##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 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
    
    23,288,613




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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
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART II  OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    23Item 6.
    
    Exhibits
    
    
    32Signature
    
    
    33Exhibit Index
    
    
    34EX-10.4 Severance and Settlement Agreement and ReleaseEX-10.5 Credit and Security AgreementEX-31.1 Section 302 CEO CertificationEX-31.2 Section 302 CFO CertificationEX-32.1 Section 906 CEO CertificationEX-32.2 Section 906 CFO Certification
  ® ® ®
 Forward-Looking Statements
  2




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PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements (Unaudited)
 PENWEST PHARMACEUTICALS CO.
 
 CONDENSED BALANCE SHEETS
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Note 2)(In thousands,except share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    31,525
    
    
    $
    16,182Marketable securities
    
    
    12,177
    
    
    
    24,408Trade accounts receivable
    
    
    765
    
    
    
    683Inventories:Raw materials and other
    
    
    67
    
    
    
    64Finished goods
    
    
    193
    
    
    
    137Total inventories
    
    
    260
    
    
    
    201Prepaid expenses and other current assets
    
    
    1,106
    
    
    
    1,595Total current assets
    
    
    45,833
    
    
    
    43,069Fixed assets, net
    
    
    3,760
    
    
    
    3,787Patents, net
    
    
    3,097
    
    
    
    3,184Deferred charges
    
    
    2,546
    
    
    
    Other assets
    
    
    2,734
    
    
    
    2,702Total assets
    
    $
    57,970
    
    
    $
    52,742LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    981
    
    
    $
    1,324Accrued expenses
    
    
    1,482
    
    
    
    2,096Accrued development costs
    
    
    850
    
    
    
    1,105Loan payable  current portion
    
    
    601
    
    
    
    Deferred compensation  current portion
    
    
    290
    
    
    
    290Total current liabilities
    
    
    4,204
    
    
    
    4,815Loan payable
    
    
    11,399
    
    
    
    Accrued financing fees
    
    
    360
    
    
    
    Deferred revenue
    
    
    40
    
    
    
    43Deferred compensation
    
    
    2,809
    
    
    
    2,763Total liabilities
    
    
    18,812
    
    
    
    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 23,286,570 shares at March 31, 2007 and 23,132,815 shares at
December 31, 2006
    
    
    23
    
    
    
    23Additional paid in capital
    
    
    218,411
    
    
    
    217,427Accumulated deficit
    
    
    (179,382
    )
    
    
    (172,428
    )Accumulated other comprehensive income
    
    
    106
    
    
    
    99Total shareholders equity
    
    
    39,158
    
    
    
    45,121Total liabilities and shareholders equity
    
    $
    57,970
    
    
    $
    52,742
  3




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PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF OPERATIONS
 Three Months EndedMarch 31,2007
    
    
    2006(Unaudited)(In thousands, exceptper share data)Revenues:Royalties and licensing fees
    
    $
    719
    
    
    $
    931Product sales
    
    
    123
    
    
    
    34Total revenues
    
    
    842
    
    
    
    965Cost of revenues
    
    
    110
    
    
    
    22Gross profit
    
    
    732
    
    
    
    943Operating expenses:Selling, general and administrative
    
    
    3,721
    
    
    
    3,463Research and product development
    
    
    4,384
    
    
    
    4,344Total operating expenses
    
    
    8,105
    
    
    
    7,807Loss from operations
    
    
    (7,373
    )
    
    
    (6,864
    )Investment income
    
    
    489
    
    
    
    561Interest expense
    
    
    70
    
    
    
    Loss before income tax expense
    
    
    (6,954
    )
    
    
    (6,303
    )Income tax expense
    
    
    
    
    
    
    Net loss
    
    $
    (6,954
    )
    
    $
    (6,303
    )Net loss per common share
    
    $
    (0.30
    )
    
    $
    (0.28
    )Weighted average shares of common stock outstanding
    
    
    23,142
    
    
    
    22,246
  4




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PENWEST PHARMACEUTICALS CO.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2007
    
    
    2006(Unaudited)(In thousands)Operating activities:Net loss
    
    $
    (6,954
    )
    
    $
    (6,303
    )Adjustments to reconcile net loss to net cash used in operating activities
    
    
    (1,628
    )
    
    
    2,174Net cash used in operating activities
    
    
    (8,582
    )
    
    
    (4,129
    )Investing activities:Acquisitions of fixed assets, net
    
    
    (249
    )
    
    
    (37
    )Patent costs
    
    
    (25
    )
    
    
    (132
    )Proceeds from maturities of marketable securities
    
    
    16,261
    
    
    
    8,075Proceeds from sales of marketable securities
    
    
    
    
    
    
    1,600Purchases of marketable securities
    
    
    (4,091
    )
    
    
    (2,014
    )Net cash provided by investing activities
    
    
    11,896
    
    
    
    7,492Financing activities:Proceeds from loan payable
    
    
    12,000
    
    
    
    Debt issuance costs
    
    
    (65
    )
    
    
    Issuance of common stock, net
    
    
    94
    
    
    
    6,723Net cash provided by financing activities
    
    
    12,029
    
    
    
    6,723Net increase in cash and cash equivalents
    
    
    15,343
    
    
    
    10,086Cash and cash equivalents at beginning of period
    
    
    16,182
    
    
    
    15,917Cash and cash equivalents at end of period
    
    $
    31,525
    
    
    $
    26,003
  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
 Product sales 
 6




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 Research and Development Expenses
  Income Taxes
      Impairment of Long-Lived Assets
  7




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
  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
    5. Share-Based Compensation
   6. Loans Payable
 Credit Facility
  9




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
    (unaudited)(in thousands)Less than one year
    
    $
    601One to two years
    
    
    3,174Two to three years
    
    
    5,483Three to four years
    
    
    2,742$
    12,000
  7. Income Taxes
  8. Supplemental Executive Retirement Plan and Deferred Compensation Plan
   Three Months EndedMarch 31,2007
    
    
    2006(unaudited)(in thousands)Interest cost
    
    $
    29
    
    
    $
    30Amortization of prior service cost
    
    
    1
    
    
    
    Net periodic benefit cost
    
    $
    30
    
    
    $
    30
  10




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
   9. Royalty Termination Agreements
    11




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 10. Comprehensive Income/(Loss)
  March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)(in thousands)Unrealized losses on
marketable securities
    
    $
    (4
    )
    
    $
    (11
    )Adjustment for funded status
of post retirement plan
    
    
    110
    
    
    
    110Accumulated other
comprehensive income
    
    $
    106
    
    
    $
    99
  Three Months EndedMarch 31,2007
    
    
    2006(unaudited)(in thousands)Net loss
    
    $
    (6,954
    )
    
    $
    (6,303
    )Changes in unrealized net gains and losses on
marketable securities
    
    
    7
    
    
    
    20Comprehensive loss
    
    $
    (6,947
    )
    
    $
    (6,283
    )
 11. Licensing Agreements
  Endo Pharmaceuticals Inc.
 ® ® ® ® ® tm.
    12




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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
    
    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 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.
    
    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 referred to above has been met.
 Mylan Pharmaceuticals Inc.
  12. Contingencies
   13




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
 ®
 Opana ER
  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 we are
developing 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 January 2007, we commenced a Phase I dose escalation to steady state trial. The intent
of this trial is to collect additional safety and pharmacokinetic information which we can
use to bridge the safety data from the acute pain trial we conducted in 2005 to a chronic
pain trial we intend to conduct in 2007. If the data from this trial supports a chronic
pain trial, we intend to commence in the third quarter of 2007 a Phase IIa proof of concept
trial in a chronic pain study comparing nalbuphine ER to placebo.
    
    Torsemide ER.We are developing torsemide ER, a controlled release formulation of
torsemide, a loop diuretic for the treatment of chronic edema, a condition involving excess
fluid accumulation resulting from congestive heart failure, or CHF. Torsemide ER, which we
are developing using our TIMERx drug delivery technology, is designed to be taken as a
tablet once daily. We expect that torsemide ER, if approved, would compete with furosemide
and other loop diuretics. We have completed several Phase I pharmacokinetic studies of
torsemide ER and completed a Phase IIa study in which torsemide ER caused prolonged urinary
sodium excretion in CHF patients. We intend to further refine our formulation for torsemide
ER in the first half of 2007.
 14




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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 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 version of Procardia XL 30 mg.
   Share-Based Compensation
 15




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Critical Accounting Policies and Estimates
  Recent Accounting Pronouncements
       16




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Results of Operations for the Three Month Periods Ended March 31, 2007 and 2006
 Revenues
 Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    Percentage
    
    
    EndedMarch 31,
    
    
    Increase
    
    
    March 31,2007
    
    

(Decrease)
    
    
    2006(in thousands, except percentages)Royalties and Licensing Fees
    
    $
    719
    
    
    
    (23
    )%
    
    $
    931Product Sales
    
    
    123
    
    
    
    262
    %
    
    
    34Total Revenues
    
    $
    842
    
    
    
    (13
    )%
    
    $
    965
   Selling, General and Administrative Expense
  Research and Product Development Expense
  Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    Percentage
    
    
    EndedMarch 31,
    
    
    Increase
    
    
    March 31,2007
    
    
    (Decrease)
    
    
    2006(in thousands, except percentages)Nalbuphine ER
    
    $
    965
    
    
    
    216
    %
    
    $
    305Torsemide ER
    
    
    150
    
    
    
    63
    %
    
    
    92Phase I Products and Internal Costs
    
    
    2,842
    
    
    
    (18
    )%
    
    
    3,450Research and New Technology
Development
    
    
    427
    
    
    
    (14
    )%
    
    
    497Total Research and Product
Development Expense
    
    $
    4,384
    
    
    
    1
    %
    
    $
    4,344
 17




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
    
    Nalbuphine ER These expenses reflect our direct external expenses relating to the
development of nalbuphine ER. These expenses approximated 22% of our research and
development expenses in the three month period ended March 31, 2007 and consisted primarily
of payments to third parties in connection with clinical trials of nalbuphine ER. The
expenses for this compound increased in the three month period ended March 31, 2007 from
the comparable period in 2006, as we advanced the drug into a Phase I safety trial that
commenced in 2007. During the remainder of 2007, we expect our research and product
development expenses relating to nalbuphine ER to increase as we conduct animal toxicology
work, complete additional Phase I studies to optimize the formulation and prepare for
additional clinical trials, including a Phase IIa chronic efficacy
trial that we expect to commence in the  third quarter of 2007.
    
    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, and approximated 3% of our
research and development expenses in the three month period ended March 31, 2007. The
expenses for this compound increased in the three month period ended March 31, 2007 from
the comparable period in 2006, primarily as a result of the additional preclinical work we
undertook in 2007 to optimize the formulation for further clinical trials. During the
remainder of 2007, we expect our expenses for torsemide ER to increase as we conduct
additional preclinical work.
    
    Phase I Products and Internal Costs These expenses primarily reflect our 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 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 month period ended
March 31, 2007 from the comparable period in 2006, primarily as a result of a decrease in
share-based compensation expense, as noted above. 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. 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 month period ended March 31, 2007 over the comparable period in
2006, primarily due to decreased professional fees and amortization expense related to
patents.
  Tax Rates
  18




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Liquidity and Capital Resources
 Sources of Liquidity
     Cash Flows
  19




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Funding Requirements
   
    
    the commercial success of Opana ER and royalties received from Endo on sales of Opana ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular our agreement with Endo with respect to Opana ER and our agreement with Mylan
with respect to Pfizers generic Procardia XL 30 mg;
    
    the 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;
    
    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; and
    
    the level of our investment in capital expenditures for facilities or equipment.
  20




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Contractual Obligations
  Less Than
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating Leases
    
    $
    1,137
    
    
    $
    718
    
    
    $
    419
    
    
    $
    
    
    
    $
    Purchase Obligations
    
    
    7,944
    
    
    
    7,944
    
    
    
    
    
    
    
    
    
    
    
    Payments Due Under Credit Facility
    
    
    15,262
    
    
    
    1,748
    
    
    
    10,328
    
    
    
    3,186
    
    
    
    Deferred Compensation, including current portion
    
    
    3,099
    
    
    
    332
    
    
    
    588
    
    
    
    588
    
    
    
    1,591Total
    
    $
    27,442
    
    
    $
    10,742
    
    
    $
    11,335
    
    
    $
    3,774
    
    
    $
    1,591
  
    
    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.
  21




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Net Operating Loss Carryforwards
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk and Risk Management Policies
    
 Item 4. Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures.
 (b) Changes in Internal Control Over Financial Reporting.
 22




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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 Annual Report
on Form 10-K for the fiscal year ended December 31, 2006. 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 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
   
    
    the commercial success of Opana ER;
    
    the timing and amount of payments received under collaborative agreements, including in
particular our agreement with Endo with respect to Opana ER and our agreement with Mylan
with respect to Pfizers generic Procardia XL 30 mg;
    
    the progress of our collaborative and internal development projects, funding obligations
with respect to the projects, and the related costs to us of clinical studies for our
product candidates;
 23




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
    
    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; and
    
    the level of our investments in capital expenditures for facilities and equipment.
   We depend heavily on the success of Opana ER, which may not be widely accepted by physicians,
patients, third-party payors, or the medical community in general
  
    
    the safety and efficacy of Opana ER as compared to competitive products;
    
    Endos ability to educate the medical community about the benefits, safety and efficacy of Opana ER;
    
    the effectiveness of Endos sales and marketing activities;
    
    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; and
    
    the level of stocking of Opana ER by wholesalers and retail pharmacies.
   24




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We are dependent on our collaborator Endo to manufacture, market and sell Opana ER, and in the
future expect to be dependent on other collaborators to manufacture, market and sell our other
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 terminate their collaborations with us under certain circumstances.
As a result, we may have to terminate the development of some drug candidates. This could
also adversely affect perception of us in the business and financial communities and make it
difficult for us to attract new collaborators.
    
    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 re-evaluate their priorities from time to time, including
following mergers and consolidations, which have been common in recent years in these
industries.
    
    Disputes may arise between us and our collaborators from time to time regarding
contractual or other matters. In 2006, we were engaged in a dispute with Endo with regard to
the sharing of marketing expenses during the period prior to when Opana ER reaches
profitability. 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.
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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; 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
    
    not be able to obtain approval for indications that are as broad as intended.
  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
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® 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
     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 the compliance
with risk management programs, which may prove difficult or expensive to comply with; and we and
Endo may face lawsuits
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Our success depends on our ability to protect our patents and other intellectual property rights
     We may become involved in patent litigation or other proceedings relating to our products or
processes, which could result in liability for damages or termination of our development and
commercialization programs
  
    
    We or our collaborators may initiate litigation or other proceedings against third
parties to enforce our intellectual property rights.
    
    If our competitors file patent applications that claim technology also claimed by us, we
or our collaborators may participate in interference or opposition proceedings to determine
the priority of invention.
    
    If third parties initiate litigation claiming that our processes or products infringe
their patent or other intellectual property rights, we and our collaborators will need to
defend our rights in such proceedings.
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We have only limited manufacturing capabilities and will be dependent on third party
manufacturers
    
    
    we or our collaborators may not be able to meet commercial demands for Opana ER or our other products;
    
    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.
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We are dependent upon a limited number of suppliers for the gums used in our TIMERx materials
  If we or our collaborators fail to obtain an adequate level of reimbursement by governmental
or third party payors for Opana ER or any other products we develop, we may not be able to
successfully commercialize the affected product
    We will be exposed to product liability claims and may not be able to obtain adequate product
liability insurance
   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
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The market price of our common stock may be volatile
  Specific provisions of our Shareholder Rights Plan, Certificate of Incorporation and Bylaws and
law 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: May 8,  2007
    /s/ Benjamin L. PalleikoBenjamin L. PalleikoSenior Vice President, Corporate Development and
Chief Financial Officer
(Principal Financial Officer) 33




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EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    Amendment, dated January 7, 2007, to the Amended and
Restated Strategic Alliance Agreement, dated as of April 2,
2002, by and between Endo Pharmaceuticals Inc. and Penwest
Pharmaceuticals Co. (incorporated herein by reference to
Exhibit 10.1 to Penwest Pharmaceuticals Co.s Current
Report on Form 8-K filed on February 15, 2007 (File No.
000-23467)).10.2
    
    Termination Agreement, dated as of February 1, 2007,
by and between Anand Baichwal and Penwest Pharmaceuticals Co.
(incorporated herein by reference to Exhibit 10.1 to Penwest
Pharmaceuticals Co.s Current Report on Form 8-K , filed on
February 15, 2007 (File No. 000-23467)).10.3
    
    Termination Agreement, dated as of February 1, 2007,
by and between John Staniforth and Penwest Pharmaceuticals Co.
(incorporated herein by reference to Exhibit 10.2 to Penwest
Pharmaceuticals Co.s Current Report on Form 8-K , filed on
February 15, 2007 (File No. 000-23467)).10.4
    
    Severance and Settlement Agreement and Release, dated
February 9, 2007, by and between Penwest Pharmaceuticals Co. and
Alan Joslyn.10.5
    
    Credit and Security Agreement, dated as of March 13, 2007,
by and among Penwest Pharmaceuticals Co. and Merrill Lynch
Capital, a division of Merrill Lynch Business Financial
Services Inc.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 200232.2
    
    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 requested as to certain portions, which portions are omitted and
filed separately
with the Securities and Exchange Commission. 34