##### 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, 2005
 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 of Incorporation)
    
    (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
  þ o
  o þ
  Class
    
    OutstandingCommon stock, par value $.001
    
    21,855,075




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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
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31PART II  OTHER INFORMATIONItem 6.
    
    Exhibits
    
    
    32Signature
    
    
    33Exhibit Index
    
    
    34EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements (Unaudited)
 PENWEST PHARMACEUTICALS CO.
 
 CONDENSED BALANCE SHEETS
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)
    
    
    (Note 2)(In thousands,except share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,209
    
    
    $
    14,249Marketable securities
    
    
    36,062
    
    
    
    60,121Trade accounts receivable
    
    
    739
    
    
    
    1,126Inventories:Raw materials and other
    
    
    127
    
    
    
    134Finished goods
    
    
    78
    
    
    
    509Total inventories
    
    
    205
    
    
    
    643Prepaid expenses and other current assets
    
    
    1,329
    
    
    
    1,143Total current assets
    
    
    63,544
    
    
    
    77,282Fixed assets, net
    
    
    3,083
    
    
    
    3,674Patents, net
    
    
    3,331
    
    
    
    3,504Cash surrender value of life insurance policies
    
    
    3,121
    
    
    
    3,062Total assets
    
    $
    73,079
    
    
    $
    87,522LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    874
    
    
    $
    2,396Accrued expenses
    
    
    2,059
    
    
    
    1,966Accrued development costs
    
    
    1,747
    
    
    
    974Deferred compensation  current portion
    
    
    291
    
    
    
    Total current liabilities
    
    
    4,971
    
    
    
    5,336Deferred revenue
    
    
    60
    
    
    
    71Deferred compensation
    
    
    2,958
    
    
    
    3,314Total liabilities
    
    
    7,989
    
    
    
    8,721Shareholders 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 21,839,802 shares at September 30, 2005 and 21,692,730 shares at
December 31, 2004
    
    
    22
    
    
    
    22Additional paid in capital
    
    
    201,061
    
    
    
    197,097Accumulated deficit
    
    
    (135,836
    )
    
    
    (118,218
    )Accumulated other comprehensive loss
    
    
    (157
    )
    
    
    (100
    )Total shareholders equity
    
    
    65,090
    
    
    
    78,801Total liabilities and shareholders equity
    
    $
    73,079
    
    
    $
    87,522
  3




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF OPERATIONS
 Three Months EndedSeptember 30,2005
    
    
    2004(Unaudited)(In thousands, exceptper share data)Revenues:Royalties and licensing fees
    
    $
    3,004
    
    
    $
    1,206Product sales
    
    
    3⁄4
    
    
    
    4Total revenues
    
    
    3,004
    
    
    
    1,210Cost of revenues
    
    
    8
    
    
    
    15Gross profit
    
    
    2,996
    
    
    
    1,195Operating expenses:Selling, general and administrative
    
    
    2,554
    
    
    
    2,323Research and product development
    
    
    3,950
    
    
    
    4,103Total operating expenses
    
    
    6,504
    
    
    
    6,426Loss from operations
    
    
    (3,508
    )
    
    
    (5,231
    )Investment income
    
    
    522
    
    
    
    228Loss before income tax expense
    
    
    (2,986
    )
    
    
    (5,003
    )Income tax expense
    
    
    3⁄4
    
    
    
    5Net loss
    
    $
    (2,986
    )
    
    $
    (5,008
    )Net loss per common share
    
    $
    (0.14
    )
    
    $
    (0.27
    )Weighted average shares of common stock outstanding
    
    
    21,714
    
    
    
    18,496
 Nine Months EndedSeptember 30,2005
    
    
    2004(Unaudited)(In thousands, exceptper share data)Revenues:Royalties and licensing fees
    
    $
    5,282
    
    
    $
    3,733Product sales
    
    
    3⁄4
    
    
    
    226Total revenues
    
    
    5,282
    
    
    
    3,959Cost of revenues
    
    
    30
    
    
    
    93Gross profit
    
    
    5,252
    
    
    
    3,866Operating expenses:Selling, general and administrative
    
    
    10,318
    
    
    
    7,187Research and product development
    
    
    13,980
    
    
    
    14,614Total operating expenses
    
    
    24,298
    
    
    
    21,801Loss from operations
    
    
    (19,046
    )
    
    
    (17,935
    )Investment income
    
    
    1,427
    
    
    
    645Loss before income tax expense
    
    
    (17,619
    )
    
    
    (17,290
    )Income tax expense
    
    
    3⁄4
    
    
    
    5Net loss
    
    $
    (17,619
    )
    
    $
    (17,295
    )Net loss per common share
    
    $
    (0.81
    )
    
    $
    (0.94
    )Weighted average shares of common stock outstanding
    
    
    21,683
    
    
    
    18,464
  4




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,2005
    
    
    2004(Unaudited)(In thousands)Operating activities:Net loss
    
    $
    (17,619
    )
    
    $
    (17,295
    )Adjustments to reconcile net loss to net cash used in operating activities
    
    
    3,578
    
    
    
    (2,436
    )Net cash used in operating activities
    
    
    (14,041
    )
    
    
    (19,731
    )Investing activities:Proceeds from sale of discontinued operations
    
    
    3⁄4
    
    
    
    1,250Acquisitions of fixed assets, net
    
    
    (164
    )
    
    
    (1,052
    )Patent costs
    
    
    (303
    )
    
    
    (390
    )Proceeds from maturities of marketable securities
    
    
    38,883
    
    
    
    15,261Proceeds from sales of marketable securities
    
    
    25,450
    
    
    
    28,000Purchases of marketable securities
    
    
    (39,943
    )
    
    
    (29,049
    )Net cash provided by investing activities
    
    
    23,923
    
    
    
    14,020Financing activities:Issuance of common stock, net
    
    
    1,078
    
    
    
    1,273Net cash provided by financing activities
    
    
    1,078
    
    
    
    1,273Net increase (decrease) in cash and cash equivalents
    
    
    10,960
    
    
    
    (4,438
    )Cash and cash equivalents at beginning of period
    
    
    14,249
    
    
    
    8,241Cash and cash equivalents at end of period
    
    $
    25,209
    
    
    $
    3,803
  5




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PENWEST PHARMACEUTICALS CO.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
 1. Business
   2. Basis of Presentation
     - 6 -




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PENWEST PHARMACEUTICALS CO.
 NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
 (Unaudited)
 3. Summary of Significant Accounting Policies
 Revenue Recognition
 Royalties and licensing fees
 Product sales 
 Research and Development Expenses
  Income Taxes
  Impairment of Long-Lived Assets
  7




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
 NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
 (Unaudited)
  Stock-Based Compensation
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(unaudited)
    
    
    (unaudited)(in thousands, except
    
    
    (in thousands, exceptper share data)
    
    
    per share data)Net loss
reported
    
    $
    (2,986
    )
    
    $
    (5,008
    )
    
    $
    (17,619
    )
    
    $
    (17,295
    )Stock-based
compensation
expense included in
reported net
loss
    
    
    144
    
    
    
    78
    
    
    
    2,804
    
    
    
    211Stock-based
compensation under
fair value method
    
    
    (894
    )
    
    
    (946
    )
    
    
    (3,403
    )
    
    
    (2,709
    )Net loss  pro
forma after stock -
based compensation
under fair value
method
    
    $
    (3,736
    )
    
    $
    (5,876
    )
    
    $
    (18,218
    )
    
    $
    (19,793
    )Net loss per share,
basic and diluted
 as reported
    
    $
    (0.14
    )
    
    $
    (0.27
    )
    
    $
    (0.81
    )
    
    $
    (0.94
    )Net loss per share,
basic and diluted
 pro forma after
stock-based
compensation under
fair value method
    
    $
    (0.17
    )
    
    $
    (0.32
    )
    
    $
    (0.84
    )
    
    $
    (1.07
    )
 4. Recent Accounting Pronouncements
   8




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PENWEST PHARMACEUTICALS CO.
 NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  ,
 5. Registration of Securities
  6. Income Taxes
  7. Compensation Charge
  8. Supplemental Executive Retirement Plan and Deferred Compensation Plan
  9




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PENWEST PHARMACEUTICALS CO.
 NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(unaudited)
    
    
    (unaudited)(in thousands)
    
    
    (in thousands)Service cost
    
    $
    3⁄4
    
    
    $
    (8
    )
    
    $
    3⁄4
    
    
    $
    (24
    )Interest cost
    
    
    31
    
    
    
    32
    
    
    
    92
    
    
    
    94Amortization of net obligation at transition
    
    
    3⁄4
    
    
    
    10
    
    
    
    3⁄4
    
    
    
    30Amortization of prior service cost
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1
    
    
    
    1Net periodic benefit cost
    
    $
    31
    
    
    $
    34
    
    
    $
    93
    
    
    $
    101
   9. Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(unaudited)
    
    
    (unaudited)(in thousands)
    
    
    (in thousands)Net loss
    
    $
    (2,986
    )
    
    $
    (5,008
    )
    
    $
    (17,619
    )
    
    $
    (17,295
    )Change in unrealized net
gains and losses on
marketable
securities
    
    
    (19
    )
    
    
    43
    
    
    
    (57
    )
    
    
    (102
    )Comprehensive loss
    
    $
    (3,005
    )
    
    $
    (4,965
    )
    
    $
    (17,676
    )
    
    $
    (17,397
    )
  10. Licensing Agreements
  10




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PENWEST PHARMACEUTICALS CO.
 NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Endo Pharmaceuticals, Inc.
    Mylan Pharmaceuticals Inc.
  11




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##### Table of Contents



PENWEST PHARMACEUTICALS CO.
 NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Prism Pharmaceuticals, Inc.
   11. Contingencies
  12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  
    
    Oxymorphone ER.Oxymorphone ER is an extended release
formulation of oxymorphone incorporating TIMERx technology
that we are developing with Endo. Oxymorphone ER, a Schedule
II narcotic analgesic, is being developed for twice-a-day
dosing in patients with moderate to severe pain requiring
continuous, around-the-clock opioid therapy for an extended
period of time.Endo, which is responsible for conducting the clinical trials
and seeking regulatory approval of the product, submitted a
New Drug Application, or NDA, for oxymorphone ER to the United
States Food and Drug Administration, or FDA, in December 2002.
In October 2003, Endo received an approvable letter for
oxymorphone ER. In the letter, the FDA requested that Endo
address certain questions, provide additional clarification
and information, and conduct some form of additional clinical
trials to further confirm the safety and efficacy of
oxymorphone ER, before the FDA would approve Endos NDA for
oxymorphone ER. In November 2004, Endo announced that the FDA
had granted under the FDAs Special Protocol Assessment, or
SPA, process, final approval of a protocol for a 12-week,
multicenter double-blinded, placebo-controlled Phase III trial
of oxymorphone ER in patients with chronic low back pain and
without recent treatment with opioid analgesics, designed to
provide the additional safety and efficacy data for
oxymorphone ER requested by the FDA.In August 2005, Endo reported that the results of this study
demonstrated statistically significant (p<0.0001)
difference in pain scores between oxymorphone ER and placebo
during a 12-week treatment period, during which the drug was
administered twice daily. The primary endpoint was a change
in average pain intensity as measured on the Visual Analog
Scale (VAS), from baseline. In addition, in October 2005,
Endo reported results of a separate Phase III trial with a
protocol virtually identical to the study described above,
except that the patient population consisted of
opioid-experienced patients. Endo reported that the results
of this study also demonstrated statistically significant
(p<0.0001) difference in pain scores between oxymorphone ER
and placebo during a 12-week treatment period, during which
the drug was administered twice daily.
    
    PW2132.PW2132 is a drug candidate intended for the
treatment of edema resulting from congestive heart failure,
which we formulated using our Geminex technology. Geminex is
a dual drug delivery system that is designed to provide
independent release of the same active ingredient or different
active ingredients contained in a drug. The technology is
based on a bi-layer tablet that utilizes TIMERx in the
controlled release layer. We conducted a pilot scale biostudy
of PW2132 in approximately 20 healthy volunteers in the fourth
quarter of 2004. In the study, PW2132 achieved the plasma
profiles we had targeted as endpoints of the study and that we
believe may improve the efficacy of the drug. Based on the
results of the pilot biostudy, in April 2005, we held a
pre-IND meeting with the FDA and filed an Investigational New
Drug Application, or IND, for PW2132. During the third
quarter of 2005, we completed a Phase IIa study, as a
single-dose efficacy study, in approximately 40 patients,
designed to show proof of concept and are in the process of
completing the analysis of the data. Early indications
suggest that the results were positive, however, we will need
to complete the full analysis of the data, which we expect to do in
the fourth quarter of 2005, to confirm the results.
 - 13 -




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##### Table of Contents




    
    In addition, we are currently conducting pilot scale
Phase I proof of principle biostudies of several product
candidates primarily for drugs to treat diseases of the
central nervous system. In these studies, we are seeking to
obtain preliminary pharmacokinetic data in humans. If the
pilot scale biostudies of any of these product candidates meet
the anticipated product profile and the commercial returns
appear attractive, we will most likely seek to advance the
product candidate into further clinical trials. The decision
to develop a product candidate on our own or consider the
option to outlicense to a potential partner will be based on,
and limited by, our available resources after consideration of
a number of factors, including the size of the potential
market, with respect to competitors in the potential market,
the availability of intellectual property protection, the
regulatory pathway, the expected timing and cost of the
development program, and the development status of our other
product candidates.
     
    
    the successful commercialization of TIMERx controlled release products, including in
particular oxymorphone ER;
 
    
    royalties from Mylans sales of Pfizer 30 mg generic version of Procardia XL; and
 
    
    the level of our investment in research and development activities.
  14




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Critical Accounting Policies and Estimates
  Results of Operations for the Three and Nine Months Ended September 30, 2005 and 2004
 Three months
    
    
    
    
    
    
    Three months
    
    
    Nine months
    
    
    
    
    
    
    Nine monthsended
    
    
    
    
    
    
    ended
    
    
    ended
    
    
    
    
    
    
    endedSeptember 30,
    
    
    Percentage
    
    
    September 30,
    
    
    September 30,
    
    
    Percentage
    
    
    September 30,2005
    
    
    Increase
    
    
    2004
    
    
    2005
    
    
    (Decrease)
    
    
    2004(in thousands, except percentages)
    
    
    (in thousands, except percentages)Royalties and Licensing Fees
    
    $
    3,004
    
    
    
    149
    %
    
    $
    1,206
    
    
    $
    5,282
    
    
    
    42
    %
    
    $
    3,733Product Sales
    
    
    
    
    
    
    (100
    )%
    
    
    4
    
    
    
    
    
    
    
    (100
    )%
    
    
    226Total Revenues
    
    $
    3,004
    
    
    
    148
    %
    
    $
    1,210
    
    
    $
    5,282
    
    
    
    33
    %
    
    $
    3,959
 Revenues
   Selling, General and Administrative Expense
  15




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##### Table of Contents



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 30,2005
    
    
    (Decrease)
    
    
    2004
    
    
    2005
    
    
    (Decrease)
    
    
    2004(in thousands, except percentages)
    
    
    (in thousands, except percentages)PW2101
    
    $
    274
    
    
    
    (79
    )%
    
    $
    1,319
    
    
    $
    2,116
    
    
    
    (65
    )%
    
    $
    6,130PW2132
    
    
    74
    
    
    
    (61
    )%
    
    
    189
    
    
    
    1,173
    
    
    
    325
    %
    
    
    276Phase I Products and Internal Costs
    
    
    3,168
    
    
    
    61
    %
    
    
    1,967
    
    
    
    9,472
    
    
    
    58
    %
    
    
    5,986Research and New Technology
Development
    
    
    434
    
    
    
    (31
    )%
    
    
    628
    
    
    
    1,219
    
    
    
    (45
    )%
    
    
    2,222Total Research and Product
Development Expense
    
    $
    3,950
    
    
    
    (4
    )%
    
    $
    4,103
    
    
    $
    13,980
    
    
    
    (4
    )%
    
    $
    14,614
  
    
    PW2101 These expenses reflect our direct external expenses relating to the development of
PW2101. These expenses consist primarily of payments to third parties in connection with
clinical trials of PW2101, the manufacturing of PW2101, including our development work related
to the qualification of an alternative manufacturing site, and the preparation of the NDA for
PW2101.
 
    
    PW2132 These expenses reflect our direct external expenses relating to the
development of PW2132. These expenses consists primarily of payments to third parties in
connection with clinical trials of PW2132.
 
    
    Phase I Products and Internal Costs These expenses reflect both our direct external
expenses and our allocated internal expenses relating to the development of Phase I product
candidates, and also include other unallocated research and development expenses. Our direct
external expenses primarily reflect payments to third parties for the active drug and
proof-of-principle biostudies conducted on our Phase I products. Our internal expenses include
expenses such as salaries and benefits of our product development personnel including our
formulation, clinical and regulatory groups, and other costs primarily related to our
laboratory facilities.
 
    
    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. 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 of 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.
 PW2101.
 16




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PW2132
 Phase I Products and Internal Costs.
 Research and New Technology Development Expenses.
  Tax Rates
  Stock Based Compensation
   17




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Liquidity and Capital Resources
 Sources of Liquidity
   Cash Flows
  Funding Requirements
   
    
    whether oxymorphone ER is approved on a timely basis, or at all;
 18




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##### Table of Contents




    
    the costs and timing of adding product candidates or technologies;
 
    
    whether we resume our participation in the funding of the development and marketing of oxymorphone ER;
 
    
    the timing and amount of payments received under collaborative agreements, including in particular with respect to
oxymorphone ER;
 
    
    the structure and terms of any future collaborative or development agreements;
 
    
    the progress of our collaborative and independent development projects, funding obligations with respect to the projects,
and the related costs to us of clinical studies for our products;
 
    
    royalties received from Mylan; and
 
    
    the prosecution, defense and enforcement of potential patent claims and other intellectual property rights.
    Contractual Obligations
  Less than
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating Leases
    
    $
    694
    
    
    $
    573
    
    
    $
    121
    
    
    $
    
    
    
    $
    Purchase Obligations
    
    
    2,444
    
    
    
    2,419
    
    
    
    25
    
    
    
    
    
    
    
    Total
    
    $
    3,138
    
    
    $
    2,992
    
    
    $
    146
    
    
    $
    
    
    
    $
    
   19




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SERP
    
    DCP
    
    TotalYear 1
    
    $
    151
    
    
    $
    140
    
    
    $
    291Year 2
    
    
    151
    
    
    
    140
    
    
    
    291Year 3
    
    
    151
    
    
    
    140
    
    
    
    291Year 4
    
    
    151
    
    
    
    140
    
    
    
    291Year 5
    
    
    151
    
    
    
    140
    
    
    
    291Years 6-10
    
    
    756
    
    
    
    560
    
    
    
    1,316
  Net Operating Loss Carryforwards
  Forward-Looking Statements
  Risk Factors
 Investing in our common stock involves a high degree of risk, and you should carefully
consider the risks and uncertainties described below in addition to the other information included
or incorporated by reference in this quarterly report. If any of the following risks actually
occurs, our business, financial condition or results of operations would likely suffer, possibly
materially. In that case, the trading price of our common stock could fall.
 We have not been profitable and expect to continue to incur substantial losses
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
    
    the successful commercialization of TIMERx controlled release products, including in
particular oxymorphone ER;
    
    royalties from Mylans sale of Pfizers 30 mg generic version of Procardia XL; and
    
    the level of our investment in research and development activities.
 We may require additional funding, which may be difficult to obtain
   
    
    whether oxymorphone ER is approved on a timely basis, or at all;
    
    the costs and timing of adding additional products or technologies;
    
    whether we resume our participation in the funding of the development and marketing of
oxymorphone ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular with respect to oxymorphone ER;
    
    the structure and terms of any future collaborative or development agreements;
    
    the progress of our collaborative and independent development projects, funding
obligations with respect to the projects, and the related costs to us of clinical studies
for our products;
    
    royalties received from Mylan; and
    
    the prosecution, defense and enforcement of potential patent claims and other intellectual property rights.
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We are dependent on collaborators to conduct clinical trials of, obtain regulatory approvals for,
and manufacture, market, and sell our TIMERx controlled release products, including, in
particular, Endo with respect to oxymorphone ER
     
    
    Our collaborators may be pursuing alternative technologies or developing alternative
products, either on their own or in collaboration with others, that may be competitive with
the product as to which they are collaborating with us, which could affect our
collaborators commitment to the collaboration with us.
    
    Our collaborators may reduce marketing or sales efforts, or discontinue marketing or
sales of our products. This would reduce our revenues received on the products.
    
    Our collaborators may terminate their collaborations with us. This could make it
difficult for us to attract new collaborators or adversely affect perception of us in the
business and financial communities.
    
    Our collaborators may pursue higher priority programs or change the focus of their
development programs, which could affect the collaborators commitment to us. Pharmaceutical
and biotechnology companies
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historically have re-evaluated their priorities from time to time, including following mergers
and consolidations, which have been common in recent years in these industries.
 We face significant competition, which may result in others discovering, developing or
commercializing products before 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 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; and
    
    collaborative arrangements in our target markets with leading companies and research institutions.
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If our clinical trials are not successful or take longer to complete than we expect, we may not be
able to develop and commercialize our products
      
    
    be delayed in obtaining marketing approval for our products;
    
    not be able to obtain marketing approval for our products; or
    
    obtain approval for indications that are not as broad as intended.
  Oxymorphone ER contains a narcotic ingredient. As a result of reports of misuse or abuse of
prescription narcotics, the sale of oxymorphone ER may be subject to new regulations, including the
development and implementation of risk management programs which may prove difficult or
expensive to comply with, and we and Endo may face lawsuits.
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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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Our controlled release products that are generic versions of branded controlled release products
that are covered by one or more patents may be subject to litigation, which could delay FDA
approval and commercial launch of our products
  The market may not be receptive to products incorporating our drug delivery technologies
   
    
    the timing of the receipt of marketing approvals and the countries in which such approvals are obtained;
    
    the safety and efficacy of the product as compared to competitive products;
    
    the relative convenience and ease of administration as compared to competitive products;
    
    the strength of marketing distribution support; and
    
    the cost-effectiveness of the product and the ability to receive third party reimbursement.
 Our success depends on our protecting our patents and patented rights
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We may become involved in patent litigation or other intellectual property proceedings relating
to our products or processes, which could result in liability for damages or stop our development
and commercialization efforts
  
    
    We or our collaborators may initiate litigation or other proceedings against third
parties to enforce our patent rights.
    
    We or our collaborators may initiate litigation or other proceedings against third
parties to seek to invalidate the patents held by such third parties or to obtain a judgment
that our products or processes do not infringe such third parties patents.
    
    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 against such proceedings.
   We have only limited manufacturing capabilities and will be dependent on third party manufacturers
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
    
    our collaborators may not be able to meet commercial demands for our products on a timely
basis;
    
    our collaborators may not be able to initiate or continue clinical trials of products
that are under development; and
    
    our collaborators 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 material
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If we or our collaborators fail to obtain an adequate level of reimbursement by third party
payors for our controlled release products, they may not be able to successfully commercialize
controlled release products
     We will be exposed to product liability claims and may not be able to obtain adequate product
liability insurance
   The market price of our common stock may be volatile
  Specific provisions of our Shareholder Rights Plan, Certificate of Incorporation and Bylaws and
of Washington law make a takeover of Penwest or a change in control or management of Penwest
more difficult
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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 6. Exhibits
  - 32 -




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SIGNATURE
  PENWEST PHARMACEUTICALS CO.Date: November 7, 2005
    
    /s/ Jennifer L. GoodJennifer L. GoodSenior Vice President, Finance and Chief Financial Officer(Principal Financial Officer)
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EXHIBIT INDEX
 ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Exchange
Act Rules 13a-14 or 15d-14, as adopted pursuant to Section 302
of Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Exchange
Act Rules 13a-14 or 15d-14, as adopted pursuant to Section 302
of Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief 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 Chief 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.
 34