,000,000 shares, none outstanding
  Common stock, par value $.001, authorized 39,000,000
   shares, issued and outstanding 11,127,958 shares in
   1999 and 11,043,331 shares in 1998                        11            11
  Additional paid-in capital                             59,583        59,025
  Accumulated deficit                                   (34,156)      (28,478)
  Accumulated other comprehensive loss                     (802)         (526)
                                                        -------       -------
     Total shareholders' equity                          24,636        30,032
                                                        -------       -------
     Total liabilities and shareholders' equity         $38,588       $41,082
                                                        =======       =======




     See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>   4



                           PENWEST PHARMACEUTICALS CO.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)




                                                       THREE MONTHS
                                                    ENDED SEPTEMBER 30,
                                                 ------------------------
                                                  1999             1998
                                                 -------          -------
                                                        (UNAUDITED)
Revenues
  Product sales                                  $ 9,457          $ 6,180
  Royalties and licensing fees                       264               50
                                                 -------          -------
    Total revenues                                 9,721            6,230
Cost of product sales                              6,611            4,591
                                                 -------          -------
    Gross profit                                   3,110            1,639
Operating expenses
  Selling, general and administrative              3,151            2,850
  Research and product development                 1,754            1,375
                                                 -------          -------
    Total operating expenses                       4,905            4,225
                                                 -------          -------
Loss from operations                              (1,795)          (2,586)
Interest expense                                      92               15
                                                 -------          -------
Loss before income taxes                          (1,887)          (2,601)
Income tax benefit                                   (10)            (329)
                                                 -------          -------
Net loss                                         $(1,877)         $(2,272)
                                                 =======          =======

Basic and diluted net loss per share             $ (0.17)         $ (0.21)
                                                 =======          =======

Weighted average shares of common stock           11,121           11,037
outstanding                                      =======          =======


                                                        NINE MONTHS
                                                    ENDED SEPTEMBER 30,
                                                 ------------------------
                                                  1999             1998
                                                 -------          -------
                                                        (UNAUDITED)
Revenues
  Product sales                                  $27,468          $21,429
  Royalties and licensing fees                       414              143
                                                 -------          -------
    Total revenues                                27,882           21,572
Cost of product sales                             19,409           15,855
                                                 -------          -------
    Gross profit                                   8,473            5,717
Operating expenses
  Selling, general and administrative              8,701            7,877
  Research and product development                 5,253            4,038
                                                 -------          -------
    Total operating expenses                      13,954           11,915
                                                 -------          -------
Loss from operations                              (5,481)          (6,198)
Interest expense                                     226               15
                                                 -------          -------
Loss before income taxes                          (5,707)          (6,213)
Income tax (benefit) expense                         (29)              75
                                                 -------          -------
Net loss                                         $(5,678)         $(6,288)
                                                 =======          =======

Basic and diluted net loss per share             $ (0.51)         $ (0.57)
                                                 =======          =======

Weighted average shares of common stock           11,094           11,037
outstanding                                      =======          =======




     See accompanying notes to condensed consolidated financial statements.




                                       4
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                           PENWEST PHARMACEUTICALS CO.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
                                 (IN THOUSANDS)



                                                              NINE MONTHS
                                                          ENDED SEPTEMBER 30
                                                         -------------------
                                                          1999         1998
                                                         -------     -------
                                                             (UNAUDITED)

Net cash used in operating activities                    $(3,696)    $(3,966)
Investing activities:
  Acquisitions of fixed assets, net                         (401)     (2,015)
  Other                                                     (299)         29
                                                         -------     -------
Net cash used in investing activities                       (700)     (1,986)
Financing activities:
  Borrowings from credit facility                          8,200          --
  Repayments of credit facility                           (5,200)         --
  Issuance of common stock                                   445          --
  Increase in payable to Penford                              --       6,105
                                                         -------     -------
Net cash provided by financing activities                  3,445       6,105
Effect of exchange rate changes on cash and cash
  equivalents                                                (82)         46
                                                         -------     -------
Net (decrease) increase  in cash and cash equivalents     (1,033)        199
Cash and cash equivalents at beginning of period           1,476         938
                                                         -------     -------
Cash and cash equivalents at end of period               $   443     $ 1,137
                                                         =======     =======



     See accompanying notes to condensed consolidated financial statements.




                                       5
<PAGE>   6



                           PENWEST PHARMACEUTICALS CO.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.  BUSINESS

         Penwest Pharmaceuticals Co. (the "Company" or "Penwest") is engaged in
    the research, development, and commercialization of novel oral drug delivery
    products and technologies. Based on its extensive expertise in developing
    and manufacturing tableting ingredients for the pharmaceutical industry, the
    Company has developed TIMERx, a proprietary controlled release drug delivery
    technology and PROSOLV SMCC(R) ("PROSOLV"), another drug delivery technology
    which improves the performance characteristics of tablets. The Company's
    product portfolio ranges from excipients that are sold in bulk, to more
    technically advanced and patented excipients that are licensed to customers.
    The Company has manufacturing facilities in Iowa and Finland and has
    customers primarily throughout North America and Europe.

         The Company is subject to the risks and uncertainties associated with a
    drug delivery company actively engaged in research and development. These
    risks and uncertainties include, but are not limited to, a history of net
    losses, technological changes, dependence on collaborators and key
    personnel, the successful completion of development efforts and of obtaining
    regulatory approval, the successful commercialization of TIMERx controlled
    release products, compliance with government regulations, patent
    infringement litigation and competition from current and potential
    competitors, some with greater resources than the Company.

2.  BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
    have been prepared in accordance with generally accepted accounting
    principles for interim financial information and with the instructions to
    Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
    all of the information and footnotes required by generally accepted
    accounting principles for complete financial statements. In the opinion of
    management, all adjustments considered necessary for a fair presentation for
    the interim periods presented have been included. All such adjustments are
    of a normal recurring nature. Operating results for the nine month period
    ended September 30, 1999 are not necessarily indicative of the results that
    may be expected for the year ending December 31, 1999. For further
    information, refer to the consolidated financial statements and footnotes
    thereto included in the Company's Annual Report on Form 10-K
    for the year ended December 31, 1998.

         The balance sheet at December 31, 1998 has been derived from the
    audited financial statements at that date but does not include all of the
    information and footnotes required by generally accepted accounting
    principles for complete financial statements.

         Certain prior year amounts have been reclassified to conform with the
    current year's presentation. These reclassifications had no effect on
    previously reported results of operations.

3.  INCOME TAXES

         The effective tax rate for each of the three month and nine month
    periods ended September 30, 1999 was a benefit of 1%. The effective rate is
    lower than the federal statutory rate of a 34% benefit due primarily to a
    valuation allowance on deferred tax assets relating to the Company's net
    operating loss as well as state and foreign income taxes. The effective tax
    rates for the three month and nine month periods ended September 30, 1998
    were a 13% benefit and a 1% expense, respectively. The effective rates
    differ from the federal statutory rate of a 34% benefit due primarily to the
    effect of tax benefits utilized by Penford Corporation (the Company's former
    parent company) through August 31, 1998 for which Penwest was not
    reimbursed, and state and foreign income taxes.




                                       6
<PAGE>   7



4.  COMPREHENSIVE LOSS

         As of January 1, 1998, the Company adopted Financial Accounting
    Standards Board Statement No. 130 "Reporting Comprehensive Income".
    Statement No. 130 establishes new rules for the reporting and display of
    comprehensive income (loss) and its components; however, the adoption of
    this Statement had no impact on the Company's Net loss or Shareholders'
    equity.

    The components of comprehensive loss, for the three-month and nine-month
    periods ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>

                                            THREE MONTHS ENDED SEPTEMBER 30  NINE MONTHS ENDED SEPTEMBER 30
                                                  1999         1998                1999          1998
                                                  ----         ----                ----          ----
                                             (IN THOUSANDS OF DOLLARS)        (IN THOUSANDS OF DOLLARS)

<S>                                             <C>          <C>                 <C>           <C>
Net loss                                        $(1,877)     $(2,272)            $(5,678)      $(6,288)
Foreign currency translation adjustments            164          200                (276)          271
                                                -------      -------             -------       -------

Comprehensive loss                              $(1,713)     $(2,072)            $(5,954)      $(6,017)
                                                =======      =======             =======       =======
</TABLE>

         Accumulated other comprehensive loss equals the cumulative translation
    adjustment which is the only component of other comprehensive loss included
    in the Company's financial statements.


5.  CONTINGENCIES

         In May 1997, one of the Company's collaborators, Mylan Pharmaceuticals,
    Inc. ("Mylan") filed an Abbreviated New Drug Application ("ANDA") with the
    U.S. Food and Drug Administration ("FDA") for the 30 mg dosage strength of
    Nifedipine XL, a generic version of Procardia XL, a controlled release
    formulation of nifedipine. Bayer AG ("Bayer") and ALZA Corporation ("ALZA")
    own patents listed for Procardia XL (the last of which expires in 2010).
    Pfizer, Inc. ("Pfizer") is the sponsor of the New Drug Application ("NDA")
    and markets the product. In connection with the ANDA filing, Mylan certified
    to the FDA that Nifedipine XL does not infringe upon these Bayer or ALZA
    patents and notified Bayer, ALZA and Pfizer of such certification. Bayer and
    Pfizer sued Mylan in the United States District Court for the Western
    District of Pennsylvania, alleging that Mylan's product infringes Bayer's
    patent. The Company has been informed by Mylan that ALZA does not believe
    that the notice given to it complied with the requirements of the
    Waxman-Hatch Act, and there can be no assurance that ALZA will not sue Mylan
    for patent infringement or take any other actions with respect to such
    notice. Mylan has advised the Company that it intends to contest vigorously
    the allegations made in the lawsuit. However, there can be no assurance that
    Mylan will prevail in this litigation or that it will continue to contest
    the lawsuit. An unfavorable outcome or protracted litigation for Mylan would
    materially adversely affect the Company's business, financial condition,
    cash flows and results of operations. Delays in the commercialization of
    Nifedipine XL could also occur because although the FDA granted tentative
    approval, it will not grant final marketing approval of Nifedipine XL until
    a final judgment on the patent suit is rendered in favor of Mylan by the
    district court, or in the event of an appeal, by the court of appeals, or
    until 30 months (December 9, 1999) (or such longer or shorter period as the
    court may determine) have elapsed from the date of Mylan's certification,
    whichever is sooner. Once the FDA grants final marketing approval, it will
    be Mylan's decision when to actually launch this product.

         In 1993, Pfizer filed a "citizen's petition" with the FDA, claiming
    that its Procardia XL formulation constituted a unique delivery system and
    that a drug with a different release mechanism such as the TIMERx controlled
    release system cannot be considered the same dosage form and approved in an
    ANDA as bioequivalent to Procardia XL. In August 1997, the FDA rejected
    Pfizer's citizen's petition. In July 1997, Pfizer also sued the FDA in the
    District Court of the District of Columbia, claiming that the FDA's
    acceptance of Mylan's ANDA filing for Nifedipine XL was contrary to law,
    based primarily on the arguments stated in its citizen's petition. Mylan and
    the Company intervened as defendants in this suit. In April 1998 the
    District Court of the District of Columbia rejected Pfizer's claim, and in
    May 1998, Pfizer appealed the District Court's decision. In July 1999, the
    US Court of Appeals for the District of Columbia ruled that the lawsuit was
    premature and that the courts won't consider lawsuits against an
    administrative agency until the FDA gives final clearance to the product.
    There can be no assurance that the FDA, Mylan and the Company will prevail
    in this litigation. An outcome in this litigation adverse to Mylan and the
    Company would result in Mylan being required to file a suitability petition
    in order to maintain the ANDA filing or to file an NDA with respect to
    Nifedipine XL,




                                       7
<PAGE>   8


    each of which would be expensive and time consuming. An adverse outcome also
    would result in Nifedipine XL becoming ineligible for an "AB" rating from
    the FDA. Failure to obtain an AB rating from the FDA would indicate that for
    certain purposes Nifedipine XL would not be deemed to be therapeutically
    equivalent to the referenced branded drug, would not be fully substitutable
    for the referenced branded drug and would not be relied upon by Medicaid and
    Medicare formularies for reimbursement. Any such failure would have a
    material adverse effect on the Company's business, financial condition, cash
    flows and results of operations. If any of such events occur, Mylan may
    terminate its efforts with respect to Nifedipine XL, which would have a
    material adverse effect on the Company's business, financial condition, cash
    flows and results of operations.

         In 1994, the Boots Company PLC ("Boots") filed in the European Patent
    Office (the "EPO") an opposition to a patent granted by the EPO to the
    Company relating to its TIMERx technology. In June 1996, the EPO dismissed
    Boots' opposition, leaving intact all claims included in the patent. Boots
    has appealed this decision to the EPO Board of Appeals. There can be no
    assurance that the Company will prevail in this matter. An unfavorable
    outcome could materially adversely affect the Company's business, financial
    condition, cash flows and results of operations.

         Substantial patent litigation exists in the pharmaceutical industry.
    Patent litigation generally involves complex legal and factual questions,
    and the outcome frequently is difficult to predict. An unfavorable outcome
    in any patent litigation affecting the Company could cause the Company to
    pay substantial damages, alter its products or processes, obtain licenses
    and/or cease certain activities. Even if the outcome is favorable to the
    Company, the Company could incur substantial litigation costs. Although the
    legal costs of defending litigation relating to a patent infringement claim
    (unless such claim relates to TIMERx, in which case such costs are the
    responsibility of the Company) are generally the contractual responsibility
    of the Company's collaborators, the Company could nonetheless incur
    significant unreimbursed costs in participating and assisting in the
    litigation.

         Testing, manufacturing, marketing and selling pharmaceutical products
    entail a risk of product liability. The Company faces the risk of product
    liability claims in the event that the use of its products is alleged to
    have resulted in harm to a patient or subject. Such risks exist even with
    respect to those products that are manufactured in licensed and regulated
    facilities or that otherwise possess regulatory approval for commercial
    sale. Product liability insurance coverage is expensive, difficult to obtain
    and may not be available in the future on acceptable terms, if at all. The
    Company is covered by primary product liability insurance in the amount of
    $1.0 million per occurrence and $2.0 million annually in the aggregate on a
    claims-made basis and by umbrella liability insurance in excess of $25.0
    million which can also be used for product liability insurance. There can be
    no assurance that this coverage is adequate to cover potential liability
    claims and may not be adequate as the Company develops additional products.
    As the Company receives regulatory approvals for products under development,
    there can be no assurance that additional liability insurance coverage for
    any such products will be available in the future on acceptable terms, if at
    all. The Company's business, financial condition, cash flows and results of
    operations could be materially adversely affected by the assertion of a
    product liability claim.

6.  REVERSE STOCK SPLIT

         On June 19, 1998, the Company effected a 0.76-for-1 reverse stock split
    of its Common Stock. Accordingly, all share and per share data have been
    retroactively adjusted to give effect to the reverse stock split.

7.   DISTRIBUTION AND CAPITAL CONTRIBUTION

         On August 31, 1998, Penford Corporation ("Penford") distributed to the
    shareholders of record of Penford common stock on August 10, 1998 all of the
    shares of the Company's Common Stock (the "Distribution"). Pursuant to the
    Distribution, each Penford shareholder of record received three shares of
    the Company's Common Stock for every two shares of Penford common stock held
    by them. In connection with the Distribution (i) the Company's Common Stock
    was registered under the Securities Exchange Act of 1934, as amended,
    pursuant to the registration statement on Form 10 which was declared
    effective on July 31, 1998, (ii) the Company's Common Stock was listed with
    and began trading on the Nasdaq National Market on August 10, 1998 and (iii)
    Penford obtained a private letter ruling from the Internal Revenue Service
    to the effect that, among other things, the Distribution qualified as
    tax-free under Sections 355 and 368 of the Internal Revenue Code of 1986, as
    amended, and that the receipt of shares of the Company's Common Stock in the
    Distribution would not result in the recognition of income, gain or loss to
    Penford's shareholders for federal income tax purposes.



                                       8
<PAGE>   9


         In connection with the Distribution, the Company and Penford have
    entered into agreements that govern various interim and ongoing
    relationships. These agreements include (i) a Separation and Distribution
    Agreement setting forth the agreement of the parties with respect to the
    principal corporate transactions which were required to effect the
    separation of Penford's pharmaceutical business from its specialty
    carbohydrate-based chemical business and the Distribution, including without
    limitation Penford's agreement to guarantee the Company's indebtedness under
    its credit facility; (ii) a Services Agreement pursuant to which Penford
    continued on an interim basis to provide specified services to the Company
    until June 30, 1999 or until Penwest no longer needed the services, of which
    costs were charged to the Company on an actual or allocated basis, plus a
    specified profit percentage (Significant services are no longer provided to
    the Company by Penford.); (iii) a Tax Allocation Agreement relating to,
    among other things, the allocation of tax liability between the Company and
    Penford in connection with the Distribution, all pre-distribution
    liabilities are the responsibility of Penford and all post distribution
    liabilities are those of the respective entities; (iv) an Excipient Supply
    Agreement pursuant to which Penford will manufacture and supply exclusively
    to the Company, and the Company will purchase exclusively from Penford,
    subject to certain exceptions, all the Company's requirements for two
    excipients marketed by the Company under quantity and pricing terms that the
    Company believes approximate fair market value; and (v) an Employee Benefits
    Agreement setting forth the parties' agreements as to the continuation of
    certain Penford benefit arrangements for the employees of the Company.
    Subsequent to the Distribution, no terminating liabilities were incurred by
    Penwest related to the Penford defined benefit plan.

         On August 31, 1998, in connection with the separation of its
    pharmaceutical business, Penford contributed to the capital of the Company
    all existing inter-company indebtedness of the Company which approximated
    $50.9 million.

8.   STOCK OPTIONS

         During the nine months ended September 30, 1999, options to purchase
    61,485 shares were exercised, options to purchase 230,000 shares were
    granted and options to purchase 57,076 shares were canceled under the
    Company's stock option plans.


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

OVERVIEW

     Penwest Pharmaceuticals Co. is engaged in the research, development and
commercialization of novel oral drug delivery technologies. The Company has
extensive experience in developing and manufacturing tableting ingredients for
the pharmaceutical industry. The Company's product portfolio ranges from
excipients that are sold in bulk, to more technically advanced and patented
excipients that are licensed to customers. On August 31, 1998 (the "Distribution
Date"), Penwest became an independent, publicly owned company when Penford, the
Company's former parent, distributed (the "Distribution") to the shareholders of
record of Penford common stock on August 10, 1998 all of the shares of the
Company's common stock. Pursuant to the Distribution, each Penford shareholder
of record received three shares of the Company's common stock for every two
shares of Penford common stock held by them.

    The Company's principal development focus to date has been the development
of controlled release drugs based on the TIMERx technology. The Company's
collaborator, Leiras Oy ("Leiras"), received marketing approval in Finland for
Cystrin CR (oxybutynin), a TIMERx formulation for the treatment of urge urinary
incontinence in October 1997 and began marketing the product in Finland in
January 1998. In addition, the Company's collaborator, Sanofi Winthrop
International S.A. ("Sanofi"), received marketing approval in the United Kingdom
and began marketing the product in November 1998 for Slofedipine XL, a
controlled release version of nifedipine utilizing Penwest's TIMERx technology
for the treatment of angina. In May 1997, the Company's collaborator, Mylan,
filed an ANDA with the FDA for the 30 mg dosage strength of Nifedipine XL, the
first generic version of Procardia XL. Subsequent to the filing of Mylan's ANDA,
Bayer and Pfizer sued Mylan alleging patent infringement and Pfizer sued the FDA
claiming that the FDA's acceptance of Mylan's ANDA filing was contrary to law.
Pfizer's claim against the FDA was rejected by a district court in April 1998
and in May 1998 Pfizer appealed the district court's decision. In July 1999, the
US Court of Appeals for the District of Columbia ruled that the lawsuit was
premature and that the courts wouldn't consider the lawsuit until the FDA gives
final clearance to the product. In March 1999, Mylan was notified by the FDA
that the ANDA for 30 mg dosage strength of Nifedipine XL had received tentative
approval. However, the Company does not expect that final marketing approval
will be granted until certain legal issues surrounding the patent dispute
between Mylan and Bayer and Pfizer have been resolved, or upon the expiration of
the thirty-



                                       9
<PAGE>   10


month clock on December 9, 1999, whichever comes sooner. Upon receiving final
marketing approval, it will be Mylan's decision as to when the product will
actually be launched. There can be no assurance that Mylan or the FDA will
prevail in these matters or that they will continue to contest these matters. An
unfavorable outcome or protracted litigation with respect to either of these
matters would have a material adverse effect on the Company's business,
financial condition and results of operations.

    The Company is a party to collaborative agreements with Mylan, Leiras,
Sanofi, Horizon Pharmaceuticals, Inc. ("Horizon") and Endo Pharmaceuticals, Inc.
("Endo") with respect to the development and commercialization of TIMERx
controlled release products. Under these collaborative agreements, the Company's
collaborators are generally responsible for conducting full scale bioequivalence
studies and clinical trials, preparing and submitting all regulatory
applications and submissions and manufacturing, marketing and selling the TIMERx
controlled release products. There can be no assurance that the Company's
collaborations will be commercially successful. The Company cannot control the
amount and timing of resources which its collaborators devote to the Company's
programs or potential products. If any of the Company's collaborators breach or
terminate their agreements with the Company or otherwise fail to conduct their
collaborative activities in a timely manner, the development and
commercialization of product candidates would either be terminated or delayed,
or the Company would be required to undertake product development and
commercialization activities on its own and at its own expense, which would
increase the Company's capital requirements or require the Company to limit the
scope of its development and commercialization activities.

    Under most of these collaborative agreements, the Company has received
upfront fees and milestone payments. In connection with the receipt of certain
upfront fees, the Company was required to perform pilot bioequivalence studies
and only recognized such fees upon delivery of the results of such studies to
the collaborators. In addition, under most of these collaborative agreements,
the Company is entitled to receive additional milestone payments, royalties on
the sale of the products covered by such collaborative agreements and payments
for the purchase of formulated TIMERx material. Because the Company has little
control over the timing and the amount of each of these payments which are
dependent on the continued development and commercialization of the products
covered by such agreements, there can be no assurance as to the timing of
receipt of some or all of these payments or as to the amount of payments to be
received by the Company.

    The Company has incurred net losses since 1994. As of September 30, 1999,
the Company's accumulated deficit was approximately $34.2 million. The Company
expects net losses to continue into 2000. A substantial portion of the Company's
revenues to date have been generated from the sales of the Company's
pharmaceutical excipients. The Company's future profitability will depend on
several factors, including the successful commercialization of TIMERx controlled
release products, and, to a lesser extent, an increase in sales of its other
pharmaceutical excipients products. There can be no assurance that the Company
will achieve profitability or that it will be able to sustain any profitability
on a quarterly basis, if at all.

    The Company's results of operations may fluctuate from quarter to quarter
depending on the volume and timing of orders of the Company's pharmaceutical
excipients and on variations in payments under the Company's collaborative
agreements, including payments upon the achievement of specified milestones. The
Company's quarterly operating results may also fluctuate depending on other
factors, including variations in gross margins of the Company's products, mix of
products sold, competition, regulatory actions, litigation and currency
exchange rate fluctuations.

    The Company's business is conducted internationally and may be affected by
fluctuations in currency exchange rates, as well as by governmental controls and
other risks associated with international sales (such as export licenses,
collectibility of accounts receivable, trade restrictions and changes in
tariffs). The Company's international subsidiaries transact a substantial
portion of their sales and purchases in European currencies other than their
functional currency, which can result in the Company having gains or losses from
currency exchange rate fluctuations.

    The Company does not use derivatives to hedge the impact of fluctuations in
foreign currencies.

RESULTS OF OPERATIONS

    Three Months Ended September 30, 1999 and 1998

    Total revenues increased 56.0% for the three months ended September 30, 1999
to $9.7 million from $6.2 million for the three months ended September 30, 1998.
Product sales increased to $9.5 million for the three months ended September 30,
1999 compared to $6.2 million for the three months ended September 30, 1998,
representing an increase of 53.0%. The increase in product sales was



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primarily due to increased sales volumes of Emcocel(R), as well as increased
sales of PROSOLV.

     Gross profit increased to $3.1 million, or 32.0% of total revenues for the
three months ended September 30, 1999 from $1.6 million, or 26.3% of total
revenues for the three months ended September 30, 1998. The increase in gross
profit percentage was primarily due to increasing margins on Emcocel products
due to volume-based manufacturing efficiencies, in addition to increased sales
of higher-margin PROSOLV and increased development revenues under the Company's
collaborative agreements (with respect to the development and commercialization
of TIMERx controlled release products).

    Selling, general and administrative expenses increased by 10.6% for the
three months ended September 30, 1999 to $3.2 million from $2.9 million for the
three months ended September 30, 1998. The increase in 1999 was partially due to
compensation related expenses, including costs related to the additions of a
vice president of marketing and a business development director, and other costs
including professional fees.

    Research and development expenses increased by 27.6% for the three months
ended September 30, 1999 to $1.8 million from $1.4 million for the three months
ended September 30, 1998. This increase was primarily due to increased spending
under the Company's collaborative agreement with Endo.

    The effective tax rate for the three month period ended September 30, 1999
was a benefit of 1%. The effective rate is lower than the federal statutory rate
of a 34% benefit due primarily to a valuation allowance on deferred tax assets
relating to the Company's net operating loss as well as state and foreign income
taxes. The effective tax rate for the three month period ended September 30,
1998 was a benefit of 13% which is lower than the federal statutory rate of a
34% benefit due primarily to the effect of tax benefits utilized by Penford
Corporation (the Company's former parent company) through August 31, 1998 for
which Penwest was not reimbursed, and state and foreign income taxes.

    Nine months ended September 30, 1999 and 1998

    Total revenues increased 29.3% for the nine months ended September 30, 1999
to $27.9 million from $21.6 million for the nine months ended September 30,
1998. Product sales increased to $27.5 million for the nine months ended
September 30, 1999 compared to $21.4 million for the nine months ended September
30, 1998, representing an increase of 28.2%. The increase in product sales was
primarily due to increased sales volumes of Emcocel, as well as increased sales
of PROSOLV. This increase in sales of Emcocel was primarily due to the addition
of two new large pharmaceutical customers during the first quarter.

    Gross profit increased to $8.5 million or 30.4% of total revenues for the
nine months ended September 30, 1999 from $5.7 million, or 26.5% of total
revenues for the nine months ended September 30, 1998. The increase in gross
profit percentage was partly due to increasing margins on Emcocel products due
to volume-based manufacturing efficiencies, increased sales of PROSOLV and
formulated TIMERx, which have higher margins, as well as increased development
revenues under collaborative agreements utilizing the TIMERx technology.

    Selling, general and administrative expenses increased by 10.5% for the nine
months ended September 30, 1999 to $8.7 million from $7.9 million for the nine
months ended September 30, 1998. The increase in 1999 was primarily due to
compensation expenses related to the employment of additional personnel
including the additions of a vice president of marketing and a business
development director, and other costs including professional fees associated
with being a publicly-held Company.

    Research and development expenses increased by 30.1% for the nine months
ended September 30, 1999 to $5.3 million from $4.0 million for the nine months
ended September 30, 1998. This increase was primarily due to increased spending
under the Company's collaborative agreement with Endo.

    The effective tax rate for the nine month period ended September 30, 1999
was a benefit of 1%. The effective rate is lower than the federal statutory rate
of a 34% benefit due primarily to a valuation allowance on deferred tax assets
relating to the Company's net operating loss as well as state and foreign income
taxes. The effective tax rate for the nine month period ended September 30, 1998
was 1% (expense) which differs from the federal statutory rate of a 34% benefit
due primarily to the effect of tax benefits utilized by Penford Corporation (the
Company's former parent company) through August 31, 1998 for which Penwest was
not reimbursed, and state and foreign income taxes.



                                       11
<PAGE>   12


LIQUIDITY AND CAPITAL RESOURCES

    Prior to the Distribution, the Company received intercompany advances from
Penford to fund the Company's operations, capital expenditures and the original
acquisition of the Company's predecessor, which aggregated to $50.9 million.
Upon the Distribution, Penford contributed the outstanding intercompany
indebtedness and certain other assets and liabilities to the capital of the
Company. Since the Distribution, the Company has funded its operations and
capital expenditures from cash from operations and advances under a credit
facility. The Company has an available credit facility which is a revolving loan
facility of $15.0 million of unsecured financing (the "Credit Facility"). On
August 31, 2000, all outstanding amounts under the Credit Facility will become
automatically due and payable. Penford has agreed that, through the period
ending August 31, 2000, it will guarantee the Company's indebtedness under the
Credit Facility. LIBOR Advances (available in multiples of $1,000,000 for 1, 2
or 3 month LIBOR periods) under the Credit Facility bear interest at a rate
equal to LIBOR, plus 1.25%. Base Rate Advances (as defined under the Credit
Facility) (available in minimum amounts of $100,000) bear interest at the Bank's
Alternate Base Rate (as defined under the Credit Facility). The Credit Facility
also requires commitment fees to be paid at .325% on unused portions of the
commitment amount.

    The Credit Facility contains a number of non-financial covenants that are
applicable to Penwest including, without limitation, restrictions on the
incurrence of additional debt and on the payment of dividends. Any breach of
these covenants by the Company would constitute a default by the Company under
the Credit Facility. In addition, the Credit Facility provides that a breach by
Penford of its guarantee of the Company's indebtedness under the Credit Facility
or the occurrence of a default under any credit agreement with Penford under
which the lender is either the sole or a participating lender, including without
limitation, an event of default arising from the failure of Penford to satisfy
certain financial conditions requiring, among other things, the maintenance of a
minimum net worth and of certain financial ratios, would constitute a default by
the Company under the Credit Facility. Accordingly, the Company is substantially
dependent on Penford in order to access and maintain the Credit Facility. Any
default under the Credit Facility would have a material adverse effect on the
Company's business, financial condition and result of operations. Although
Penford has guaranteed the Company's indebtedness under the Credit Facility, in
no other respects is Penford providing financial support to the Company.

    As of September 30, 1999, the Company had cash and cash equivalents of
$443,000 and $5.2 million of outstanding borrowings under the Credit Facility.
The Company has no committed sources of capital other than the Credit Facility
and no indebtedness to any third or related parties other than under the Credit
Facility. As of September 30, 1999, the Company did not have any material
commitments for capital expenditures. The Company has entered into a strategic
alliance agreement with Endo and the Company expects to expend an additional $7
million, primarily in 2000 and 2001 on the development of a drug. The Company
expects to rely on funds available under the Credit Facility and cash from
operations to fund expenditures. However, the Company may be required to raise
additional funds to continue its development activities under the Endo
agreement. However, either the Company or Endo may terminate the agreement upon
30 days' prior written notice, at which time the Company's funding obligations
would cease.

    The Company had negative cash flow from operations in each of the periods
presented primarily due to net losses for the periods as well as significantly
higher trade receivables over December 31, 1998. Funds expended for the
acquisition of fixed assets were primarily related to efforts at the Company's
manufacturing facility in Iowa to increase capacity. Funds expended for
intangible assets include costs to secure and defend patents on technology
developed by the Company and secure trademarks.

    The Company anticipates that its existing capital resources, together with
the funds available under the Credit Facility and internally generated funds,
will enable it to maintain currently planned operations through at least August
2000. However, this expectation is based on the Company's current operating
plan, which could change as a result of many factors and the Company could
require additional funding sooner than anticipated. The Company's requirements
for additional capital could be substantial and will depend on many factors,
including (i) the timing and amount of payments received under existing and
possible future collaborative agreements; (ii) the structure of any future
collaborative or development agreements; (iii) the progress of the Company's
collaborative and independent development projects; (iv) revenues from the
Company's traditional excipients; (v) the costs to the Company of bioequivalence
studies for the Company's products; (vi) the prosecution, defense and
enforcement of patent claims and other intellectual property rights; and (vii)
the development of manufacturing, marketing and sales capabilities. There can be
no assurance that the Company will be able to access the Credit Facility at such
times as it desires or needs capital.




                                       12
<PAGE>   13


    The Company is currently pursuing financing alternatives to replace the
Credit Facility. The alternatives may include various debt and equity
financings. The Company anticipates that it will complete the financings prior
to the expiration of the Credit Facility. There can be no assurance that such
funds will be available on favorable terms, if at all. The Credit Facility
restricts the incurrence of additional indebtedness by the Company and provides
that the maximum amount available to Penwest under the Credit Facility, $15.0
million, will be reduced by the amount of any net proceeds from any financing
conducted by the Company and that the Company will repay any outstanding amounts
under the Credit Facility in excess of the new maximum amount. To the extent
that additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to the
Company's shareholders. If adequate funds are not available, the Company may be
unable to comply with its obligations under its collaborative agreements, which
could result in the termination of such collaborative agreements. In addition,
the Company may be required to curtail operations significantly or obtain funds
through entering into collaborative agreements on unfavorable terms. The
Company's inability to raise capital would have a material adverse effect on the
Company's business, financial condition and results of operations.

YEAR 2000

    The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any of the
Company's computer programs or hardware or other equipment that have
date-sensitive software or embedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.

    The Company's plan to resolve the Year 2000 issue involves the following
four phases: assessment, remediation, testing and contingency planning. The
Company has completed 100% of its overall assessment of programs, hardware or
other equipment that could be significantly affected by the Year 2000. The
assessment indicates that most of the Company's significant information
technology systems will not be affected. The Company recently installed a new
integrated computer system for all domestic operations that is Year 2000
compliant. The underlying hardware is also Year 2000 compliant according to
vendor certification. The assessment of the Company's North American
manufacturing facility is complete, and the required remediation was completed
in July 1999. The Company's international information technology system
primarily consists of personal computers, some of which required replacement,
which was completed in May 1999. The assessment also indicated that software and
hardware (embedded chips) used in production and manufacturing systems
(hereafter also referred to as operating equipment) in Nastola, Finland, which
produce the Company's European Emcocel products, are Year 2000 non-compliant.
However, the software that is expected to correct this problem has been
identified and is expected to be installed and operational by the end of
November 1999. A failure in this plant could cause disruption to the operations
at the Finnish plant, which could have a material adverse effect on the
Company's business, financial position, results of operations or cash flows.

    Other than that noted above regarding its operating equipment at its Nastola
facility, the Company has completed the remediation phase with respect to the
Year 2000 issues it has identified relating to its information technology
systems. In addition, the Company has completed its planned testing of all
existing significant hardware and software systems to ensure compliance.


    None of the Company's significant systems interface with third party
vendors, manufacturers or customers. The Company has completed its process of
identifying and requesting documentation from its significant suppliers and
subcontractors who do not share information systems with the Company to
determine the extent to which such suppliers and subcontractors will be affected
by any significant Year 2000 issues. The Company is also in the process of
communicating with its significant customers. To date, the Company is not aware
of any supplier, manufacturer, subcontractor or significant customers with a
Year 2000 issue that could have a material adverse effect on the Company's
business, financial position, results of operations or cash flows. The Company
has sent correspondence to all of its major suppliers, subcontractors and
manufacturers and has received approximately 95% of the responses back.

    There can be no guarantee, however, that third parties of business
importance to the Company will successfully and timely evaluate and address
their own Year 2000 issues. The failure of any of these third parties to achieve
Year 2000 compliance in a timely fashion could have a material adverse effect on
the Company's business, financial position, results of operations or cash flows.



                                       13
<PAGE>   14


    The costs of the Company's worldwide Year 2000 compliance efforts are being
funded with cash flows from operations as well as the Company's Credit Facility.
Based upon the assessment efforts to date, the Company does not anticipate that
the costs of becoming Year 2000 compliant will have a material adverse effect
upon the Company's business, financial position, results of operations or cash
flows. The Company does not expect that the costs of replacing or modifying the
computer equipment and software will be substantially different, in the
aggregate, from the normal, recurring costs incurred by the Company for systems
development, implementation and maintenance in the ordinary course of business.
The Company has incurred total worldwide costs of approximately $100,000 to
become Year 2000 compliant on its hardware, software and operating equipment and
anticipates that any remaining costs will not be significant.

    The Company does not presently believe that the Year 2000 issue will pose
significant operational problems. However, if all Year 2000 issues are not
properly identified, or assessment, remediation and testing are not affected on
a timely and effective basis with respect to Year 2000 problems that are
identified, there can be no assurance that the Year 2000 issue will not have a
material adverse effect on the Company's business, financial position, results
of operations or cash flows or adversely affect the Company's relationships with
customers, suppliers or others.

    Contingency planning is currently underway for dealing with operational
problems and costs (including loss of revenues) that would be reasonably likely
to result from failure by the Company or certain third parties to achieve Year
2000 compliance on a timely basis. The Company currently plans to complete its
analysis of the problems and costs associated with the failure to achieve Year
2000 compliance and to complete its contingency plan in the event of such
failure by December 1999.

    The foregoing assessment of the impact of the Year 2000 issue on the Company
is based on management's best estimates as of the date of this Quarterly Report
on Form 10-Q, which are based on numerous assumptions as to future events. There
can be no assurance that these estimates will prove accurate and actual results
could differ materially from those estimated if these assumptions prove
inaccurate.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

    This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects", "intends", "may", and other
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by forward-looking statements
contained in this report and presented elsewhere by management from time to
time. These factors include the matters discussed in the Overview to Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the matters set forth under "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK AND RISK MANAGEMENT POLICIES

    The operations of the Company are exposed to financial market risks,
including changes in interest rates and foreign currency exchange rates. The
Company's interest rate risk consists of cash flow risk associated with
borrowing under its variable rate Credit Facility. The Company's international
subsidiaries transact a substantial portion of their sales and purchases in
European currencies other than their functional currency, which can result in
the Company having gains or losses from currency exchange rate fluctuations. The
company does not use derivatives to hedge the impact of fluctuations in foreign
currencies or interest rates. The Company does not believe that the potential
exposure is significant in light of the size of the Company and its business.


                                       14
<PAGE>   15



                          PART II. -- OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    a.     Exhibits.

           See exhibit index below for a list of the exhibits filed as part of
           this Quarterly Report on Form 10-Q, which exhibit index is
           incorporated herein by reference.

    b.     Reports on Form 8-K.

           None.





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                                   SIGNATURES



Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                       PENWEST PHARMACEUTICALS CO.


Date:   November 12, 1999                 By: /s/ Tod R. Hamachek
                                              Tod R. Hamachek
                                              Chairman of the Board and Chief
                                              Executive Officer




                                  EXHIBIT INDEX

     EXHIBIT NUMBER                         DESCRIPTION

           27             Financial Data Schedule

           99*            Pages 34 through 44 of the Company's Annual Report on
                          Form 10-K for the year ended December 31, 1998 as
                          filed with the Securities and Exchange Commission on
                          March 31, 1999 (which is not deemed filed except to
                          the extent that portions thereof are expressly
                          incorporated by reference herein).


* Incorporated by reference from Exhibit 99 to the Company's quarterly report
  on Form 10-Q for the quarter-ended June 30, 1999.


                                       16