##### 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 September 30, 2007
 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 No. 000-23467
 Penwest Pharmaceuticals Co.
 
 (Exact Name of Registrant as Specified in Its Charter)
 Washington
    
    91-1513032(State or Other Jurisdiction of Incorporation or 
Organization)
    
    (I.R.S. Employer Identification No.)39 Old Ridgebury Road, Suite 11,Danbury, Connecticut
    
    06810-5120(Address of Principal Executive Offices)
    
    (Zip Code)
 (877) 736-9378  (Registrants telephone number, including area code)
 þ o
  o þ o
  o þ
  Class
    
    OutstandingCommon stock, par value $.001
    
    23,413,977




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##### 



PENWEST PHARMACEUTICALS CO.
TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Condensed Financial Statements (Unaudited):Condensed Balance Sheets
    
    
    3Condensed Statements of Operations
    
    
    4Condensed Statements of Cash Flows
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27PART II  OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    28Item 6.
    
    Exhibits
    
    
    39Signature
    
    
    40Exhibit Index
    
    
    41EX-10.1 COLLABORATION AND LICENSE AGREEMENT DATED JULY 16, 2007EX-31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302EX-31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302EX-32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906EX-32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906
   Forward-looking Statements
  2




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PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements (Unaudited)
 PENWEST PHARMACEUTICALS CO.
 
 CONDENSED BALANCE SHEETS
 September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Note 2)(In thousands,except share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    19,837
    
    
    $
    16,182Marketable securities
    
    
    10,048
    
    
    
    24,408Trade accounts receivable
    
    
    807
    
    
    
    683Inventories:Raw materials and other
    
    
    39
    
    
    
    64Finished goods
    
    
    357
    
    
    
    137Total inventories
    
    
    396
    
    
    
    201Prepaid expenses and other current assets
    
    
    1,486
    
    
    
    1,595Total current assets
    
    
    32,574
    
    
    
    43,069Fixed assets, net
    
    
    3,692
    
    
    
    3,787Patents, net
    
    
    2,946
    
    
    
    3,184Deferred charges
    
    
    2,513
    
    
    
    Other assets
    
    
    2,480
    
    
    
    2,702Total assets
    
    $
    44,205
    
    
    $
    52,742LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    756
    
    
    $
    1,324Accrued expenses
    
    
    1,982
    
    
    
    2,096Accrued development costs
    
    
    1,716
    
    
    
    1,105Loan payable  current portion
    
    
    1,803
    
    
    
    Deferred compensation  current portion
    
    
    290
    
    
    
    290Total current liabilities
    
    
    6,547
    
    
    
    4,815Loan payable
    
    
    10,196
    
    
    
    Accrued financing fees
    
    
    360
    
    
    
    Deferred revenue
    
    
    199
    
    
    
    43Deferred compensation
    
    
    2,643
    
    
    
    2,763Total liabilities
    
    
    19,945
    
    
    
    7,621Shareholders 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 23,411,711 shares at September 30, 2007 and 23,132,815 shares at
December 31, 2006
    
    
    23
    
    
    
    23Additional paid in capital
    
    
    221,712
    
    
    
    217,427Accumulated deficit
    
    
    (197,591
    )
    
    
    (172,428
    )Accumulated other comprehensive income
    
    
    116
    
    
    
    99Total shareholders equity
    
    
    24,260
    
    
    
    45,121Total liabilities and shareholders equity
    
    $
    44,205
    
    
    $
    52,742
  3




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PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF OPERATIONS
 Three Months EndedSeptember 30,2007
    
    
    2006(Unaudited)(In thousands, exceptper share data)Revenues:Royalties and licensing fees
    
    $
    731
    
    
    $
    669Product sales
    
    
    53
    
    
    
    51Research and development reimbursements
    
    
    98
    
    
    
    Total revenues
    
    
    882
    
    
    
    720Cost of revenues:Cost of product sales
    
    
    48
    
    
    
    49Cost of research and development reimbursements
    
    
    95
    
    
    
    Total cost of revenues
    
    
    143
    
    
    
    49Gross profit
    
    
    739
    
    
    
    671Operating expenses:Selling, general and administrative
    
    
    3,444
    
    
    
    3,189Research and product development
    
    
    6,625
    
    
    
    6,843Total operating expenses
    
    
    10,069
    
    
    
    10,032Loss from operations
    
    
    (9,330
    )
    
    
    (9,361
    )Investment income
    
    
    429
    
    
    
    620Interest expense
    
    
    (350
    )
    
    
    Loss before income tax expense
    
    
    (9,251
    )
    
    
    (8,741
    )Income tax expense
    
    
    
    
    
    
    Net loss
    
    $
    (9,251
    )
    
    $
    (8,741
    )Net loss per common share
    
    $
    (0.40
    )
    
    $
    (0.38
    )Weighted average shares of common stock outstanding
    
    
    23,261
    
    
    
    22,941
 Nine Months EndedSeptember 30,2007
    
    
    2006(Unaudited)(In thousands, exceptper share data)Revenues:Royalties and licensing fees
    
    $
    1,996
    
    
    $
    2,529Product sales
    
    
    342
    
    
    
    231Research and development reimbursements
    
    
    98
    
    
    
    Total revenues
    
    
    2,436
    
    
    
    2,760Cost of revenues:Cost of product sales
    
    
    302
    
    
    
    104Cost of research and development reimbursements
    
    
    95
    
    
    
    Total cost of revenues
    
    
    397
    
    
    
    104Gross profit
    
    
    2,039
    
    
    
    2,656Operating expenses:Selling, general and administrative
    
    
    10,832
    
    
    
    10,501Research and product development
    
    
    17,051
    
    
    
    16,408Total operating expenses
    
    
    27,883
    
    
    
    26,909Loss from operations
    
    
    (25,844
    )
    
    
    (24,253
    )Investment income
    
    
    1,448
    
    
    
    1,793Interest expense
    
    
    (767
    )
    
    
    Loss before income tax expense
    
    
    (25,163
    )
    
    
    (22,460
    )Income tax expense
    
    
    
    
    
    
    Net loss
    
    $
    (25,163
    )
    
    $
    (22,460
    )Net loss per common share
    
    $
    (1.08
    )
    
    $
    (0.99
    )Weighted average shares of common stock outstanding
    
    
    23,197
    
    
    
    22,663
  4




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PENWEST
PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,2007
    
    
    2006(Unaudited)(In thousands)Operating activities:Net loss
    
    $
    (25,163
    )
    
    $
    (22,460
    )Adjustments to reconcile net loss to net cash used in operating activities
    
    
    2,239
    
    
    
    4,821Net cash used in operating activities
    
    
    (22,924
    )
    
    
    (17,639
    )Investing activities:Acquisitions of fixed assets, net
    
    
    (730
    )
    
    
    (1,592
    )Patent costs
    
    
    (217
    )
    
    
    (385
    )Proceeds from maturities of marketable securities
    
    
    32,700
    
    
    
    32,311Proceeds from sales of marketable securities
    
    
    
    
    
    
    1,600Purchases of marketable securities
    
    
    (18,139
    )
    
    
    (17,275
    )Proceeds from cash surrender value of life insurance policy withdrawal
    
    
    
    
    
    
    446Net cash provided by investing activities
    
    
    13,614
    
    
    
    15,105Financing activities:Proceeds from loan payable
    
    
    12,000
    
    
    
    Debt issuance costs
    
    
    (112
    )
    
    
    Issuance of common stock, net
    
    
    1,077
    
    
    
    9,867Net cash provided by financing activities
    
    
    12,965
    
    
    
    9,867Net increase in cash and cash equivalents
    
    
    3,655
    
    
    
    7,333Cash and cash equivalents at beginning of period
    
    
    16,182
    
    
    
    15,917Cash and cash equivalents at end of period
    
    $
    19,837
    
    
    $
    23,250
  5




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PENWEST PHARMACEUTICALS CO.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
 1. Business
  ® ®
  2. Basis of Presentation
   3. Summary of Significant Accounting Policies
 Revenue Recognition
 Royalties and licensing fees
 6




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Milestone payments
 Product sales 
 Research and development reimbursements
 Research and Development Expenses
  Income Taxes
   7




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
     Impairment of Long-Lived Assets
  Share-Based Compensation
   §
    
    the stock option exercise price;§
    
    the expected term of the option;§
    
    the grant date price of the Companys common stock, which is issuable upon exercise
of the option;§
    
    the expected volatility of the Companys common stock;§
    
    expected dividends on the Companys common stock (the Company does not anticipate
paying dividends for the foreseeable future); and§
    
    the risk-free interest rate for the expected option term.
  8




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
    4. Recent Accounting Pronouncements
   Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities
  9




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 5. Share-Based Compensation
    6. Loans Payable
 Credit Facility
    10




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   (unaudited)(in thousands)Less than one year
    
    $
    1,803One to two years
    
    
    4,713Two to three years
    
    
    5,484$
    12,000
  7. Income Taxes
  8. Supplemental Executive Retirement Plan and Deferred Compensation Plan
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(unaudited)(in thousands)Interest cost
    
    $
    30
    
    
    $
    30
    
    
    $
    89
    
    
    $
    90Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Net periodic benefit cost
    
    $
    30
    
    
    $
    30
    
    
    $
    90
    
    
    $
    91
  11




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   9. Royalty Termination Agreements
    10. Comprehensive Income/(Loss)
  September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)(in thousands)Unrealized gains (losses) on marketable securities
    
    $
    5
    
    
    $
    (11
    )Adjustment for funded status of post retirement plan
    
    
    111
    
    
    
    110Accumulated other comprehensive income
    
    $
    116
    
    
    $
    99
 12




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(unaudited)(in thousands)Net loss
    
    $
    (9,251
    )
    
    $
    (8,741
    )
    
    $
    (25,163
    )
    
    $
    (22,460
    )Changes in unrealized net gains and losses on
marketable securities
    
    
    9
    
    
    
    57
    
    
    
    16
    
    
    
    124Adjustment for funded status of post retirement plan
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Comprehensive loss
    
    $
    (9,241
    )
    
    $
    (8,684
    )
    
    $
    (25,146
    )
    
    $
    (22,336
    )
 11. Collaboration and Licensing Agreements
  Endo Pharmaceuticals Inc.
 ® ® ® ® ®
    
    
    Endo will pay the Company royalties on U.S. sales of Opana ER calculated based on a
royalty rate starting at 22% of annual net sales of the product up to $150 million of annual
net sales, with the royalty rate then increasing, based on agreed-upon levels of annual net
sales achieved, from 25% up to a maximum of 30%.
    
    No royalty payments will be due to the Company for the first $41 million of royalties
that would otherwise have been payable beginning from the time of the product launch in July
2006 (the Royalty Holiday). If the Company was not subject to the $41 million Royalty
Holiday, the Company believes that it would have
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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 received royalties from Endo of approximately $4.2 million and $13.6 million, respectively, for
the three and nine months ended September 30, 2007. Cumulatively, through September 30, 2007,
the Company believes that approximately $14.6 million has been applied against the Royalty
Holiday.
    
    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 sales
thresholds.
    
    The Companys share of the development costs for Opana ER that it opted out of funding in
April 2003 will be fixed at $28 million and will be recouped by Endo through a temporary 50%
reduction in royalties. This temporary reduction in royalties will not apply until the
threshold for the $41 million Royalty Holiday has been met.
 Edison Pharmaceuticals, Inc.
      14




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  Mylan Pharmaceuticals Inc.
  Otsuka Pharmaceutical Co., Ltd.
  12. Contingencies
   15




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
 ®
 Opana ER
   A0001.
 16




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Additional Product Candidates.
 
    
    Nalbuphine ER.  We are developing nalbuphine ER, a controlled release formulation of
nalbuphine hydrochloride, for the treatment of chronic pain. Nalbuphine ER, which is
formulated using our TIMERx drug delivery technology, is designed to be taken as a tablet
twice daily. We expect that nalbuphine ER, if approved, would compete in the moderate pain
market with products such as Tramadol® ER, codeine and Demerol®. In
December 2005, we completed a Phase IIa trial of nalbuphine ER designed to determine the
degree and duration of pain relief of two different dose levels of nalbuphine ER in acute
pain. No unusual side effects were reported during the twelve-hour dosing interval. In
2006, we decided to develop this product for a chronic pain indication and conducted
reformulation work and several Phase I studies to optimize the formulation for this purpose.
In March 2007, we completed a Phase I dose-escalation to steady-state safety trial, which
collected additional safety and pharmacokinetic information for use in designing future
trials. In June 2007, we initiated a Phase IIa, forced titration, dose-ranging trial
designed to determine the efficacy and safety of nalbuphine ER compared to placebo for
treatment of chronic pain. We completed enrollment for this trial in late October 2007. We
anticipate preliminary results from this trial in the first quarter of 2008.
    
    We are also developing two other product candidates for the treatment of disorders of
the nervous system. We are currently developing formulations of these product
candidates, following which we intend to conduct bioavailability studies in humans to
characterize their pharmacokinetic profiles.
    17




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
    
    the commercial success of Opana ER, and the timing and amount of royalties from Endos
sales of Opana ER;
    
    the level of our investment in research and development activities;
    
    the level of our investment for acquisitions, or in-licensing of technologies or
compounds intended to support our growth;
    
    the successful development and commercialization of product candidates in our portfolio;
    
    the timing and amounts of payments to Edison in connection with the Edison agreement,
as well as our internal costs of development for drug candidates for which we acquire rights
under this agreement; and
    
    royalties from Mylans sales of Pfizers generic version of Procardia XL 30 mg.
   Critical Accounting Policies and Estimates
  Revenue Recognition
 Royalties and licensing fees
 18




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Milestone payments
 Product sales 
 Research and development reimbursements
 Recent Accounting Pronouncements
      19




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Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in
Future Research and Development Activities,
  Results of Operations for the Three and Nine Month Periods Ended September 30, 2007 and 2006
 Revenues
 Three months
    
    
    
    
    
    
    Three months
    
    
    Nine months
    
    
    
    
    
    
    Nine monthsended
    
    
    Percentage
    
    
    ended
    
    
    ended
    
    
    Percentage
    
    
    endedSeptember 30,
    
    
    Increase
    
    
    September 30,
    
    
    September 30,
    
    
    Increase
    
    
    September 30,2007
    
    
    (decrease)
    
    
    2006
    
    
    2007
    
    
    (decrease)
    
    
    2006(in thousands, except percentages)
    
    
    (in thousands, except percentages)Royalties and Licensing Fees
    
    $
    731
    
    
    
    9.3
    %
    
    $
    669
    
    
    $
    1,996
    
    
    
    (21.1
    )%
    
    $
    2,529Product Sales
    
    
    53
    
    
    
    3.9
    %
    
    
    51
    
    
    
    342
    
    
    
    48.1
    %
    
    
    231Research & Development
Reimbursements
    
    
    98
    
    
    
    n/a
    
    
    
    
    
    
    
    98
    
    
    
    n/a
    
    
    
    Total Revenues
    
    $
    882
    
    
    
    22.5
    %
    
    $
    720
    
    
    $
    2,436
    
    
    
    (11.7
    )%
    
    $
    2,760
    Selling, General and Administrative Expense
 ,
 20




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Research and Product Development Expense
   Three months
    
    
    
    
    
    
    Three months
    
    
    Nine months
    
    
    
    
    
    
    Nine monthsended
    
    
    Percentage
    
    
    ended
    
    
    ended
    
    
    Percentage
    
    
    endedSeptember 30,
    
    
    Increase
    
    
    September 30,
    
    
    September 30,
    
    
    Increase
    
    
    September 30,2007
    
    
    (decrease)
    
    
    2006
    
    
    2007
    
    
    (decrease)
    
    
    2006(in thousands, except percentages)
    
    
    (in thousands, except percentages)Nalbuphine ER
    
    $
    1,494
    
    
    
    (28
    )%
    
    $
    2,070
    
    
    $
    4,981
    
    
    
    50
    %
    
    $
    3,324Torsemide ER
    
    
    107
    
    
    
    (80
    )%
    
    
    544
    
    
    
    361
    
    
    
    (67
    )%
    
    
    1,098Edison Program
    
    
    2,048
    
    
    
    n/a
    
    
    
    
    
    
    
    2,048
    
    
    
    n/a
    
    
    
    Phase I Products and Internal Costs
    
    
    2,517
    
    
    
    (31
    )%
    
    
    3,660
    
    
    
    8,267
    
    
    
    (19
    )%
    
    
    10,249Research and New Technology
Development
    
    
    459
    
    
    
    (19
    )%
    
    
    569
    
    
    
    1,394
    
    
    
    (20
    )%
    
    
    1,737Total Research and Product
Development Expense
    
    $
    6,625
    
    
    
    (3
    )%
    
    $
    6,843
    
    
    $
    17,051
    
    
    
    4
    %
    
    $
    16,408
 
    
    Nalbuphine ER These expenses reflect our direct external expenses relating to the
development of nalbuphine ER. These expenses approximated 23% and 30% of our R&D expenses
in the three and nine month periods ended September 30, 2007, respectively, and consisted
primarily of payments to third parties in connection with clinical trials of nalbuphine ER,
including payments for the drug active. The expenses for this compound increased in the
nine month period ended September 30, 2007 from the comparable period in 2006, as we
completed a Phase I safety trial and also initiated a Phase IIa proof of concept efficacy
and safety trial. During the remainder of 2007, we expect our R&D expenses relating to
nalbuphine ER to increase as we continue animal toxicology work and continue the Phase IIa
chronic efficacy trial from which we anticipate preliminary results in early 2008.
    
    Torsemide ER These expenses reflect our direct external expenses relating to the
development of torsemide ER. These expenses consisted primarily of payments to third
parties in connection with clinical trials of torsemide ER. At the end of the second
quarter of 2007, we indicated our intention to review this
 21




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program prior to conducting any further development of this candidate. During the third
quarter of 2007, we completed a review of all our development programs, including torsemide
ER. As a result of this review, we determined to cease all development efforts on this
program. This decision was based upon our analysis of the expected level of effort required
for this program compared to our internal resources and the programs lack of fit with our
corporate strategy. As a result of this decision, we do not expect to incur significant
expenses for torsemide ER in future periods.
    
    Edison Program These expenses reflect our funding of Edisons research activities
under the Edison agreement. The amounts included in the three and nine months ended
September 30, 2007 include the initial upfront payment of $1.0 million and a prorated first
quarterly research and development payment. Additionally, these expenses reflect our
direct external expense relating to the preclinical development work that we are conducting
on A0001.
    
    Phase I Products and Internal Costs These expenses primarily reflect our internal
expenses such as salaries and benefits of our product development personnel, including our
pharmaceutical development, clinical and regulatory groups, and other costs primarily
related to our laboratory facilities that are not allocated to specific programs. These
expenses also reflect both our direct external expenses and our allocated internal expenses
relating to the development of Phase I product candidates. Our direct external expenses
primarily reflect payments to third parties for the drug active and proof-of-principle
biostudies conducted on our Phase I products. These costs decreased in the three and nine
month periods ended September 30, 2007 from the comparable periods in 2006, primarily as a
result of a decrease in share-based compensation expense, as discussed below, as well as
the termination of certain preclinical programs in 2007. We continually evaluate the Phase
I product candidates we are developing, and may terminate or accelerate development of
product candidates based on study results, product development risk, commercial
opportunity, perceived time to market and other factors.
    
    Research and New Technology Development These expenses reflect both our direct
external expenses and our allocated internal expenses relating to the development of new
drug delivery technologies, preformulation activities and formulation feasibility studies.
These direct external expenses consist primarily of payments to third parties in connection
with outside laboratory and consulting fees. Our internal expenses primarily include
salaries and benefits for our research and new technology development group, and other
costs such as depreciation on purchased equipment, and the amortization or any write-downs
of patent costs, other than product patent write-offs charged directly to a product
development project or amortization of patent costs relating to commercialized products
which are included in cost of revenues. These expenses decreased in the three and nine
month periods ended September 30, 2007 over the comparable periods in 2006, primarily due
to decreased legal fees and amortization expense related to patents.
  Share-Based Compensation
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Tax Rates
  Liquidity and Capital Resources
 Sources of Liquidity
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Cash Flows
     Funding Requirements
  24




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
    
    the commercial success of Opana ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular our agreement with Endo with respect to Opana ER and our agreement with Mylan
with respect to Pfizers generic Procardia XL 30 mg;
    
    our ability to access the second $12 million term loan under the credit facility and the
timing of the availability of this $12 million;
    
    the timing and amount of payments to Edison in connection with the Edison agreement, as
well as our internal costs of development for drug candidates for which we acquire rights
under this agreement;
    
    the progress of other collaborative and independent development projects, funding
obligations with respect to the projects, and the related costs to us of clinical studies
for our product candidates;
    
    the level of investment for the acquisition or in-licensing of technologies or compounds
intended to support our growth;
    
    the structure and terms of any future collaborative agreements;
    
    the prosecution, defense and enforcement of our patents and other intellectual property
rights, such as the Opana ER patents and the Impax matter; and
    
    the level of our investment in capital expenditures for facilities or equipment.
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Contractual Obligations
  Less Than
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating Leases
    
    $
    1,592
    
    
    $
    790
    
    
    $
    802
    
    
    $
    
    
    
    $
    Purchase Obligations
    
    
    5,089
    
    
    
    5,089
    
    
    
    
    
    
    
    
    
    
    
    Payments Due Under Credit Facility
    
    
    14,736
    
    
    
    2,999
    
    
    
    11,737
    
    
    
    
    
    
    
    Deferred Compensation, including current portion
    
    
    2,933
    
    
    
    294
    
    
    
    587
    
    
    
    587
    
    
    
    1,465Edison Program
    
    
    4,667
    
    
    
    3,792
    
    
    
    875
    
    
    
    
    
    
    
    Total
    
    $
    29,017
    
    
    $
    12,964
    
    
    $
    14,001
    
    
    $
    587
    
    
    $
    1,465
  
    
    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.
   Net Operating Loss Carryforwards
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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.
 (b) Changes in Internal Control Over Financial Reporting.
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PART II  OTHER INFORMATION
 
 Item 1A. Risk Factors
 An updated description of the risk factors associated with our business is set forth below.
This description includes any material changes to and supersedes the description of the risk
factors associated with our business previously disclosed in Part I, Item 1A of our Quarterly
Report on Form 10-Q for the quarter ended September 30, 2007. Investing in our common stock
involves a high degree of risk, and you should carefully consider the risks and uncertainties
described below in addition to the other information included or incorporated by reference in this
quarterly report. If any of the following risks actually occurs, our business, financial condition
or results of operations would likely suffer, possibly materially. In that case, the trading price
of our common stock could fall.
 We have not been profitable and expect to continue to incur substantial losses
    
    
    the commercial success of Opana ER, and the timing and amount of royalties from Endos
sales of Opana ER;
    
    the level of our investment in research and development activities;
    
    the timing and amount of payments to Edison in connection with the Edison agreement, as
well as our costs of development for drug candidates to which we acquire rights under the
Edison agreement;
    
    the successful development and commercialization of product candidates in our portfolio;
    
    the level of investment for acquisitions or in-licensing of technologies or compounds
intended to support our growth; and
    
    royalties from Mylans sales of Pfizers generic Procardia XL 30 mg.
 We may require additional funding, which may be difficult to obtain
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
    
    the commercial success of Opana ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular our agreement with Endo with respect to Opana ER and our agreement with Mylan
with respect to Pfizers generic Procardia XL 30 mg;
    
    our ability to access the second $12 million term loan under the credit facility and the
timing of the availability of this $12 million;
    
    the timing and amount of payments to Edison in connection with the Edison agreement, as
well as our internal costs of development for drug candidates for which we acquired rights
under this agreement;
    
    the progress of other collaborative and independent development projects, funding
obligations with respect to the projects, and the related costs to us of clinical studies
for our product candidates;
    
    the level of investment for the acquisition or in-licensing of technologies or compounds
intended to support our growth;
    
    the structure and terms of any future collaborative agreements;
    
    the prosecution, defense and enforcement of our patents and other intellectual property
rights, such as our Orange Book listed patents for Opana ER; and
    
    the level of our investments in capital expenditures for facilities and equipment.
   Our ability to generate revenues depends heavily on the success of Opana ER
   
    
    the safety and efficacy of Opana ER as compared to competitive products;
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
    
    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;
    
    Endos ability to manufacture and maintain suitable inventory for sale on an ongoing
basis;
    
    the reimbursement policies of government and third party payors with respect to Opana ER;
    
    the pricing of Opana ER;
    
    the level of stocking of Opana ER by wholesalers and retail pharmacies; and
    
    the availability of generic versions of Opana ER and the timing of generic competition.
    We are dependent on our collaborators to manufacture and commercialize our products
     
    
    Our collaborators may be pursuing alternative technologies or developing alternative
products, either on their own or in collaboration with others, that may be competitive to
the product on which we are collaborating, which could affect our collaborators commitment
to our collaboration.
    
    Our collaborators may reduce marketing or sales efforts, or discontinue marketing or
sales of our products. This could reduce the revenues we receive on the products.
    
    Our collaborators may pursue higher priority programs or change the focus of their
commercialization programs, which could affect the collaborators commitment to us.
Pharmaceutical and biotechnology companies re-evaluate their priorities from time to time,
including following mergers and consolidations, which have been common in recent years in
these industries.
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
    
    Disputes may arise between us and our collaborators from time to time regarding
contractual or other matters. In 2006, we were engaged in a dispute with Endo with regard to
the sharing of marketing expenses during the period prior to when Opana ER reaches
profitability. In January 2007, we resolved our dispute as part of an amendment to the
strategic alliance agreement between us and Endo. Any other such disputes with Endo or other
collaborators could be time consuming and expensive, and could impact our anticipated rights
under our agreements with those collaborators.
 We have limited experience in developing, manufacturing, marketing and selling pharmaceutical
products
   The Drug Enforcement Agency, or DEA, limits the availability of the active drug substances used in
Opana ER. As a result, Endos procurement quota may not be sufficient to meet commercial demand
   We face significant competition, which may result in others discovering, developing or
commercializing products before us or more successfully than we do
  
    
    significantly greater financial, technical and human resources than we have and may be
better equipped to develop, manufacture and commercialize drug products;
    
    more extensive experience than we have in conducting preclinical studies and clinical
trials, obtaining regulatory approvals, and manufacturing and marketing pharmaceutical
products;
    
    competing products that have already received regulatory approval or are in late-stage
development; or
    
    collaborative arrangements in our target markets with leading companies and research
institutions.
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If our clinical trials are not successful or take longer to complete than we expect, we may not be
able to develop and commercialize our products
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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.
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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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Opana ER contains a narcotic ingredient. As a result of reported misuse and abuse of
prescription narcotics, the sale of Opana ER is subject to additional regulations, including
compliance with risk management programs, which may prove difficult or expensive to comply
with; and we and Endo may face lawsuits
  Our success depends on our ability to protect our patents and other intellectual property
rights
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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.
   We have only limited manufacturing capabilities and will be dependent on third party
manufacturers
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
    
    we or our collaborators may not be able to meet commercial demands for Opana ER or our
other products;
    
    we may not be able to initiate or continue clinical trials for products that are under
development; and
    
    we may be delayed in submitting applications for regulatory approvals of our products.
   We are dependent upon a limited number of suppliers for the gums used in our TIMERx materials
  If we or our collaborators fail to obtain an adequate level of reimbursement by governmental
or third party payors for Opana ER or any other products we develop, we may not be able to
successfully commercialize the affected product
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We will be exposed to product liability claims and may not be able to obtain adequate product
liability insurance
   If we are unable to retain our key personnel and continue to attract additional professional
staff, we may not be able to maintain or expand our business
  The market price of our common stock may be volatile
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Specific provisions of our Shareholder Rights Plan, Certificate of Incorporation and Bylaws and
the laws of Washington State make a takeover of Penwest or a change in control or management of
Penwest more difficult
  
 Item 6. Exhibits
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SIGNATURE
  PENWEST PHARMACEUTICALS CO.Date: November 5,  2007
    /s/ Benjamin L. PalleikoBenjamin L. PalleikoSenior Vice President, Corporate Development and
Chief Financial Officer
(Principal Financial Officer) 40




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EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    Collaboration and License Agreement, dated as of July 16,
2007, by and between Edison Pharmaceuticals, Inc. and
Penwest Pharmaceuticals Co.31.1
    
    Certification of Principal Executive Officer pursuant to
Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted
pursuant to Section 302 of Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer pursuant to
Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted
pursuant to Section 302 of Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer pursuant to
Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Principal Financial Officer pursuant to
Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
 
 
    
    Confidential treatment has been requested as to certain portions of this Exhibit; such
portions have been omitted and filed separately with the Securities and Exchange Commission. 41